The Game: How the World of Finance Really Works - part 4: corporate finance

In the last of our extracts from his bestselling book about the City and beyond, Alex Buchanan introduces corporate finance
Investment banking
Types of work

In a world of one-upmanship, there's no industry more hierarchical than corporate finance. If any branch of the City still personifies the old days, where boys were boys and men were men, this is it. Performance-based pay structures and technological innovations may have altered the buy side and trading landscapes forever, and youngsters barely out of school may be strutting their stuff atop sales desks and hedge funds, but corporate finance remains the place where experience counts, where you don't get to be a prefect or smoke with impunity until you reach maturity.

So much of the City evokes the playground, and corporate finance is the school where the bigger boys win. You'll have to accept it for what it is - a rite of passage - if you want to survive. You suffer today but you'll prosper tomorrow, that's the deal. Just remember - 20 years ago the managing director with the grey hair and expensive smile was standing in your little shoes.

In a Nutshell

Corporate financiers (or "investment bankers") give advice to companies (or "clients") and help them carry out transactions (or "deals"). Advice comes in many shapes and sizes (it can be structural, legal or regulatory in nature or specific to a country, industry or type of transaction), and typical transactions include mergers, acquisitions and the raising of capital, both debt and equity. Most fees are payable only on the successful conclusion of a deal - a key difference when one compares corporate finance to other white-collar professions - and explains much of the behaviour and many of the attitudes that we shall come to explore.

Cult Following

It's 9am. You fight your way out of the station, along the street and in through the door of your neo-classical office façade. You pass through the turnstile, get into and out of the lift and swipe your security card on the reader (corporate-finance departments resemble fortresses - Chinese Walls must be maintained).

You open the door, go through it and look around you. Everything's silent. There's nobody there. Is it Christmas?

No, it isn't. It's a normal day in corporate finance. Welcome to the world of all-night endeavour.

Picture the scenario. You share an apartment with a friend. You're both graduates. He works as a broker and you work as an investment banker. He leaves when you're asleep and returns just as your day gets serious. You go in late and go home very late, working nights and most weekends. A month goes by and you never set eyes on each other.

This isn't some far-fetched nightmare; this is reality. Corporate finance is a socially destructive profession. It's a boot camp without the military fatigues, where offices come equipped with sleep pods, toothbrush holders and shirt-vending machines. Firms differ as to the intensity of the workload, but you can be sure of one thing: in most places people compete to see who can stay awake the longest. Investment bankers make research analysts and their obsession with face time look like schoolgirls.

But despite the rumours of austerity, chastity and sleep deprivation, fresh conscripts aren't in short supply. University production lines belch out the brightest and the best and banks crank up the propaganda in an effort to turn their heads. Are you loyal? Yes, sir! Are you devoted? Of course I am, sir! Can you show application? In bucket loads, sir! Do you want a social life? No, I don't, sir! Then sign (away your life) here now. You're the elite and don't you forget it!

More than any other City profession, investment banking has a purity that attracts the zealot. There's something about raw, unbridled capitalism that can brainwash the most hardy of souls. Year in, year out, investment banks serve up the magic potion and graduates fight tooth and nail to drain the glass.

A Broad Church

Investment banking comprises a multitude of activities. Different banks do slightly different things, but for the sake of simplicity we'll split everything into two camps: "advisory" and "financing". As an employee of one, however, you should expect similar responsibilities to, and regular contact with, colleagues of the other - all too often investment-banking activities tread on each other's toes (and bonus pots).

Advisory, which in most firms includes the functions of mergers and acquisitions (or M&A) and corporate broking, consists of a) the strategic and tactical advice that investment banks give to clients such as companies, families and government entities and b) the ability to help effect a transaction (from a structural, technical and mechanical perspective). Financing, on the other hand, involves the raising of capital (both equity and debt) for these and other clients, often in connection with transactions where the firm is playing an advisory role.

Corporate brokers exist only in the UK and are essentially a company's eyes and ears around the market, relating any investor desires or anxieties and funnelling information back and forth between a business and its shareholders. Depending on its size/sense of self-importance, a company will give official mandates to one or two corporate brokers. Although as a general rule (but not exclusively) M&A advisers concentrate on big-picture strategy and corporate brokers on market-facing issues (such as equity issuance, drafting results announcements, helping company executives buy or sell stock and organising investor road shows), in many firms the two are interrelated, with both providing help and advice on a variety of subjects. Indeed it's quite usual for close corporate broking contacts to result in lucrative M&A transactions.

