Monkey Business (14 page)

The whole thing was, Gator’s craziness may have been the result of a supercharged adrenaline rush coursing its way through
his veins. Rob Katz, a vice president who used to spend a lot of time working with Gator, told me
that he’d once been on an airplane trip back from Asia with Gator and he’d been having some difficulty sleeping. Gator told
him to “try a half of one of these pills that I have.” Katz asked for a whole pill, but Gator told him that he’d probably
better stick with a half. “They’re kind of powerful,” he said. Katz claimed that he took half a pill and then watched Gator
down two of them. Katz reported falling into this incredibly deep dreamless sleep immediately thereafter.

The next thing Katz remembered, all the passengers were getting off the plane and hitting him in the head with their luggage
as they passed him in the aisle. Gator was still going full speed two seats over, cranking through a huge pile of work. The
man couldn’t be slowed.

Gator knew that he was a pit bull. It made him proud. He used to tell stories that perpetuated the myth. The best one came
my way as I was cruising through the woods of Minnesota with him in the back of this late-seventies Cadillac stretch limousine.
We were on our way back to the airport from a closing dinner, and the two of us were smoking some stogies and stinking up
the entire limo. We started bullshitting about stupid things we’d done through the years, and Gator let loose with a classic.

“When I was in college, I was on a road trip with a buddy of mine. We were traveling from South Bend, Indiana, to Ann Arbor,
Michigan. It started to get kind of late one night, and my buddy saw this quick-stop store up ahead, so we pulled in to grab
some coffee and get something to eat. Well, while we were in there my buddy saw this
Penthouse
magazine, so he decided to buy a copy so
that he would have something to do once we were back on the road.

“We were taking back roads most of the way, and the sun had gone down, so the roads were pretty dark. On top of that, my buddy
had the dome light on in the car so that he could get a real good look at all these naked chicks who were in the magazine.
You take all that, plus the fact that I was listening to my buddy read the
Penthouse
“Forum” submissions to me, and you ended up with me not paying real close attention to everything that was happening on the
road in front of me. Next thing I knew, there was this fucking cow standing right there in the middle of the road, right in
front of me, and it was too late for me to stop. We hit the cow.

“Well, now, this cow was a big fat one, and when it came down to this collision between our car and the cow, the cow came
out ahead. He rolled up onto the hood, rolled over and crushed the front windshield, and then rolled right off the side of
the hood and landed next to the car standing on all four legs. It was amazing. He stood there dazed for a minute, let out
a belch, and walked off toward the side of the road into the darkness.

“I think that me and my buddy were more shocked than the cow was. We were sitting there in the middle of nowhere, and now
we had a crushed hood, a windshield that we couldn’t see out of, and we still had another fifty miles to go until we got to
Ann Arbor. There was one other small problem. When we had hit this cow it was so shocked that it had spontaneously emptied
its bowels all over the front of the car, so we now had not only transport problems and vision problems but stench problems
too. My buddy was all flipped out about the car, and he
kept saying that we needed to wait for another car to come along so that they could drive us to the nearest place with a tow
truck. Well, I told him ‘Fuck that, we don’t have any idea when somebody’s gonna come help us out, I’m gonna get us to Ann
Arbor one way or another.’”

I often thought about the remainder of Gator’s trip to Ann Arbor after he told me that story. I pictured him starting the
car back up, sticking his head out the window like a dog, and driving down the road. I could see him, like the Red Baron,
piloting a big whale of a cruise-mobile up to about thirty-five miles an hour before pieces of cow crap started peeling off
the hood and flying back to hit him in the face. I could picture his buddy in the car hearing the slapping noises of the doody
chunks hitting Gator in the face, and I could picture him pulling into Ann Arbor covered in cow shit, looking like something
out of a grade-B horror movie. It didn’t paint a pretty mental picture, but it helped me understand how Gator operated.

An associate didn’t stand a chance with a guy like Gator as his managing director. He may have been a great guy out of the
office, he could have even been the Messiah, but when it came to banking the guy was an animal. Getting staffed on a pitch
with Gator was a sure death sentence for the associate, and there was no appeals process. The electric chair was ready and
waiting and the power was turned on.

T
he investment banking associate devotes a significant portion of his or her existence to performing valuation work. Theoretically,
every transaction involves a valuation. If the bankers are selling a company, then they need to do a valuation to figure out
what a fair sales price is. If the bankers are doing an equity offering, then they need a valuation to tell them how much
money the market will give them for the equity. If the bankers are doing a bond offering, the bond buyers will want to know
what sort of value the assets backing the bonds have.

The valuation work begins at the very first stages of the pitch and continues throughout the entire process until the deal
is actually consummated. The valuation will go up, down, sideways, and backward. The valuation will start out looking like
Little Bo Peep and end up looking like Quasimodo.

Any associate who has graduated from business school
knows all the different valuation techniques. There are market-based methods and theoretical methods. There are trading values
and takeout values. There are going-concern values and liquidation values. Troob and I knew all this, but what we didn’t know
was how the valuations in an investment bank usually got done. After we learned, we called it doggy-style valuation because
it was done backward. In an investment bank, the managing director figures out what reasonable valuation number he is going
to need to tell the client in order to win the business. It then becomes the associate’s job to work backward to figure out
a way to display analysis that will validate the target value. In the process, associates try to convince themselves that
what they’re doing is solid analysis and not simply pure pretzel logic or high-level finance magic tricks.

