Do Investment Bankers Actually Add Value?

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Do Investment Bankers Add Value?“With investment banking, you make a lot of money, and you get a distorted feeling of how wonderful you are. You’ll be flying around in corporate jets and you’ll be attending board meetings, but you don’t really add value.”

-Guy Kawasaki, New York Times Interview

And hey, it’s not just Guy – it’s a common criticism of investment bankers:

You work a lot, but you don’t actually do anything useful.

So should you cross banking off your list?

And what about those corporate jets?

First Off…

Before delving into these questions, let’s first address this specific quote:

  • There are no corporate jets unless you’re a very senior executive. Even MDs fly commercial.
  • Board meetings are rare as a junior banker – most of the time you’re too busy or too sleep-deprived to go.

Back in the day I was offered a chance to go to a board meeting for a major public company as a “reward” for having worked on a couple of pitches.

But I had pulled an all-nighter the day before, so I attended the sleeping room rather than the board meeting.

And as for making a lot of money, well, that’s dependent on the economy and whether banks are hiring or firing.

Elements of Truth

But Guy is not entirely wrong.

As a junior banker most of what you do doesn’t add value – you might revise that presentation 73 times, but chances are no one will even look at it.

Occasionally you might get to bring in revenue or save your bank money – which you need to capitalize on – but most of your day is spent on administrative tasks rather than changing the world.

So there’s some truth to his claim at the end:

“Jobs for college graduates should make them gain knowledge in at least one of these three areas: how to make something, how to sell something or how to support something.”

While you do learn a lot about markets, transactions, and dealing with massive egos in investment banking, you won’t learn as much about making, selling, or supporting products as someone working at a startup.

The Problem(s)

…but here’s the flaw in Guy’s logic: not everyone wants to start or manage a company.

Some people want other experiences, others want to gain a broader understanding of business, and still others aren’t sure exactly what they want to do.

So if you’re in one of those categories, investment banking is still a good bet.

And no matter what entry-level job you pick, you probably won’t be adding much “value” anywhere.

At first it’s all just learning and moving up the curve, and that’s the same whether you’re an engineer, a marketer, or an investment banking analyst.

Products vs. Services

Finally, you do learn how to make things, sell them, and support them in finance: it’s just that these “things” are financial instruments (if you’re a trader), your own services (bankers), or an investment from your firm (buy-side).

Yes, it’s different from building a new iPhone app that sets the world on fire, but at the very least you learn a lot about selling since you have to do it so much.

And scurrying around to handle all those last-minute changes from high-maintenance clients counts as “customer support.”

Alternatives

So while you may not be changing the world in investment banking, you’re still learning and making yourself more valuable in the process.

And let’s say that you went to work at a Fortune 500 company that makes “real” products.

Maybe you’re in sales, marketing, engineering, or customer support – how much value would you be adding there?

We’ve been over the trade-offs: with these positions the work can be even less intellectually stimulating than finance, and advancement may be near-impossible.

They try to make it sound more appealing by creating “leadership” and “rotational” programs but let’s face the facts: are you more likely to get hired somewhere after working at Goldman Sachs or at a random F500 company?

The More Interesting Question

So yes, compared to a startup founder the average junior banker or consultant doesn’t add value.

But you do learn a lot, position yourself for better opportunities, and give yourself flexibility – which is more than 99% of other undergraduate and MBA students can say.

The more interesting question is whether senior investment bankers themselves add value.

We know what bankers do: they advise companies on deals and help them find buyers, or sellers if it’s a buy-side engagement.

Just like Ari Gold.

Is The Pay Deserved?

So do investment bankers deserve to make this much money?

I view this as a silly question because it’s like asking, “Should Louis Vuitton be able to sell handbags for $45,000?

The market and peoples’ behavior – whether rational or irrational – determine what something is “worth.”

People get paid what they get paid based on how much revenue they generate, or what percent of other peoples’ revenue they receive.

So let’s look at the source of investment bankers’ pay: the fees that companies pay them for advising on transactions.

Is It Worth It?

You’ve just sold your company for $1 billion, and you pay the bankers advising you a nice $10 million fee, 1% of the transaction value.

Ridiculous, right? Why should the bank earn $10 million merely for “advising” you, talking to the buyer on your behalf, and making a few presentations?

But that’s the wrong way of looking at it.

Had you not paid them the $10 million, would you have sold for more than $990 million or less than $990 million?

If it’s less than $990 million, then their services were worth it. More than $990 million, and their services actually cost you money.

Measuring Value

But there’s no way to determine “what would have happened” had you not hired the bankers.

So you need to look at what they actually did – what new buyers (or sellers) they brought to the table, and whether their involvement resulted in higher or lower prices.

Rules of Thumb

Investment bankers add the most value when:

  • The deal is extremely specialized – a hostile takeover defense for a cross-border transaction – and requires skills that only a few bankers have.
  • The deal requires longstanding relationships and access to key decision-makers.
  • The company is not spectacular but bankers dress it up really well to generate lots of interest and competitive bids, driving the price up.

