Mickey Mouse Investment Banks

Elizabeth Nowicki —  13 April 2007

Last month, at Tulane’s Corporate Law Institute, Delaware Vice Chancellor Leo Strine suggested that it might not be prudent for directors to consult “Mickey Mouse” investment banks when assessing a going private (or other) deal.  Normally I am a huge Strine fan.  But I think he missed the bus on this one.Â

Let me first stipulate that I understood Strine’s Mickey Mouse comment to mean that boards of directors or special committees should not struggle to find a truly independent investment bank (e.g. one who has never done work for the company) to advise them when assessing proposed going private transactions.  Better to pick one of the big regular players:Â

Goldman Sachs = Credible Bank; Nowicki & Damodoran = Mickey Mouse Bank

But Vice Chancellor Strine appears not to acknowledge that understanding how to value corporations and deals is not something on which Goldman et al. have a monopoly.  A small and/or no-name Mickey Mouse investment bank can certainly compete in terms of quality of advice given.  Perhaps it would be helpful to analogize:  Wachtell, Lipton, Rosen & Katz.  They started as a small shop, with no-name lawyers, all of whom graduated from NYU.  They are now one of the top three deal law firms.  It seems to me that clients who hired them in their Mickey Mouse law firm days were prescient, not ill-advised.

Going further, I recall that Vice Chancellor Strine said he favored investment banking repeat players because they were not starting from scratch – they knew the issuers, they had done work for the issuers.  He intimated that the Mickey Mouse bank would not be able to give the same good advice the regular players could give because the Mickey Mouse bank would not have the history and familiarity with the target corporation that the regular player had.  To that, I say, most respectfully, hogwash.

I am not a Goldman Sachs i-banker, but I can do a valuation.  With the right tools, I could make a fancy board book, and I could give a power point presentation on how to value a business.  Naysayers might respond with a scoff, saying that I lack “the insight” the big players have to do a really good valuation of any given business.  My response would be that there is nothing proprietary about insight.  If there is something special about the issuer that makes it more or less valuable than the comparables or the DCF or whatever would indicate, that can be revealed by talking to the CFO (or by talking to the special committee itself).  (I was going to suggest “by reading the public disclosure,” but I did not want the cynics to snort.)

I suppose Vice Chancellor Strine might reply that valuation is more an art than a science.  My response to that, however, is that this art is often expressed in favor of the regular client.  Phrased differently, the regular players do have more of a foundation from which to start an analysis of a proposed deal, but they *also* have more of a reason to reach a given decision on the deal in one direction or another.  They have more of a reason to be biased.  So I think things are a wash in that regard.

Mind you, I am not suggesting that hiring me to prepare a board book is a good option, but I am suggesting that there is likely a flood of Mickey Mouse investment banks out there staffed with super bankers who can certainly can do a quality job advising a board or a special committee on a deal.  With fewer conflicts than the big players.

One response to Mickey Mouse Investment Banks

  1. 

    I was at the conference and thought the exact same thing. There surely are benefits (e.g., internal databases, institutional knowledge, personal relationships with the opposing party’s bankers/lawyers, etc.) at places like Goldman, but I think you can get equally competent, if not superior, advice from a lot of boutique banks. Companies also can obtain more favorable engagement letter terms and fee structures from smaller banks. I’m trying not to read too much into the VC’s comments. Perhaps they were a reaction to some weak performances of late from some banks that are outside of the top 5 or so (e.g., the panel was fairly critical of Netsmart’s bankers).

    I was also troubled by a comment that some banker-company conflicts of interest should not prevent the company from retaining the bank. I agree with that as a legal principle, but in practice it may be hard to know where to draw the line—and its unclear whether you’d have to let the plaintiffs get discovery to prove that the conflict was immaterial or otherwise didn’t adversely affect the process.