Wednesday, September 4, 2013

The Verizon-Vodafone Deal Generates Lawyers Envy

The Verizon-Vodafone Deal Generates Lawyers Envy

Verizon is buying out its mobile partner Vodafone in a deal valued at $130 billion.  It’s estimated that the investment banks advising on this deal will make more than $200 million just for providing advice to each side of the transaction.[1]  Of course, it’s been nearly 14 years since the investment banks got paid for putting Verizon and Vodafone’s cellular businesses together in the first place.  So it’s high time for another deal.  Since Verizon will be issuing $50 billion in debt, the investment banks will make even more money helping the company pay for the deal.  They’ll make more money advising Vodafone as it spends some of the $130 billion on acquisitions in Europe.  In short, there’s probably $500 million in fees imbedded in this transaction.
 
Playind Defense (1999)
Let’s just focus on the advisory fee that Verizon will pay to its investment banks.  Four firms will split the spoils: JP Morgan, Morgan Stanley, Guggenheim, and Paul J. Taubmann.   Guggenheim is a boutique whose investment banking arm is run by Alan Schwarz, the former CEO of Bear Stearns.  Yes, the man who presided over the failure of Bear Stearns is being paid millions to dispense advice. 

Paul J. Taubmann is an ex-Morgan Stanley banker who was eased out of his job late last year despite being one of the bank’s biggest producers and shareholders.  Clearly, the dispute between Mr. Taubmann and Morgan Stanley didn’t jeopardize their respective relationships with Verizon, as they’ll both be paid.

Let’s go back to Verizon’s advisory fee, estimated at as much as $125 million.  What does it mean in something a lawyer could understand?   How many billable hours would it take to generate that kind of fee?  If we assume that a top-notch law corporate firm would bill at $1,000 per hour, this means that they would have to put in 125,000 hours of work.  It would take a law firm nearly 42 person-years to generate that kind of fee assuming that every lawyer charged at the $1000 per hour rate and billed 3,000 hours per year (50% higher than the national average).

At the other end of the pay scale, the same investment banking fee would consume 17.2 million hours by minimum wage workers.  This is the equivalent of 8,600 minimum wage employees working full-time for a year. Of course, many minimum wage workers can’t find full-time employment in the first place, so $125 million would cover many more low wage workers.

We can’t be sure how the Verizon management fee will be divided up, but it is safe to assume that a small handful of investment bankers will net $5,000 to $10,000 per hour for their efforts, thereby adding millions to their considerable net worth.  Of course, Vodafone’s advisors, Goldman Sachs and UBS will be divvying up a similar windfall.  The bankers will, no doubt, defend their fee because their advice adds “value”, while at the same time warning us of the dire consequences of raising the minimum wage.   

The long history of corporate transactions suggests that the Verizon-Vodafone transactions won’t add any value whatsoever.  However, the bankers will get paid no matter what.  In due course, the same bankers will come back to Verizon and advise them on another round of deals.  Only one thing is certain.  The minimum wage worker adds more value.




[1] http://dealbook.nytimes.com/2013/09/02/big-banks-and-solo-deal-maker-to-share-in-huge-telecom-deal/?_r=0

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