Macaskill on markets: False valuations threaten deal fees


Jon Macaskill
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Delusional clients are complicating the business of collecting fees for advising on mega trades for customers such as Saudi Aramco and Tesla.


It turns out Saudi Aramco won’t be going public after all, or Tesla going private.

Not any time soon, at least.

The twin failures of what would have been the biggest IPO in history and what could have been one of the most controversial buyouts of a public company highlight the risks to Wall Street bankers when they try to cash in on audacious deal plans by headstrong leaders.

There were plenty of reasons for the abandonment of the potential deals, but a refusal to take advice on core issues of valuation was central to each embarrassing climb down.

In the case of Saudi Aramco, the stubborn attachment of Saudi Arabia’s crown prince Mohammed bin Salman to a $2 trillion valuation for the oil producer was a key reason for the shelving of an IPO that was intended to raise $100 billion or more in cash.

Even analysts working at banks that would profit from involvement in an IPO struggled to get to a valuation of more than $1.5 trillion for Saudi Aramco, given projected oil revenues.

That stalled the process of making decisions on issues such as listing venues. Exchange heads were as keen as bankers to cash in on a deal, but they faced reputational threats when it became apparent that they might be asked to contort their listing rules to suit the Saudis.


The potential for a giant deal to struggle because of an overly aggressive valuation might have been enough to tilt the risk/reward calculation away from aggressive pursuit of a listing for some exchange managers.

Delays to the deal’s momentum caused by valuation disputes also seem to have given court rivals to the crown prince time to persuade his father, King Salman, to veto the IPO.

The problem at the court of Elon Musk, founder and chief executive of electric car maker Tesla, seems to be that none of his courtiers – in the form of old friends on the board – seem willing or able to restrain his wilder assertions.

The example of Dell shows that a publicly listed technology company with a founder still at the helm can go private when it seems undervalued and prosper subsequently.

Michael Dell ran into plenty of criticism in 2013 when he led the leveraged buyout of the firm he had founded, but he took advice on valuation and debt funding from private equity firm Silver Lake and bankers at JPMorgan, and successfully closed the trade. He is currently relisting the company – although without an IPO – at a valuation more than twice the $24.9 billion at which it went private.

If a Dell 2.0 deal was what Elon Musk had in mind when he sent his notorious August 7 tweet about a buyout for Tesla, then he immediately sabotaged the project with his cavalier approach to valuation and funding.

The tweet read in full: “Am considering taking Tesla private at $420. Funding secured.”

Sycophancy remains one area where the traditional Wall Street adviser is unlikely to be superseded by technology or disintermediated by new ways of investing 

It quickly emerged that funding was far from secured and Musk’s assertion was based on little more than conversations with the Saudi sovereign wealth fund about a potential investment. And the quoted valuation of $420 per share might eventually be categorized by regulators as a crude and possibly illegal attempt to create losses for short sellers of Tesla stock.

Deal hungry Wall Street financiers nevertheless quickly offered their services to Musk in a bid to put a feasible buyout proposal together, with Goldman Sachs and Silver Lake working the phones like it was 1999 to line up potential investors.

When it finally dawned on Musk that his debt market options were so limited that the only way to go private would be to sell a major equity stake to a buyer like a petro-economy (Saudi Arabia) or a traditional car company (Volkswagen), he executed another 180 degree turn and announced that Tesla will remain public after all.

Saudi-Aramco-stop-R-780Saudi Aramco's Ras Tanura oil refinery and oil terminal in Saudi Arabia

So no Tesla buyout bonus for Goldman; while the Saudi Aramco IPO fee taps were turned off for banking coordinators JPMorgan, Morgan Stanley and HSBC, along with boutique advisers Moelis and Evercore.

This might indicate that false valuations – the financial market equivalent of the fake news concept popularized by Donald Trump – are posing a serious threat to the business of monetizing deal advice for big banks.

Messianic confidence

Trump’s political success certainly seems to be encouraging other leaders with a similarly messianic confidence in their own abilities to discount inconvenient facts that don’t serve their purpose. This in turn presents obvious challenges for Wall Street advisers who cannot convince their more challenging clients to face reality and accept available deal terms, rather than holding out for all their goals.

But as long as they can maintain a relationship to the leader in question, while cycling through a list of potential business solutions until finding one that is actually viable, Wall Street advisers can still expect to cash in at some point.

Saudi Arabia, for example, is likely to remain a huge source of fees in the coming years, whether or not an IPO of Saudi Aramco is ever revived. A $11 billion syndicated loan was put together soon after the IPO was pulled, which keeps banks like JPMorgan busy and specialist firms like Moelis and Evercore that are not big lenders will no doubt be thrown some advisory scraps from the table as the Saudis shift assets between state-owned entities.

Elon Musk might not be as careful to keep his Wall Street contacts well fed, given that he seems to divide his time between tinkering with the Tesla production line at odd hours and conducting feuds on Twitter.

Even Musk may feel some vestigial loyalty to Goldman Sachs, however, as long as the bankers there take care to nurture his self-image as a technological genius who is tragically misunderstood by the petty minds of the public equity markets.

Sycophancy remains one area where the traditional Wall Street adviser is unlikely to be superseded by technology or disintermediated by new ways of investing.

The nature of market reality may feel malleable these days and the pace of change may seem strange to a banker brought up in a comfortable world of elite academies and reliable barometers of success. An instinct for what needs to be done to keep a client happy is timeless, however.

Call it fawning or call it attention to detail and the primacy of the customer’s needs.

Fake valuations and erratic clients should be no more than a minor barrier to the business of extracting advisory fees for bankers.