the mystery of why bankers earn so much

During the cross-examination of James McNeill Whistler, American Victorian painter deposed in 1878 against John Ruskin, he is asked how he justifies the accusation of 200 guineas for painting a show of fireworks in London that took two days to complete. "I demand knowledge of a lifetime," said Whistler.

Investment bankers explain their bonuses in the same way, although the rewards for advisers in the field of mergers and acquisitions (M & A, by its acronyms in English) are greater than those of most painters.Goldman Sachs will receive $ 58 million from 21st Century Fox for his advice on the sale to Walt Disney of $ 71 billion of assets Fox (and the bank will earn $ 47 million extra to finance the rest of Fox).

These are extraordinary payments; current boom l Negotiations represents the most rewarding moment in history to be a global banker specializing in M ​​& A. It is especially lucrative for the top advisers who perform many auctions. A person with the ability to guide "nervous" advice through the obstacles and having the reputation of "squeezing" the best prices can specify their fees.

But what exactly are they doing for what they are paid for? When asked this question, counselors become shy and vaguely talk about the art of persuasion rather than the science of evaluation. The secret of a large "success premium" is less about getting the best deal possible than to make the CEO and the board of directors believe that they got it. This is not the same thing, especially in the long run.

The work of the M & A consultant has three qualities that place his practitioners in a powerful bargaining position of their own allocation. The first is that there are significant risks. A former banker compares him to a surgeon who explains his charges to a patient when he takes her to the operating room. The patient must have the best professional possible and is not able to oppose it.

For managers who have not yet followed an M & A process, the experience may seem to go through a surgical procedure. Shareholders and the media are on the lookout, ready to condemn any mistake (the latter risk is the reason why public relations consultants are so paid). There are many subterfuges and haggling over details, any one of which could prove fatal to the outcome.

The second quality is that counselors are paid with the money of others. This is especially true when a business sells; The total price, including fees, will be absorbed by the buyer, so what difference do some millions make? Even when the customer is an acquirer, tips whose personal reputation is at stake do not take money out of pocket to pay.

Seeing the charges across one end of the telescope, they even look small. The average amount to sell a company valued between $ 10 billion and $ 25 billion is about 0.3 percent, and can cover years of unpaid work. Bankers say that they are not expensive compared to real estate agents, who can charge several percentage points for the sale of a home. As always, the best way to make money is to be around people who have lots of money.

The third quality is that mergers and acquisitions advice is a black box. There is a large number of technical skills in structuring a transaction, such as using acquisitions to modify tax homes. This is combined with access to the bank's contacts with potential bidders in multiple countries, and an advisor to the board of directors is responsible for presenting it together. The tone of the experienced banker's voice reflects a mix of financial advice, human judgment and trust.

The last factor is the most valuable. In theory, M & A advice could be broken down into different tasks, but meeting rooms can only accommodate a few people.