I was not from a target school, so at the time I literally had to BREAK INTO Wall Street, or at least carefully slip through the backdoor as to not wreck the Ivy League party. The process was not particularly pleasant. It first involved calling any alumni I knew (at my non-target school) that had somehow made it into the field and beyond that cold-calling people I could look up on my school Bloomberg Terminal.
Sidenote: You know all those pictures you see of large trading rooms at banks with the multi-colored screens. Well in the early 1980's most of those were probably Quotron screens but what you see now 90% of the time are Bloomberg Terminals. Ohh, and each one runs about $20,000 a year.
Side Sidenote: Yes - the company was started by the Mayor Bloomberg of New York.
Anyways, after getting rejected '86' times (this means I sent in '86' applications and received rejection letters from almost all of them), I got hits at three large bulge bracket banks in NY and went up for second round interviews. At this point I had practiced interviewing with numerous friends in the same boat as well as new, recently hired, analysts I knew that were a year ahead of me and gotten through first round phone interviews. In another semi-sidenote, one has to understand that analysts are the key to interviews because they know all the flavor of the day questions, and in a world of quick bucks interview standards change rapidly.
What I failed to mention in the preceding paragraph was that during that application process, and the preceding six months, I had started to develop a fear of investment banking. It wasn't the '100' hour weeks or the horror stories of forgetting a pitch-book for a critical meeting, nor the insane practical (or not so practical jokes often played) - the problem was, I found myself struggling to figure out if investment bankers really added to the economy and created value. My bottom line was I couldn't figure out if the bankers did anything productive.
Now to grasp this you need to understand what I expected to be doing. My goal was to enter what is called the Investment Banking Mergers and Acquisitions space. This basically means I would be doing valuations for companies that would be considering purchasing other companies in order to discover a price, or doing valuations for companies being bid for, what is called a "Fairness Opinion." A Fairness Opinion means get the highest price possible.
So I thought about my place in the world and asked myself some of the following questions:
1) Does my job need to exist for the economy to function; rephrased does it make sense for companies to purchase other companies?
Any business major could answer this question with one word, SYNERGIES! Of course it was good, a company buys another and reaps economies of scale which cuts cost and saves money (obviously this was one of my first questions and the answer is pretty obvious). Some readers are probably thinking this is a bad answer but trust me, I will address your concerns below.
2) Do mergers create value for companies, rephrased, do those synergies work?
This was slightly tougher, but I was able to weasel my way into an answer that I could accept. The answer is yes, mergers do create value.....sometimes. Most mergers actually result in overpayment by the company making the purchase and end in some degree of failure. However, I was content in my naïveté thinking that any deal I participated on would have to look good or I would simply move to another team (not only was this naive but it would probably have gotten me fired; however, at the time it did the trick).
3) As an economist I had to ask, are the incentives aligned between the company and the banker representing the company? In other word, is what’s good for one good for the other. My post on Why The World Sucks Because We Don't Understand Incentives may be helpful for you at this point.
This was the curve ball. An investment banker of course wants to make money, to make money they earn fees, and their fees are directly and positively correlated to the size of the deals they participate in and the number of those deals. While a company may purchase another at a few critical points during its life when it sees a good opportunity, a banker wants companies to buy each other as much as frequently as possible! Wouldn't you, if you get 1% in fees of the dollar size of every transaction, the more buying and the bigger the better. A good four man banking team consisting of an analyst, associate, VP (Vice-President) and MD (Managing Director), can clean-up on over a million dollars in a few busy days.
And that was my problem. The more I thought about it the more I realized why barely any of those mergers or buy-outs worked out for either company. Most merger ideas were the product of overworked, just out of business school associates slaving away putting together pitch books at the discretion of a VP. A VP who is desperately trying to make a pitch stick, so they can pad their bonus and make MD in a few years. The banker could care less of the terms of the acquisition (except for the fee schedule) and would have no qualms with bilking companies on a bad purchase. And that is why I couldn't stomach becoming an investment banker.
Now I recognize that someone has to exist to shepherd companies through the few acquisitions that actually do create value; however, the incentives governing the game at this moment in time are terribly misaligned and I think that the bad by far outweighs the good.
Now this is only referring to traditional investment bankers (I will save traders for later) - but if I have convinced one future engineer to stay that career track and not move to banking this post was worth it, for the other problem with Wall Street is it sucks away good honest talent. For another post...
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