Pulling deals: painful or shameful?
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People and MarketsCraig CobenCoben the Contrarian

Pulling deals: painful or shameful?

Edinburgh, Scotland, United Kingdom, 1 March, 2018. Heavy snowfalls continue across the city from the storm known as The Beast from the East. Most shops are closed and transport services have been cancelled. Pictured; Waverley Railway Station has seen mos

Hooking a new issue is the nightmare that haunts us all

Every capital markets banker suffers setbacks — clients award prized mandates to other banks; a block trade leaves the firm long and wrong; a deal nosedives in the aftermarket.

But nothing stings like pulling a deal. You spend months, sometimes years working on a transaction, only for investors to spurn it. It depresses and degrades you in equal measure, bruising morale and reputation.

These thoughts sprang to mind at the end of April when Fidelidade, a Portuguese insurance company controlled by Chinese conglomerate Fosun, which also owns Wolverhampton Wanderers Football Club, postponed the IPO of its healthcare arm Luz Saude.

The flotation, led by Citi and UBS, would have been the first in Portugal in years. Lisbon IPOs have a special place in my heart. My first deal as an investment banker involved the privatisation of motorway operator Brisa Auto-estradas de Portugal in 1997.

In its announcement Fosun blamed “recent instability in the capital markets” for cancelling the offering just two weeks after issuing its intention to float.

Yeah, whatever.

Unstable markets didn’t scupper the deal; they were good enough for others to proceed. Rather, the cancellation was, as GlobalCapital pointed out, “due to a mismatch of valuation expectations between the company and investors.”

And it’s not just the equity market. Raffeisen Bank International withdrew a €650m additional tier one capital bond offering during bookbuilding after news reports about US concerns over the issuer’s links with sanctioned Russian magnate Oleg Deripaska. Data centre REIT Equinix pulled its bond deal after a short-seller’s report rocked the market, while a bond offering for German renewables firm BayWa fizzled out due to lack of investor interest.

Got to get up…

It’s worth considering the chronology of a pulled deal to see at what point someone should have known it was going pear-shaped.

An unsuccessful stock market flotation such as Luz Saude is a good example because the lead time is longer and the sunk costs are deeper than for most debt issues, although many of the problems are similar.

Bereshit, banks pitch (often several times over) to the company and its shareholders for the mandate. Their presentations discuss positioning and, importantly, an indication of likely valuation based on different metrics, usually comparable company multiples.

The client likes what it hears and mandates the banks it thinks are best able to deliver.

The client likes what it hears and mandates the banks it thinks are best able to deliver

Then there are ‘early look’ and ‘pilot fishing’ meetings with selected investors. Before any research is published, management meets with a few fund managers, and the banks follow up for feedback, asking about likely participation, valuation methodology and preliminary views on pricing.

If there’s a big discrepancy, you should know about it by now.

The level of distraction at the company is rising, including for its senior management. IPOs are time sinks, but executives and employees are motivated by the excitement of a public listing.

Meanwhile, lawyers and accountants prepare the prospectus with audited financial statements. Unlike investment bankers, they charge by the hour and the bills are mounting. It isn’t just the anticipation that is piling up.

Then comes the intention to float and the publication of pre-deal broker research. This is a big moment. The deal is now in the public domain.

Friends call to congratulate you. The financial press writes about you. Research analysts fan out to visit fund managers and walk them through the investment case. Salespeople hit the phones to solicit feedback from a broader universe of investors. These are heady times.

… to let down

And then your hopes and dreams are dashed because nobody cares. At least not at the price your seller wanted.

At one level, there’s no shame in a pulled deal. Failure happens. Market conditions change. Client expectations prove unmanageable. “Stuff happens,” as Donald Rumsfeld infamously said in 2003 after looting broke out in US-occupied Baghdad.

A pulled deal can feel almost as painful as a pulled tooth

But when a deal has brewed for this long and it goes off, the stench is horrific. You spent time and money to execute it and, moreover, you ran up huge legal bills that your client is required under the engagement letter — but may not be minded — to reimburse.

I don’t know which is less fun: asking an unhappy client to pay your legal and out-of-pocket expenses or calling lawyers to beg for a discount or a deferral.

This is how a pulled deal can feel almost as painful as a pulled tooth. But at least a tooth extraction is over in minutes and typically yields sympathy — maybe even a bravery badge — rather than opprobrium from all involved.

And the blame game is played in public. The press — including the deal mavens at GlobalCapital — write about it.

Rival bankers gleefully publicise your failure to clients. “This would never have happened if we were on the deal,” the bankers tell the trade magazines, with a straight face.

The client is usually disinclined to accept responsibility, even if they ignored your early warnings about the merits of proceeding. The customer always thinks he's right — and who are you to say otherwise out loud when the deal could be resurrected?

Who are you calling stupid?

It’s almost beside the point who is to blame. Maybe the client clung to a fantasy. Perhaps the bankers failed to come clean about likely investor reception — itself often a product of cowardice and a craven desire to please in the short-term. The reality is everyone is jointly and severally responsible (not legally, but morally).

The worst aspect may be that the debacle calls into question your very professional competence. It hurts for the same reason that Otto hates being called stupid in the 1988 film A Fish Called Wanda.

How could you have allowed the client — and your firm — to become so exposed? What does it say about your client and deal selection, much less your market judgement? Were you too timid to tell the client the truth or to give the best advice? Do you have a clue what you’re doing?

Like recovering from any acrimonious break-up, it’s about picking yourself up and soldiering on. Dwelling on the past serves little purpose: as the awesome Beverley Knight sings, “shoulda, woulda, coulda are the last words of a fool.”

Memories are short, and time softens even the sharpest blows, some of which may even come from your own colleagues. Just see if the lawyers can cut you some slack on the bill.


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