We had a lot of valuation techniques at our command. It would have been nice if we could have tried out a few techniques,
and then used the one that gave us the target value we were hoping to reach. The problem was that usually our valuation techniques
didn’t give us the numbers we needed. The numbers we had to give the companies during the pitch in order to win the business
were usually bigger than we could reasonably justify. This was problematic, but it wasn’t insurmountable. As long as we were
willing to push the limits of our optimism, we could come out where we needed to be. As long as we were willing to take a
second mortgage on our integrity, everything would be Dy-No-Mite.

This is how we did it.

The quickest method of valuing a company is through use of a comparable multiples analysis (“comp analysis”). In a comp analysis
the associate identifies a group of companies, the comps, that are similar to the company being valued, then he looks at what
prices the comps are trading for in the public market. For instance, the group of comps might be trading on average for ten
times cash flow. If that’s the case, then the associate simply has to take the target company’s cash flow and multiply it
times ten in order to derive a value for the company. It’s as easy as pie, and the principle behind the comp analysis is simple:
if your neighbor’s 1975 Chevy Nova sold for three hundred dollars, your 1977 Chevy Nova should probably sell for about the
same amount.

The problem with the comp analysis is that most of the time the banker wants to have a group of comps with the highest multiples
possible and that, in turn, means that the bank may have to use companies as comps that are completely different from the
company being valued. The associate’s job then becomes figuring out a way to make all the companies seem similar, even though
they’re not. I once worked on an IPO for an engineering company that had a lot of clients in the broadcasting industry. Broadcasting
companies were selling at huge premiums to engineering companies in the market, so we convinced the buyers that the company
going public was actually a
broadcasting
company that just happened to employ a lot of engineers. It worked like magic. On the comp analysis, any company with even
the slightest justification
for inclusion is considered. It can be a redheaded stepson, or a second cousin through marriage three times removed, and it’ll
still get invited to the family barbecue.

Bankers, in general, love comp analysis. A well-executed comp analysis contains lots of data, and that gets most bankers hotter
than a plate of Louisiana crawdads. Our associate comrade Slick once worked on a deal for DLJ’s merchant bank. The merchant
bank wanted to sell one of their portfolio companies and they needed a comp analysis to figure out what sort of price they
could expect to get in the public markets. The portfolio company was a textile company. The managing director said that he
needed a very thorough comparable analysis; he didn’t want to leave any stone unturned. Our man Slick had to put together
a comparable analysis with one hundred companies on it. We called it the “100 Company Underwear Comp” because a lot of the
companies made underwear. Four times a year each of the companies on the comp released their quarterly financial statement
and Slick had to update all one hundred companies. It took him two entire days. That was when he realized he had hit it big
as an investment banker. Nobody knew as much about the trading multiples of underwear companies as he did. He had found his
niche.

Another key weapon for the creative banker is the discounted cash flow (DCF) analysis. The DCF is the grand-daddy of all crocks
of shit. It’s the technique that makes
Linda Lovelace look like a Catholic schoolgirl and Richard Nixon look like Abe Lincoln. In a DCF analysis, the banker projects
the company’s cash flow for a bunch of years into the future, then he figures out what all those future cash flows are worth
today.

The DCF analysis is especially useful for valuing companies with no real business. A comp analysis, at least, requires that
the company being valued have some revenues, cash flow, or earnings
today
in order to have any value. The DCF analysis does not. It finesses the problem by only attributing value on the basis of
how the company is projected to do in the future.

The associate always takes the first pass at developing the DCF model. The associate has a quick rule of thumb—reality is
irrelevant. The projections should always show revenues going up and expenses going down. That makes the DCF model spit out
a big fat value for the business. Big fat values make CEO’s happy.

When the associate finishes taking wild stabs in the dark on the DCF model, the more senior bankers will get involved. The
senior vice president will decide that the revenue growth should be 11 percent per year instead of 8 percent. The vice president
will have the associate take the gross margin up a percentage point. There are standard investment banking reasons why any
given margin should improve. They always involve phrases like “operating efficiencies,” “synergies,” and “economies of scale.”
Everyone on the deal team will pull a few of these phrases out of the hope chest, and tweak the model a little bit so as to
put his own special mark on it. It’s like animals marking their territory. At the end of the day,
there’s only one immutable goal. The team has to reach the valuation target that the company will be happy with.

Over and over again associates tweak their DCF models. Over and over again they have models that show the company growing
at a rate that, if continued, would allow the company being modeled to take over the entire planet within a generation. Over
and over again the investors buy securities that are overpriced based on inflated and unrealistic expectations. For some reason,
nobody ever learns. It’s part of the magic of the DCF.

There is one final line of defense after the bankers have marked their valuation territory. This is the research analyst,
the person who will be expected to write research reports and provide coverage of the company being valued. In theory, the
research analyst is supposed to operate as a check on the overly optimistic bankers and is supposed to bring some incremental
level of industry expertise to the entire valuation process. While some of them do, there are plenty of others who aren’t
truly independent anymore. These analysts operate as extensions of the investment banking operation, helping to win deals
and generate business.

Research analysts have a mixed set of incentives. On the one hand, they need to maintain some credibility because long after
the bankers have headed for the hills following a deal’s sale, the analysts will continue to answer to the institutions whom
they convinced to buy the deal in the first place. On the other hand, the bank is in
the business of making money, and the investment banking fees associated with underwriting and advisory business are a prime
contributor to the institution’s profitability. Anybody who isn’t a contributor to that profitability isn’t going to be kept
around for long. There’s always the distinct possibility that the “cooperative” analyst will become accustomed to eating steak
tartare at The Palm, while the less cooperative analyst will end up eating Salisbury steak at the Denny’s buffet.