MONEY MAKERS INSIDE THE NEW WORLD OF FINANCE AND BUSINESS David Snider and Dr. Chris Howard ADDITIONAL PRAISE FOR MONEY MAKERS: “David Snider and Chris Howard write with insiders’ knowledge and outsiders’ perspective. Through an impressive array of interviews and secondary re- search, they provide a remarkably coherent explanation of the industries driv- ing the modern economy—what they are, how they have evolved and been affected by the recent recession, and why they matter. I would recommend this book both to my students and my friends who are curious about these fields.” —Joel Fleishman, professor of Law and Public Policy at Duke University, member of the Board of Directors of the Polo Ralph Lauren Corporation “I was blown away at how insightful Money Makers is. A fresh look at the DNA of private equity, venture capital, hedge funds, and more. I wish something like this existed when I started my career in finance.” —Jeff Bloomberg, Principal at Gordon Brothers, former Senior Managing Director for Retail and Consumer Products at Bear Stearns “A revealing look at the mosaic of the financial community and its all-stars. If you want a road-map for understanding key finance and business fields this is the book for you!” —Dr. Dana Ardi, Managing Director and Founder of Corporate Anthropology Advisors, former private equity executive “Whether you are an aspiring financier, management consultant, entrepre- neur, or simply want to learn what people in these professions do, Money Makers will be a critical companion in your journey. Through their thorough analysis and insightful interviews, Howard and Snider provide a valuable re- view of our financial industries and what makes them tick.” —Christopher Gergen, Director of Duke University’s Entrepreneurial Leadership Initiative and coauthor of Life Entrepreneurs: Ordinary People Creating Extraordinary Lives “Howard and Snider provide a concise and dynamic view of the venture capi- tal business. Anyone who wants to understand the mechanics of this industry will learn from and enjoy the book, particularly those who aspire to be ven- ture capitalists.” —Nicholas Beim, General Partner at Matrix Partners 01 snider text.qxp:01 zinni fm 12/22/09 2:14 PM Page i This page intentionally left blank MONEY MAKERS INSIDE THE NEW WORLD OF FINANCE AND BUSINESS DAVID SNIDER AND DR. CHRIS HOWARD 01 snider text.qxp:01 zinni fm 12/22/09 2:14 PM Page iii MONEY MAKERS Copyright © David Snider and Chris Howard, 2010. All rights reserved. The views expressed in this text are those of the authors and the interviewees cited and do not necessarily reflect the views of the organizations for which they currently work or have previously been employed. First published in 2010 by PALGRAVE MACMILLAN® in the U.S.—a division of St. Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Where this book is distributed in the UK, Europe and the rest of the world, this is by Palgrave Macmillan, a division of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN: 978–0–230–61401–7 Library of Congress Cataloging-in-Publication Data Snider, David. Money makers : inside the new world of finance and business / David Snider and Chris Howard. p. cm. ISBN-13: 978–0–230–61401–7 (hardcover) ISBN-10: 0–230–61401–9 (hardcover) 1. Investments. 2. Venture capital. 3. Hedge funds. 4. Banks and banking. I. Howard, Christopher, 1970– II. Title. HG4521.S71134 2010 332.092’273—dc22 2009025885 A catalogue record of the book is available from the British Library. Design by Letra Libre, Inc. First edition: February 2010 10 9 8 7 6 5 4 3 2 1 Printed in the United States of America. 01 snider text.qxp:01 zinni fm 12/22/09 2:14 PM Page iv CONTENTS Foreword vii by Robert K. Steel Introduction 1 CHAPTER ONE The Billion-Dollar Brokers and Traders of Investment Banking 9 CHAPTER TWO The Shepherds and Builders of Business: Venture Capital and Entrepreneurship 49 CHAPTER THREE The Billionaire Borrowers: Private Equity and Leveraged Buyouts 85 CHAPTER FOUR The Market Mavericks: Hedge Funds 113 CHAPTER FIVE The Million-Dollar Analysis of Management Consulting 149 CHAPTER SIX Big Business: The Management of Fortune 500 Companies 179 01 snider text.qxp:01 zinni fm 12/22/09 2:14 PM Page v MONEY MAKERS vi Conclusion 203 Appendix A: Firm Profiles 207 Appendix B: Featured Interviewees’ Backgrounds 232 Acknowledgments 237 Notes 238 Index 243 01 snider text.qxp:01 zinni fm 12/22/09 2:14 PM Page vi FOREWORD T his book is being published at an extraordinary time. The fi- nancial markets and the economy in the United States have been through a remarkably destabilizing period. Today we are evaluating the damage, seeking to understand the root causes, and thinking about how public policy should be adjusted for the future. In this book, the authors take an in-depth look at six of the fields driving the economy, many of which were key actors in this recent drama: investment banking, venture capital, private equity, hedge