When is too much, too much ?
How do you price services which are very exclusive and for which there is no possibility of a real market ? Is there some such thing as a “fair price” or is that concept an oxymoron ? Does public opinion on what constitutes “excessive” have any role to play ? Should pricing have any relation to cost at all ? Not easy questions to answer. Welcome to the world of investment banking.
The case that triggers this post is a legal suit filed by JP Morgan on Consolidated Minerals (ignore who they are for the purpose of this issue), in an Australian court. The case relates to the acquisition of Consolidated Minerals, a mining company, by Palmary for A$ 1.3 bn. JP Morgan was Consolidated Minerals' advisor in the acquisition. But the new owner, Palmary has a dispute on what fees must be paid by them to JP Morgan. Palmary believes that JP Morgan’s fees should be A$ 7m. JP Morgan believes it should be A$ 50m. Hence the dispute.
Its extremely rare for investment banking fees to be brought to court. It’s a rarified and secretive world, which usually settles its fees in cosy chats. The amounts involved are huge. In big M&A transactions, fees would routinely be in hundreds of millions of dollars. The fees are usually a percentage of the size of the transaction and since acquisitions are routinely in many billions of dollars, the adviser’s fees are also massive.
But there is growing criticism that the fees are “excessive”. Herein lies the rub – who, if anyone, is to determine what is excessive ? In a normal free market, you would say its none of anybody’s business. But as I observed before, its not a free market – in fact its not a market at all. Its all cloaked in secrecy. Does just that fact justify intervention by anybody ?
One thing is certain – the fees bear no relation to costs. But then in a million other products and services, the price bears no relation to cost. In the case of M&A adviser’s fees the costs are probably less than 5% of the fee amount. That, by itself, is no argument for saying the fees are excessive. The difficulty is that fees of many millions of dollars does seem usurious; there’s just no way it will not attract attention. Especially since it usually one of the most profitable lines of a bank leading to large bonuses, which the public and governments seem to be very agitated about.
Defenders say that as long as a company is willing to pay the fee, it’s a matter between the company and the adviser and everybody else should keep their noses out of the matter. There is a lot of merit in this position. If at all anybody should object, it should be the shareholders of the company - they are the ones with the power to restrain Boards from paying excessive amounts. And they should exercise that power, and not merely keep quiet.
But the socialist bleeding heart that I am, I have some qualms. I have had some insight into this business in a previous avatar. With a few shining exceptions, the “advice” the many investment banks dole out is often trash. That they should be paid many hundreds of millions for this, doesn’t sit easily, even though the economic rationale for it may be somewhat strong.
I have some difficulty swallowing the pricing of different services in the banking world. It does look a bit too much. But then, when is too much, too much ? And who is to say so ?
The case that triggers this post is a legal suit filed by JP Morgan on Consolidated Minerals (ignore who they are for the purpose of this issue), in an Australian court. The case relates to the acquisition of Consolidated Minerals, a mining company, by Palmary for A$ 1.3 bn. JP Morgan was Consolidated Minerals' advisor in the acquisition. But the new owner, Palmary has a dispute on what fees must be paid by them to JP Morgan. Palmary believes that JP Morgan’s fees should be A$ 7m. JP Morgan believes it should be A$ 50m. Hence the dispute.
Its extremely rare for investment banking fees to be brought to court. It’s a rarified and secretive world, which usually settles its fees in cosy chats. The amounts involved are huge. In big M&A transactions, fees would routinely be in hundreds of millions of dollars. The fees are usually a percentage of the size of the transaction and since acquisitions are routinely in many billions of dollars, the adviser’s fees are also massive.
But there is growing criticism that the fees are “excessive”. Herein lies the rub – who, if anyone, is to determine what is excessive ? In a normal free market, you would say its none of anybody’s business. But as I observed before, its not a free market – in fact its not a market at all. Its all cloaked in secrecy. Does just that fact justify intervention by anybody ?
One thing is certain – the fees bear no relation to costs. But then in a million other products and services, the price bears no relation to cost. In the case of M&A adviser’s fees the costs are probably less than 5% of the fee amount. That, by itself, is no argument for saying the fees are excessive. The difficulty is that fees of many millions of dollars does seem usurious; there’s just no way it will not attract attention. Especially since it usually one of the most profitable lines of a bank leading to large bonuses, which the public and governments seem to be very agitated about.
Defenders say that as long as a company is willing to pay the fee, it’s a matter between the company and the adviser and everybody else should keep their noses out of the matter. There is a lot of merit in this position. If at all anybody should object, it should be the shareholders of the company - they are the ones with the power to restrain Boards from paying excessive amounts. And they should exercise that power, and not merely keep quiet.
But the socialist bleeding heart that I am, I have some qualms. I have had some insight into this business in a previous avatar. With a few shining exceptions, the “advice” the many investment banks dole out is often trash. That they should be paid many hundreds of millions for this, doesn’t sit easily, even though the economic rationale for it may be somewhat strong.
I have some difficulty swallowing the pricing of different services in the banking world. It does look a bit too much. But then, when is too much, too much ? And who is to say so ?
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