Trust Amongst the Investment Bankers

And you thought it didn’t exist.

Well, pretty much it doesn’t. But it’s interesting to explore why.

A delightful blog, The Epicurean Dealmaker, dusts off an old paper by Harvard Business School academics Bob Eccles and Dwight Crane, which describes the path of trust failure in the investment banking world.

E.D. summarizes it nicely as follows:

1) Markets for capital and strategy get more diverse and complex, leading to more threats and opportunities

2) Formerly monogamous Company XYZ begins to talk with more than one investment bank to identify, analyze, and take advantage of these market threats and opportunities

3) Investment banks which have never had a shot at breaking into Company XYZ before gladly start lobbing in ideas and golf trips to get XYZ’s business

4) XYZ’s CFO and finance staff get smarter about the markets and cleverer at playing the i-banks off against each other for better deal pricing, better ideas, and better golf trips

5) I-banks begin to see they are getting played and begin to play back, lobbing completely unoriginal Ideas of the Week in on a regular basis on the chance one of them will hit and pestering XYZ’s CFO to let them visit the CEO with A Really Big M&A Idea

6) XYZ’s CFO realizes the i-banks are no longer really paying attention to him and gets pissed, doing everything he can to prevent the i-banks from getting into the CEO’s office and screwing them even harder in pricing negotiations

7) Both XYZ and the i-bankers start bitching to The Wall Street Journal and anyone else who will listen that the other is no longer interested in building relationships, but only wants to do deals

As E.D. suggests, skip steps 1 and 2 and you have the story of private equity.

For the prosaic rest of us, this is the script for your friends on who bemoan the dearth of relationships (and it’s not just women).

I have also seen this script play out in the paper merchant industry; the brokerage industry; the real estate industry; the commercial banking industry; the consulting industry; the auto supply industry; and a good deal more.

As Step 6 in the progression points out, the end-game is unhappy bitching about how short-term, transactional, and generally untrustworthy the other one is. A crummy ending.

Question 1: at which of the 6 Steps could the provider have done something differently, and turned the cycle toward trust?

Question 2: at which of the 6 Steps could the client have done something differently, and turned the cycle toward trust?

Hint 1: Questions 1 and 2 have the same answer.

Hint 2: The answer rhymes with “all of them.”