By Lina Saigol
Try telling a CEO that their planned blockbuster deal is a busted flush.
It’s one of the hardest jobs on Wall Street.
That’s why Warren Buffett has suggested turning the boardroom into a courtroom. When considering a deal, directors would invite two M&A advisers — one arguing for, the other against the merits of the move.
In the latest annual report of Berkshire Hathaway /zigman2/quotes/208872451/composite BRK.A -0.59% , his investment company, Buffett noted that when a board considers an M&A transaction, “the deck is stacked in favor” of the deal recommended by the CEO and their “obliging” staff.
“I have yet to see a CEO who craves an acquisition bring in an informed and articulate critic to argue against it,” he wrote.
In an ideal world, that’s what standard M&A advisers are meant to do. The risk involved in launching a multibillion-dollar takeover bid is substantial. Failure can ruin reputations and sometimes, even end careers.
AT&T /zigman2/quotes/203165245/composite T +0.33% CEO Randall Stephenson came under fire from Elliott Management in December after the U.S. activist investor took a $3.2 billion stake in the telecoms group, questioned his M&A strategy and called for his removal from the board. Stephenson has bought himself some time by appeasing Elliott with a three-year strategic plan that includes selling up to $10 billion worth of assets.
In the U.K., Tidjane Thiam, the former head of Prudential /zigman2/quotes/200530572/delayed UK:PRU -0.91% , became the first FTSE 100 chief executive to be personally censured by the FCA for failing to inform the regulator about the British insurer’s doomed 2010 $36 billion takeover of AIA, the Asian arm of U.S. giant AIG /zigman2/quotes/203700638/composite AIG +0.91% .
Many bankers and advisers go to great lengths to insist that they often advise their clients not to do potentially value-destroying deals.
In reality, they hardly do. Bankers make the bulk of their fees when a deal is concluded, which gives them a large and skewed incentive to convince CEOs to launch multibillion takeover deals.
CEOs often argue that just obtaining a so-called fairness opinion is enough. But when the banks providing the opinions are the same that are advising on the deal, “fairness” is in the eye of the beholder. What’s more, such opinions don’t even evaluate the merits of a transaction, or suggest there might be other options.
All they do is show investors that management has fulfilled its fiduciary duty by ensuring they are getting or paying a fair price for their holdings, giving CEOs some protection against future litigation.
What Buffett is suggesting goes deeper. He wants to see an active voice “in the room” playing devil’s advocate with no fear of offending the boss or losing an adviser contract.
“It would be an interesting exercise for a company to hire two “expert” acquisition advisers, one pro and one con, to deliver his or her views on a proposed deal to the board—with the winning adviser to receive, say, 10 times a token sum paid to the loser,” Buffet advised.
Some industry observers have suggested that one way of having more independent bank advisers would be to pay them a fixed fee.
In a report published by Legal & General in 2018, the fund manager proposed that companies appoint independent advisers to report to the board who are” remunerated on a flat fee basis and not connected to the transaction.”
L&G also said that fees and other governance arrangements connected with a deal should be set out as separate items for approval by shareholders, so investors are able to express their views on the resolutions without jeopardizing the whole deal.
Introducing stringent M&A checks can help control the process for boards considering big deals. But at the end of the day, they can’t control a CEO’s ego.
Or, as Buffet puts it: Don’t ask the barber whether you need a haircut.