Johann Rupert, chairman of luxury goods giant Richemont and investment firm Remgro, likes to say that having changed course after his early years in investment banking at Lazard Frères and Chase Manhattan, he’s now a "reformed prostitute".
It’s an inside joke that will have many investment bankers smirking into their martinis, even if they don’t agree wholesale. Part of their job, as Rupert suggests, is to visit boardrooms and pitch deals to CEOs hoping they’ll bite, in exchange for a fee.
For those who’ve been sold a dud, it’s less funny.
You can imagine, for example, that there wouldn’t be too many laughs in the executive suites at Mediclinic, which did a horror deal to buy Abu Dhabi-based Al Noor in 2015 for US$2.3bn. Or at Brait, which bought British fashion chain New Look for R14.5bn, only to write it down to zero two years later.
At Remgro’s AGM three months ago, when Rupert was asked if he intended to stick by Mediclinic, he answered: "Mediclinic is a very well-run business that has had very bad financial advice on deals."
Its share price shows that’s no exaggeration. From a peak of R218/share in June 2016, Mediclinic has dropped to about R93/share. The hospital company’s off-colour performance meant Remgro’s net asset value fell last year for the first time since 2008, when it unbundled British American Tobacco.
Rupert told the Financial Mail this week that the problem wasn’t Mediclinic going overseas, but the financial structure it used. "You can’t blame [Mediclinic] for looking to go abroad. Here it was facing an industry that was becoming more regulated and highly politicised. But it should be done properly," he says.
Most CEOs don’t need prodding — doing huge deals is how you build your reputation
As much as investment bankers are given incentives to pitch deals to CEOs, management teams should be alert to pitfalls. But in late 2015 — when everyone was falling over themselves to do an overseas deal — this scepticism was quietly shelved.
And in Mediclinic’s case, it also paid an awful lot to its advisers — R468m — based on the "transaction costs" in the 2015 circular to investors.
The two financial advisers — Rand Merchant Bank (RMB) and Morgan Stanley — got a chunky R167m each. Law firm Cliffe Dekker Hofmeyr got R6m and its UK counterpart, Slaughter & May, got R85m.
Chris Logan, CEO of investment company Opportune Investments, says that as much as a board should take responsibility, if a number of deals flop due to poor advice, the advisers deserve scrutiny.
"What’s wrong with our advisers? You’d expect that for earning the kinds of fees they do, they should be putting together very solid deals. But if you take the case of Mediclinic, the value destruction has been immense. Let alone the bad deals at other companies."
RMB CEO James Formby says Mediclinic hasn’t expressed any regrets about doing the deal.
"I don’t think it’s a dud. It was a transformational transaction, but some of the integration issues were tougher than expected. And the decline in Mediclinic’s share price has been due to a range of factors not only linked to this transaction — for example, changes in the regulatory environment in Switzerland," he says.
Formby says companies that expanded overseas in 2016, when it seemed every JSE-listed company was itching for a bolt hole, weren’t always making the wrong call. "It isn’t necessarily a bad philosophy, but there have been examples where some companies have overestimated the ability of their SA management teams to add value to an overseas business. In many cases, I’m not sure they have the depth of management to handle a tough market at home, as well as a new market overseas," he says.
This is probably true. As is the view of RECM chairman Piet Viljoen, who points out that while CEOs are by design optimists, when it comes to allocating capital, the pessimists who can assess what can go wrong and why they’re paying so much will do better.
Investment banking isn’t easy, given the tension between making fees, doing what is best for the client, and then managing the fallout of a deal being branded a failure because the firm didn’t integrate it properly.
But as one banker told The Guardian: "Sometimes we would advise clients on solutions that were primarily to our advantage — they weren’t bad for the client per se, but they were suboptimal." He added: "Most CEOs don’t need prodding — doing huge deals is how you build your reputation as a business leader."
In the wake of the fallout from New Look, Al Noor and Steinhoff, chances are there will be a new dose of healthy scepticism the next time the investment bankers pitch a transformational deal.
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