Articles
Financial advisors talk a lot about adding value. I use the phrase quite regularly when trying to convince clients to hire me. I tell them I can add value by coming up with loads of useful advice.
My potential to add value is being put to the test right now on an M&A transaction. I am advising a Chinese company bidding for the Asian arm of a financially troubled American company. We’ve made a bid and as far as I can tell there are no real competitors.
“We can accept your client’s offer,” says Robert, the advisor to the American company, “if they can raise their price by $50 million”.
“No chance Robert” is my reply.
“Well, I’d like to be able to go back to my client with some sort of gesture, to demonstrate that your client is serious,” he says, “how much are you prepared to increase your offer in order to close this deal?”
“Not at all. There are no other bidders and you’re lucky to get the price we have offered. So that’s it.”
Robert is not happy, but he eventually gives up. It’s standard practice for the seller’s advisor to try to squeeze extra money out of the buyer, but it’s not going to work on this deal. After my conversation with Robert, I immediately call my client, Mr Wang.
“I just got a call from Robert. He is trying to squeeze us for extra money” I say.
“What did you tell him?” asks Mr Wang.
“Well, as far as I can tell there are no other really serious bidders,” I explain, “so I’m fairly certain we are the only option they have. So there’s no reason for us to have to increase our bid at all. So I told him no way.”
“OK, so what happens now?” asks Mr Wang.
“Most likely, he’ll call you and try the same thing on you. He’ll tell you that unless you increase the price they’re not sure if they can go ahead with you, and so on. Do not offer anything more.” This is me adding value with useful advice. By following my advice my client can save a lot of money.
“Sure, understood” says Mr Wang.
Fifteen minutes later my phone rings. It’s Mr Wang.
“Great news Alan, they’ve agreed to close the deal with us next week” he says.
“That’s good to hear. How did you get that message?”
“Oh, I just spoke to Robert. He said that if we can increase our price by $60 million, the deal is ours. So I agreed.”
This happens all the time. Clients hire me, pay dearly for my advice, and ignore it. It’s the way of the world. Clients ignore advisors, patients ignore doctors, and athletes ignore coaches. Everyone thinks they know better.
I am of course furious at Mr Wang, but I can’t tell him that he’s a fool and that he just threw away $60 million of his company’s money. Insulting clients, while no doubt very satisfying, is not a good way to make sure that your invoices get settled on time.
So the deal gets done and Mr Wang’s company buys the Asian arm of a financially doubtful American multi-national for $60m more than they had to. Mr Wang is happy, Robert and his client are happy, and I am happy to get my fee despite the fact that my client would have saved $60m if he had have listened to me.
But this is not the end of the story, and not my last chance to add value to Mr Wang. A few months after the transaction is completed one or two analysts start to suggest that Mr Wang’s company paid too much for the business. It’s not making the kind of money they were hoping and it’s getting difficult for them to explain.
When management look like they might have messed up, there is a natural urge to pass the buck, and there is no better place to pass the buck than to someone outside the company. And that’s where financial advisors really add value, as someone to blame.
A few days pass, a few more analyst reports and a few more difficult questions from financial journalists and it eventually appears. Mr Wang is quoted in the press: “Based on this independent advice received we believe the price we paid is reasonable. We were advised on the sale price by Alan Alanson.”
Subtracting my added value
Sunday, November 1, 2009
