Can't teach old dogs new tricks
Australian Financial Review
1 April 2004

If you want plain vanilla advice, best not to go to Carnegie, Wylie & Co. The independent advisory house established by former CSFB executive John Wylie and his long-time friend and private equity player Mark Carnegie is shaking the investment banking tree in Australia. The pair share their thoughts with Brett Clegg.

AFR: Carnegie Wylie & Co was established in 2000. What were the motivations for establishing the firm?

JW: Mark and I wanted to re-create an old-style European merchant bank with emphasis on long-term relationships, alignment of interests with clients and willingness to invest capital. We thought that would be really satisfying for our clients, our employees and for us.

MC: We wanted to deal with both big and small companies with challenging strategic issues. We wanted to work with people we liked and admired. We wanted to build an enduring franchise that we could be proud of.

JW: We were also having an extremely enjoyable lunch and thought "why not?"

AFR: How has the investment banking industry changed over the last 10 years?

MC: The quality of the people has become steadily better, but the quality of the advice to clients has become steadily worse. So something's radically wrong with the industry's business model. And what's wrong is that it now largely revolves around how extensively you can get your client to act to further your financial interests.

JW: This is driven by banks' lower profits in their traditional lending business and increased reliance on transaction fee income; and the global adoption of the American investment banking business model with its central motivational reliance on "eat what you kill" bonuses and "hire and fire". So the nature of client relationships in these banks has changed from balanced advice to a marketing and sales role.

MC: "Alignment of interests" has rightly become the hot topic in the corporate governance debate: e.g, aligning CEOs' compensation with returns for their shareholders, or fund managers' compensation with their investors' returns. Yet mention this concept to an investment banker about his/her fees and you're guaranteed a blank stare. To a banker in a "global shop", who has to make a revenue budget or get fired, the idea that you would not chase a fee because an acquisition is overpriced is like asking a turkey to vote for Christmas. The problem is amplified if there is a capital markets transaction attached, given the size of the fees generated in that area urging a client to not buy the business is only for those with a death wish. Which investment banker wants to invest time and energy in a long-term relationship if you can jump into bed with whichever company CEO is hot for a deal and get paid a really big fee?

JW: So now the banks' solution to almost every client business problem is for the client to buy or sell something or to do some capital raising transaction usually immediately. All too often this advice is an outright menace to shareholders' interests. Often we tell clients to ask banks pitching them acquisitions just how much of their fees they'll stake based on the client's share price performance after the acquisition. In almost every case the banks' answer is none at all. We by contrast are happy to tie our fees to performance.

AFR: What other elements of the investment banking industry do you have an issue with?

JW: The way that banking "league tables" further incentivise the banks to worry about their own interests not their clients'. These tables recognise outcomes for the banks not the clients. They keep track of deal numbers and values, not quality of work. For example, they give full credit to a bank for advice on an overpriced acquisition or an unsuccessful defence against a takeover bid that should have been beaten. The advice that fends off a lowball takeover offer or recommends against a dumb purchase is ignored. And yet these tables have grown to assume tremendous importance in the industry in the last decade: it's now the banks' prime marketing tool. Under the pressure of that sort of conflict, who's going to come second: the banks' self interest or the client?

MC: The investment banking landscape has become one of a safari park where you can claim success if you can get an elephant to mate with a walrus.

AFR: So being independent of the big banks and the conflicts of their capital markets activities allows you to be objective, does it?