Thu 8 Apr 2004
Oren Cass ‘05 has an interesting post about his adventures among the consulting and investment banking firms that hire from Williams. The whole thing is worth a read. I was struck by this passage:
Let’s say you are given a billion dollars and told to invest it however you want. What’s the first thing you would do? Hire an investment banker! When companies find themselves with billions of dollars, they do the same thing.
No! The last thing you should do when that billion dollars magically appears is hire an investment banker. You might as well hire a used car salesman. Now, if you know you need a car, then hiring hiring a used car salesman might make sense. But first you figure out what you want, because any (good) salesman is going to sell you whatever he has.
Most investment banking fees are not made on the purchase side of the transaction. They are made on the sales side. For the most part, I think, it is the seller who pays — just like when you sell a home.
April 8th, 2004 at 9:09 am
Oren said you’re “told to invest it however you want”. Isn’t an investment banker (assuming you can find an unbiased one, which may or may not be possible; feel free to educate me on this point) someone who can help you invest the money such that it will grow your wealth in whatever way works best for you?
April 8th, 2004 at 9:40 am
Investment bankers almost always work with companies. Their primary function is to advise/arrange on things like mergers, spin-offs, capital raising (IPO’s or debt underwriting) and the like.
Wealthy individuals have financial planners to assist them with managing their money. Individuals, of course, don’t do IPO’s.
My personal opinion is that most companies with excess cash would be better served to return that money to shareholders (via dividends or share buybacks) as opposed to spending it on mergers, but reasonable people differ. The investment bankers only get paid if the company decides to do something like a merger, so their “advice” can hardly be considered objective.