[Reposted from The New York Times | David Gelles | February 28, 2015]
But that doesn’t mean he approves of all the trappings of Wall Street and deal-making.
In his annual letter to shareholders, released on Saturday, Mr. Buffett takes umbrage with investment bankers, accusing them of being nearsighted and self-serving and pressing for deals that aren’t always in the best long-term interest of their clients.
“The Street’s denizens are always ready to suspend disbelief when dubious maneuvers are used to manufacture rising per-share earnings, particularly if these acrobatics produce mergers that generate huge fees for investment bankers,” Mr. Buffett wrote.
Particularly aggravating to Mr. Buffett was the notion that investment bankers were, well, doing their jobs and drumming up business.
“Investment bankers, being paid as they are for action, constantly urge acquirers to pay 20 to 50 percent premiums over market price for publicly held businesses,” he said. “The bankers tell the buyer that the premium is justified for ‘control value’ and for the wonderful things that are going to happen once the acquirer’s C.E.O. takes charge. (What acquisition-hungry manager will challenge that assertion?)”
But bankers, Mr. Buffett said, are quick to change their tune about the strategic logic of a deal, once a new opportunity comes along.
“A few years later, bankers – bearing straight faces – again appear and just as earnestly urge spinning off the earlier acquisition in order to ‘unlock shareholder value,’” he wrote. “Spin-offs, of course, strip the owning company of its purported ‘control value’ without any compensating payment. The bankers explain that the spun-off company will flourish because its management will be more entrepreneurial, having been freed from the smothering bureaucracy of the parent company. (So much for that talented C.E.O. we met earlier.)”
In pitching for deals, Mr. Buffett said bankers largely ignore what he calls “intrinsic value” — the true worth of a company, rather than it’s book value or what it’s worth to a competitor — often urging their clients to overpay for a company simply for the sake of winning a bidding war.
“I can promise you that long after I’m gone, Berkshire’s C.E.O. and board will carefully make intrinsic value calculations before issuing shares in any acquisitions,” he said. “You can’t get rich trading a hundred-dollar bill for eight tens (even if your advisor has handed you an expensive ‘fairness’ opinion endorsing that swap).”
The modest Mr. Buffett also railed against bankers’ notorious affinity for the finer things in life.
When the deal-making machine springs to life, “a lot of mouths with expensive tastes then clamor to be fed – among them investment bankers, accountants, consultants, lawyers and such capital-reallocators as leveraged buyout operators. Money shufflers don’t come cheap.”