Is Germany the Next Nortel?

In the late 1990s, Nortel Networks was a leader in selling telecommunications equipment to new start-ups.  But, what few people understand is how Nortel itself was a key contributor to the ultimate bursting of the tech bubble.  In order to encourage these communication service providers to buy Nortel’s communications equipment, Nortel would provide financing.  In some cases, Nortel would actually pay the communications companies to buy Nortel’s products.  Nortel would offer 100% financing on the equipment sale, and then would provide a further 20% to 30% of the purchase price via working capital loans.  All this free capital contributed to too much communications capacity being built, prices collapsing and the bursting of the tech bubble.  Ultimately, Nortel went bankrupt.

Why do I bring up this story?  Because it reminds me a lot of Germany’s situation today and the issues surrounding the European common currency.  Germany is the second largest exporter in the world, which contributes significantly to its prosperity.  Unlike the US which runs large trade deficits, Germany runs large trade surpluses.  And, much of this trade surplus is with Eurozone countries.

So, what is the connection between Nortel and Germany?  Well, let’s review what has been happening in Europe for the past decade.  Southern European countries, such as Greece and Italy, have incurred high levels of government debt in order to provide social welfare for the people.  And, once the Greek and Italian people receive this social welfare, they spend the money.  And, a meaningful amount of this spending goes toward German exports.  So, who buys the Greek and Italian debt and thus provides the money to the Greek and Italian governments?  You guessed it, in part German banks.  So, Germans provide money to the countries who are buying their exports.  And, to be honest, the French are no better and doing the same thing.  Now do you see the similarity?  And, we know how things turned out for Nortel.

Understand That About Which You Opine

Today, Andrew Ross Sorkin, of the New York Times DealBook, wrote an article which states that over the past two years Hewlett-Packard has paid $81 million in acquisition advisory fees to investment banks but received questionable advice.  Here is the link:

http://dealbook.nytimes.com/2011/11/07/as-h-p-shops-its-bankers-do-very-nicely/?nl=business&emc=dlbka22

What this article shows is that Andrew, and most journalists for that matter, have no idea what M&A advisors actually do.  I worked as an investment banker for 12 years (Citigroup, Merrill Lynch and First Boston), interacting with numerous boards and management teams on acquisitions.  I then worked in private equity where I was involved in decisions on buying or selling companies, which included hiring investment banks.  So, let me explain how the process actually works and what investment bankers actually do.

First, investment bankers do not tell companies to make acquisitions or to sell companies.  Investment bankers may bring ideas to companies, but universally the companies decided what to buy and sell.  Usually, companies identify a company to buy or decide to sell their company.  So, what then do the investment bankers do?  Very simply, they haggle over the terms.  That’s it.  Investment bankers try to get the best terms, which primarily means price, for their client.  Then, the client decides if they want to proceed.  Somehow, the media has this fantasy that investment bankers are these larger than life figures who dupe companies into agreeing to transactions that are not in the companies’ interests.  Nothing could be further from the truth.  Boards decide whether to proceed and investment bankers have very little influence over them.  The investment bankers are advisors.  They advise on the pros and cons of a deal, they advise on the financial and business terms of a deal.  But, all they do is advise; they do not decide anything.

And, I can remember specific situations where our team advised companies not to proceed with a deal but the company decided to move forward anyway.  We told them we did not think the deal terms were in the best interest of the company, but if they wanted to proceed we would support them and continue to advise them.  Ultimately, it’s up to companies to decide what to do.  How does Andrew Ross Sorkin know what advice the investment bankers gave H-P?  Maybe the investment bankers advised against the acquisitions but H-P moved forward anyway?  In which case, the investment bankers had a fiduciary responsibility to still work on behalf of H-P to get the best terms possible, even if the overall transaction was not advisable in their opinion.

My advice to the media is to actually understand the industries about which you write.  Your active imagination may make for fun reading and tap into readers’ pre-disposition for another reason to hate Wall Street, but it does a dis-service by mis-informing them.

Boycott Wall Street

Occupy Wall Street has many complaints.  One is crony capitalism, which includes bank bailouts.  And, while protesting is capturing national attention, it won’t have an effect on corporate behavior because there are no actual consequences to companies.  But, if OWS, and America for that matter, really want to change corporate behavior, the solution is actually quite easy; boycott companies whose behavior you do not support.

If you do not like Bank of America, then close your bank account and move to a local bank.  If you do not like Morgan Stanley, then close your brokerage account and move it to one of the many brokerages that did not receive a bailout.  For Goldman Sachs, since they do not really work with retail customers, it is a little less direct.  You have to boycott Goldman Sach’s customers.  Boycott Groupon because they hired Goldman Sachs to lead their IPO.  Or, boycott Hewlett-Packard because they recently hired Goldman Sachs as an M&A advisor.  If Americans boycott companies that hire the banks, then I guarantee the banks’ behavior will change.  Instead of thinking Washington D.C. will regulate the behavior of the banks, Americans should take control of their destiny and regulate the banks themselves by withholding the one thing to which all banks respond, revenues.

While banks tend to be the focus of OWS, many non-financial companies thrive on government contracts.  For example, Jeffrey Immelt, General Electric’s CEO, heads President Obama’s jobs council.  The council has made recommendations on how to jump start the economy.  Two of the recommendations are high speed rail and wind power.  And, surprise, surprise, GE is a supplier to the rail and wind power industries.  So, if you do not approve of crony capitalism, simply boycott GE’s products.  There are plenty of companies that do not pander to Washington D.C. for assistance.