funds, management consulting, and the management of important U.S. corpo- rations. The perspectives and conclusions offered are the result of scores of interviews with the most important and knowledgeable people in each of these areas. This unusual access, combined with the authors’ clear analysis, provides an excellent narrative for all types of readers. My own professional history has touched many of the areas this book considers. I began my career in asset management then enjoyed almost three decades in investment banking before having the privilege to serve as under secretary of the U.S. Treasury and then, for a brief pe- riod of time, manage a major commercial bank. During this period, the position of alternative investing (including venture capital, private equity, and hedge funds) grew tremendously, increased trade, created global markets and technology, and became an offensive tool as well as a key part of business strategy. Money Makers provides important background and perspective on these shifts and how our current fi- nancial landscape evolved as it did—both to enable so much prosper- ity and to put it all at risk. 01 snider text.qxp:01 zinni fm 12/22/09 2:14 PM Page vii I have always believed that well-functioning capital markets are a critical factor in successful economies. When providers and suppliers of capital meet and make informed decisions, in their own self interest, both the economy and the citizenry win. Capital is allocated in a supe- rior way and results in increased growth for the economy. There must be clear rules and regulations that make this supplier-provider engagement fair, predictable, and confidence-building. But professional participants are also a key ingredient for this process to produce the best result. Indeed, several of these activities—venture capital, private equity, and hedge funds in particular—are very young industries, really only about a generation old. Surely given their recent rapid growth and vis- ibility, the future of these industries will be characterized by greater transparency, more oversight and, in general, greater scrutiny. While the other activities considered here, such as investment banking, man- agement consulting, and the leadership of Fortune 500 companies, are more established, they, too, have transformed substantially in the last few decades and experienced significant disruption in the wake of re- cent events. Money Makers provides a timely explanation of these com- ponents of the economic landscape. There is no question that recent events have shaken everyone’s confidence in many parts of our system. It is very fair to ask hard ques- tions about what went wrong, what went right, and how we should ad- just public policy goals and the attendant regulation. But to arrive at the right answers we need to understand who these industry players are, the rules they have been playing under, and how their own prac- tices and cultures have been rapidly changing. Money Makers will be an important source of perspectives in that effort. Robert K. Steel is the former president and CEO of Wachovia Corpora- tion. He joined the board of directors of Wells Fargo & Co. upon the firm’s merger with Wachovia. He previously served as under secretary of the Treasury for domestic finance. In this role, he worked as the principal ad- visor to the secretary on matters of domestic finance and led the depart- ment’s activities with respect to the domestic financial system, fiscal policy and operations, and governmental assets and liabilities. Prior to becom- ing under secretary, he was vice chairman of Goldman Sachs & Company. MONEY MAKERS viii 01 snider text.qxp:01 zinni fm 12/22/09 2:14 PM Page viii INTRODUCTION B illionaires Julian Robertson and Henry Kravis did not in- herit large sums of money. They have never invented a new product or built companies that serve millions of cus- tomers. Yet by pioneering new ways to successfully invest, they have taken investors’ money, produced large returns, and, in the process, made themselves extremely wealthy. But how did they do it and what are these industries that they have helped to create? Although the elite fields of business and finance play large and dy- namic roles in the global economy, how they work remains a mystery to most outsiders. Just over a decade ago, “hedge funds,” “private eq- uity,” and “venture capital” were finance terms rarely discussed in the mainstream media. Today, they receive full-scale coverage. A recent “Time 100: People Who Shape our World” included a publicity-shy hedge-fund trader, a New York leveraged-buyout veteran, and a West Coast venture-capital financier, along with assorted entrepreneurs and Fortune 500 CEOs. This book describes the inner workings of the highly selective and often secretive industries of the private sector: investment banking, venture capital, private equity, hedge funds, management consulting, and the management of Fortune 500 companies. It reveals them from the perspectives of leaders in each field, who share insights, anecdotes, and recommendations that can be valuable to anyone with an interest in finance and business. 