Investment bankers add less value when:

  • They run a generic sell-side M&A auction process where they contact dozens or hundreds of companies but don’t rely on specialized skills or relationships.
  • They’re in charge of an IPO or other debt/equity offering where you “have” to use bankers, but where they’re just dotting i’s and crossing t’s rather than increasing the company’s price.

This is why small companies with attractive offers on the table sometimes skip bankers: unless there’s a great potential buyer that only the bank has access to, they don’t add value.

On the other hand, distressed companies and PE firms looking to sell less-than-desirable companies often hire bankers because they’re great at making “ugly” assets look more attractive.

Value

So yes, investment bankers add value – when they help a company earn or save more than the company pays for the bank’s services.

And outside of banking, traders and others in market-related positions add value by making markets and enhancing liquidity.

No, these are not quite the same as changing the lives of billions of people, but if banks truly added no value then they wouldn’t exist.

Bankers get accused of “adding no value” because what they bring to the table – relationships, access to the key decision-makers, and specialized skills – is hard to quantify compared to a company making products.

Private Equity, Hedge Funds, and Others

The case for “value add” on the buy-side is more difficult to make because many times, PE firms and hedge funds don’t improve a company’s operations or help the company make more money – it’s just financial engineering.

Instead, they add value by earning a good return on their investments and then distributing the profits to their limited partners. The limited partners themselves are these firms’ “customers.”

But the public at large doesn’t understand how finance works, which is why you see so many attacks against PE firms for “not adding value.”

So What Should You Do?

If you’re interested in investment banking, then go do it.

You may not add value at the junior levels, but that’s true of any job. What you will do is learn a lot and make yourself more valuable in the process.

But if you want to do something less traditional, then you should go do it right away.

The “work for 2-3 years and save up some capital to try a risky venture” argument still doesn’t make sense, for all the reasons we mentioned before.

Rather than debating whether or not investment bankers “add value,” focus on adding value yourself – by saving your firm time or money or helping them earn more money.

And don’t listen to every interview you read with dubious claims about investment banking or finance – otherwise, we’d all be flying around in corporate jets.

About the Author

is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys learning obscure Excel functions, editing resumes, obsessing over TV shows, and traveling so much that he's forced to add additional pages to his passport on a regular basis.

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33 Comments to “Do Investment Bankers Actually Add Value?”

Comments

  1. SB says

    what is the “standard” experience that every analyst should get by the end of their two years? i know this question may seem dumb as there is no standard…but given that I do not work for a BB, I want to know how/what I should be proactive to learn. about 50% of our analyst still move on to MM PE… and i want to see how to best position myself to get there. My goal is not necessarily PE… its more of making sure I don’t waste my two years doing “no value-add” admin work.

    • says

      You should know the deal process very well and be comfortable doing all the standard tasks – writing an IM/OM, putting together a management presentation, creating a model for the company, and seeing how a deal comes together.

  2. MMBinNC says

    Consultants add value, I straight create it. People want to believe that people add value in traditional ways, and I admit at the lower level I doubt you add much value in doing spreadsheets and stuff. But the knowledge and experience and relationships that you bring to the meetings at the higher levels add value all the time. Without bankers do you think anyone would pay the prices of an LBO or even a strategic acquisition (as they are priced today)? No.

  3. soodas says

    Thanks for the great post Brian!

    What you said about the board meetings is so true… I pulled three consecutive all nighters to get a bondholder presentation done and my MD gave the honor of sitting in the bondholder meeting. It actually turned out to be more torture than reward because I had to struggle to stay awake and not fall asleep in front of a room full of bondholders. I would have taken the sleeping room any day!

  4. flyer456 says

    It seems to me that bankers add value simply by being customer support. The more contacts a banker has the better he can create value through differentiation of the deal. There might be only 1 player really going after the deal but by being able to drum up competition bankers can increase the value of a company. Even if the banker only drums up one other interested party, the value will increase due to competition.

  5. Leo says

    Guy means bankers do no add value to the society as a whole. He is not wrong, but many people as far as I know from my personal ring of bankers joined or are struggling to join this industry for the only purpose of adding value to self. Social responsiblity? What social responsibility?

    • says

      I don’t really agree with that because “value to society” is so subjective. Not everyone wants to do charity or volunteer work – where do you draw the line between what’s valuable and what’s not?

      The other thing is that without bankers, many of the companies he supports would never get sold or even raise funding – so I would argue that bankers can help others add value.

  6. HRS says

    I can think of a few examples how investment banking adds value. One is price discovery. Assume that there is a startup company that needs to raise capital or go public. An invest bank can help identify how much the company is really worth, which in turn will enable the business to access the market and grow. If you look at many third world countries with inefficient markets, the lack of an efficient capital market has severely limited their economic development. I am sure there are many other examples how investment banks add value to the society as well.