Old is Beautiful

Investment banking and the progression of capitalism are one and the same. In a world in which the strong subsume the weak, the rich get richer and "biggest is best" cuts the smartest cloth, bankers and company executives/megalomaniacs can be each other's greatest allies.

Rainmakers, kingmakers or dealmakers, call them what you will, senior bankers are under constant pressure to deliver. Like the snooker player who thinks two shots ahead or the DJ who spins three records at once, they're forever scheming, manipulating and manoeuvring, thirsting for fees as they run from client to client. In an industry where league tables can be sliced, diced and re-sliced to suit every bank's purposes, bankers are assessed and re-assessed on a constant basis. You're only as good as your last deal. And revenues are just one side of the story - market share matters too. Bagging a $3 million fee means nothing if the guy down the street/ in the office next door brings home ten times that amount.

The successful banker is a jack-of-all-trades. Adviser, salesman, counsellor and sounding board to name but several, he must combine reason with resilience and temper gluttony with self-restraint. Giving bad advice and/or conning a client into the wrong deal might not stand him in good stead for the long term, but for many the prospect of bagging a fee and moving on is all too tempting.

Patience is a senior banker's greatest virtue. Transactions earn fees but advice costs nothing. You can spend years helping a client navigate the most shark-infested of waters and still not receive a penny in fees. A client might choose to sit on his hands or, as is more likely, deals that you thought were nailed-on certainties will suddenly unravel/lead to a dead end (a rough estimate is that nine in ten "buy-side" deals go nowhere). On the other hand, you can't afford to rest on your laurels - if you do you'll soon be superseded. While in some countries (such as the UK) companies employ official advisers, in theory anyone can pitch an idea and win an investment-banking mandate. Even though this is an industry where relationships are all important, it's not uncommon for one adviser to be elbowed out of the way by another.

This can happen for any number of reasons. People fall out, management moves on, somebody turns up with a better idea or a company grows too big for its boots, dazzled by the bright lights and yearning for the (not necessarily) superior services of a larger bank. In this last instance the cuckolded adviser can do nothing - kicking up a fuss will only damage the relationship - and so settles unhappily for a minor role in a ménage à trois.

Transactions come in many shapes and sizes - e.g. A is buying B, C is selling D, E is trying to protect itself from F, G wants to raise capital and H wants to restructure its debt. It's worth making the point now: no one deal is the same, but it sure helps to have experience. What you learn in the past will guide you in the future, and the more you've learned the wiser you should be.

Companies don't (normally) hire banks because they have the most palatial offices, the most alluring secretaries or the most industrious graduates. They hire those that a) give the best advice and b) get the job done. And while there are occasions when banks appear on the team sheet because of who they are and not because of what they offer, most of the time individuals clinch deals, not institutions.

Company executives don't think,

"Let's get Morgan Stanley as our lead adviser. We don't know their main men Smith and Jones, but I'm sure it will all work out."

Instead they think,

"Let's get our friends Smith and Jones to be the leads. Are they still at Morgan Stanley or have they moved on?"

Only once they've secured the services of those they trust might they also add,

"We've got Smith and Jones to be our leads, but I think it also makes sense to have Goldman on board. We don't expect them to do much, but having them there will make us look better."

In this industry long-term relationships are critical. The old school tie confers everything and clients tend to value continuity over the claims of a Johnny-comelately. In a world where anyone can approach anyone, you can spend months hammering on a company's door with the most brilliant of ideas, but if you don't know the management or the board and they don't know you, you can forget about securing a mandate. Only if you work for a firm that can bring something specific to the party (such as sector expertise or political contacts), might you walk through a door that would otherwise remain barred.

Compared with most other City professions investment banking is a gruelling existence, a promise of long-term gain for a pound of flesh today and another tomorrow. M&A in particular is a marathon not a sprint, with never-ending hours for juniors, no rapid promotions and only a gradual increase in responsibility. If you seek instant gratification then forget it - this isn't for you.

The Game: How the World of Finance Really Works (E&T Books, £9.99) was published in summer 2013.