01 snider text.qxp:01 zinni fm 12/22/09 2:14 PM Page 1 [...]... industry and many of the routes to power and monetary success THE PERIOD OF FINANCIAL RECKONING September 2008 through the first half of 2009 was one of the worst periods for business and finance in history Trillions of dollars in the market value of U.S businesses disappeared, and with it went a commensurate amount of average Americans’ and professional investors’ money Although investment bankers, hedge-fund... Investment banks play critical roles in nearly every aspect of the economy They are both the brokers and bankrollers of the business world and, recently, of the finances of everyday Americans They are hired by companies and investors to buy and sell businesses, assets, stocks, and debts, as well as to simultaneously arrange the financing of these transactions Imagine trying to sell a house with no real... then the world s largest insurance company and a forced government takeover of the mortgage-lending institutions Fannie Mae and Freddie Mac To avoid a full-scale financial meltdown, the secretary of the Treasury and the chairman of the Federal Reserve asked the U.S Congress for $700 billion to buy the troubled assets that were weighing down the investment banks and inhibiting the ability of the credit... of dollars on behalf of investors and has a huge influence on the development of new companies, the operations of business, and the movements of public financial markets Chapter 2, on venture capital, also discusses the experiences and challenges of entrepreneurship, because that is so intricately linked to the venture business Chapter 5 explores management consulting and bridges the divide between the. .. profitability By expanding the amount of money they could trade and lend, banks could boost their profits, as long as the additional uses of money yielded higher returns than the costs of the loans Many also increased their lending to private equity firms, commercial real estate developers, and hedge funds—all leveraged 13 14 MONEY MAKERS investors Furthermore, new banking regulations, under the international... creating new areas of high-profit margin When they get created, they become commoditized, and then you have to find the next area of opportunity,” explains Alan Schwartz, executive chairman of Guggenheim Partners and former CEO of Bear Stearns The prob- THE BILLION-DOLLAR BROKERS AND TRADERS lem was that banks’ risk management did not always evolve as quickly as the products that traders were creating and. .. of the debt used by private equity firms to purchase companies, banks were often left with billions in loans (if the banks did not sell all the debt associated with the deals) As the economy soured in late 2007, the market’s expectation of the likelihood of a default on that debt increased, and the market price of the loans fell to only a fraction of their initial value The banks had to write down the. .. percentage of the transaction value of the deal on which it has worked In the same way that a real estate agent is paid only when he or she sells a house (and the higher the price, the larger the commission), bankers make most of their money if and when deals close If a bank is representing a seller, there is generally a sliding scale for the fees * When a business decides to purchase a number of companies and. .. leaders receive The huge amount of money that these executives make is a function of their capacity to raise capital from investors and to rapidly and consistently increase that money Investors are never forced to place their money with a particular manager; they choose to pay high investment fees because they believe that those fees are justified by the acumen of the investment professional Finance is Darwinian;... trying to determine the true value of the target company’s $400 billion in assets and operating businesses as well as the risks posed by the financial products held on its balance sheet.3 There was palpable anxiety among both analysts and senior bankers as they tried to understand the business and its current financial state The analysts were creating Excel models to value elements of the business based on . MONEY MAKERS INSIDE THE NEW WORLD OF FINANCE AND BUSINESS David Snider and Dr. Chris Howard ADDITIONAL PRAISE FOR MONEY MAKERS: “David Snider and Chris Howard write with insiders’. blank MONEY MAKERS INSIDE THE NEW WORLD OF FINANCE AND BUSINESS DAVID SNIDER AND DR. CHRIS HOWARD 01 snider text.qxp:01 zinni fm 12/22/09 2:14 PM Page iii MONEY MAKERS Copyright © David Snider and. Europe and other countries. ISBN: 978–0–230–61401–7 Library of Congress Cataloging-in-Publication Data Snider, David. Money makers : inside the new world of finance and business / David Snider and