  7. Jay says

    No offense Brian. I agree with you on most points, but I think it is easier for a company to run an M&A process themselves than issue debt/equity.

    Bankers are able to guarantee that a debt offering gets places. Imagine an M&A deal with an EV of $300 million an only $290 million of the issued debt would be placed.

    I agree that maybe not a lot of skill is involved, but only banks have a network and expertise to be able to essentially guarantee and then place an offering.

    The same applies though as for your M&A reference, the more specialized the more bankers add value. On a HY bond or a levered loan a banker adds a lot more value than for their IG equivalents.

    • says

      I agree that companies do need bankers for debt/equity offerings more so than for M&A deals.

      However, I would still argue that the value add is minimal. It’s sort of like doing your taxes – yes, you should probably have a professional help out but in many cases unless you have a really unusual situation they don’t really add that much value.

      That is why I lumped generic sell-side processes and debt/equity together – banks don’t have a huge impact on the outcome with either one, though you do need to use them for the latter.

  8. Anon says

    This is completely off topic but I remember you saying your major does not really matter when pursuing investment banking. However, I just want to know if I enrolled in a non-business undergraduate school (i.e. NYU’s CAS) does the same apply?

    • says

      A major helps to show interest, but it still doesn’t matter all that much vs. internships / networking. So yes, it would help you a bit to do something more closely related to finance but it’s not the end of the world if you don’t.

  9. Erik says

    Hi

    As always, great posts.

    Will you be doing an article of the difference working in The City vs. Wall Street and how the application process differs between EMEA and North America?

    • says

      I’ve wanted to cover this before but someone else with experience working in both places would have to volunteer to be interviewed. Everyone here worked in Asia or on the west coast of the US so there’s no firsthand experience.

  10. Mike says

    Off-topic question: I have a fairly extensive record in combat sports (I was a regional Mixed Martial Arts champ and national kickboxing champion).

    Should I leave this information off of my resume? I guess I’m asking if financial types will find this to be an interesting part of “my story,” or if they will consider it to be barbaric.

    Thoughts?

  11. Kyle says

    I appreciate the post; enjoy the site. Off topic, but I’ve been wondering: If I’ve spent most of my career in marketing and have gone to business school to rebrand/redirect my career and will exit business school by the time I’m 31, is that too old to get in the door as an associate at an i-bank? How old is too old for the newly-minted associate position? thanks.

  12. Dre60 says

    With the whole financial melt down/credit crises some due to securitization/scructured finance/CDOs/etc.. Should’t the real question be do Financial Engineers/Quants add value?

  13. says

    I’m totally off track from my career path! I wonder if you could give me some advices? I was major in Economics and got into a Graduate School for my Master degree. The program was completed last year. (Master of Economics) I got my CFA’s level 1 and HKSI’s exams done. (which is kind of licenses you required for profession dealing with equity in Hong Kong) However, up to this point my work experiences is narrow or perhaps i got none working experience. Since i’m lack of experience, is there anyway or anything(s) i can do to close the gap that can lead me to a entry position in investment banking? Would it helps if i pursuit another Master degree in Financial Engineering? Thank you!

    • says

      Try to get an informal or unpaid internship at a local firm… another Master’s degree would not help that much. Consider professional societies like the CFA Charterholders’ Groups etc. to find leads.

  14. John Smith says

    Hi Everyone,

    Thanks for the continued advisement. I really appreciate the truthful advice.

    1. Even though finance sounds like the best of many bad options of entry level jobs, can you explain why there’s such a high-turnover rate?

    2. Are there any reasons not to do I-banking? (i.e. you need 6+ hours of sleep, you value time with your friends and family, etc.)?

    Thanks for the consideration

    • M&I - Nicole says

      1. numerous reasons – mainly better offers elsewhere (higher pay, better perks) ; personal reasons; career development reasons.
      2. Yes. Depends on your value. You’ll have to compromise your time sleeping, your time w/ family and friends and you basically don’t have a life other than work

      • John Smith says

        Thanks for the continued commentary. It sounds like finance may be a good fit for me, at least when I am young and have time to spare. I should just realize there won’t be too much time for family gatherings, exercise, girlfriend, etc.

  15. Yifei Yang says

    Hi Nicole,

    A quick question that may be bit off-topic:

    How to prepare a question asking “how will you utilize your academic skills and experience to add value to the division you are applying for” these kind of question? I searched a lot but still have no clue. Hope you can give me some tips.

    Thank you very much.

    • M&I - Nicole says

      If you’ve had taken any courses which allowed you to hone your valuation skills and knowledge of finance you can mention that. And link that to how you can contribute to the role i.e. perhaps you learned how to value a company in the auto industry in your class and you would like to apply such skills on a larger scale at the firm. Experience – talk about your work experience especially your leadership and teamwork skills gained there

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