Thursday, June 08, 2006

Thanks for the advice A Newsweek column ("Sweet deals: Bulk Up, Then Break Up", 1/23/06) by finance writer Allan Sloan takes on the pick-up and discard course of how big companies operate, what we call the "gin-rummy game." Sloanbegins by asking: Is it better for companies to grow bigger and more diversified or for them to shrink and get lean and mean and focused? If you're a Wall Street investment banker, things are good either way. At least they're good for you. You get paid to put companies together, and then you get paid again to split them up. It's a wonderful life. Sloan sees the dealmakers and financial advisors at the top investment banks readily applauding and encouraging any deal that come their way as brilliant. Even better if the same acquisition that lubricated the business wheels makes a trip in reverse as a sell-off in the next year. In talking about split-up of carefully amassed companies like Tyco and Viacom, Sloan notes "You don't know how either split-up is going to work out as a corporate strategy. But you do know that investment banks will get tens of millions of dollars for advising them on doing so." The likelihood, as he points out, is that the newly shrunken companies will start the game again by buying new pieces and bulking up once again. And the bankers' fees are hidden, so that the real cost to sharehodlers is deeply buried. So when you read that so-and-so a company was advised by Goldman Sachs and the other party was advised by Morgan Stanley, realize that "advice" (beyond the mechanics of the deal, has nothing to do with the well-being of the company or its shareholders. As Sloan writes: "Wall Street's real business is making deals, not looking out for its clients." 7:18:46 PM

comment []