Imagine trying to do a deal in the 1950s or ’60s no search engines, no e-mail, no cell phones, faxes or even FedEx’s. And yet, somehow deals got done.
There certainly was less urgency in those days and obviously less sophisticated technology but for dealmaking veterans, the differences go beyond that.
“You knew Pete and his company pretty well,” recalled Richard Cupp, chief executive of 1st Century Bank in Century City and one-time head of commercial banking at First Interstate Bank. “He’d walk in with some financials, which were not audited, by the way, and we’d ask him how much he needed. Recourse wasn’t the issue for buyer or seller. The deals were small and there was much less to go wrong.”
By today’s standards, deals were downright unsophisticated, with no concerns about Wall Street reaction, environmental impact reports or institutional shareholders. They were often hammered out over drinks. Documents were haggled over the only way available at the time: the U.S. Mail. And at 5 or 6 on a Friday, work was put away for the following week. Things could always wait.
“The only M & A; deals we did when I started at UCB (United California Bank) were for long-term customers who wanted to sell their companies,” Cupp said. “The deals were informal, and the goal was always to preserve the client relationship, not make large fees in the capital markets, like today.”
When George Smith closed one of his first real estate deals 40 years ago, the buyer showed up at the Ontario site in a pickup and blue jeans to pore over the plans on the hood of Smith’s car.
Everyone shook hands in the middle of the dirt field, and Smith went back to his office to sketch out a construction loan dozens of pages shorter than would be done for a comparable apartment site sale today.
“We have 760 lenders in our database,” said Smith, who started his own firm, George Smith & Partners, in 1992. “Negotiating with more than 20 lenders back in the old days was inconceivable because you would have to drive all over Southern California just to find 20 lenders. And that was on a freeway system that hadn’t even reached Fountain Valley.”
Investment banker Dick Israel remembers dealmaking as a world built on close relationships. Israel, who started with Cantor Fitzgerald in 1967, says he drew up transactions with simple math on the backs of envelopes in steak houses, not via risk assessment spreadsheets in high-rise offices.
“Without computers,” Israel recalled, “everything moved laboriously. You had time to think, study, review and respond to a deal. Today, you get an e-mail and all you have time to do is respond before someone else closes.”
Israel’s first deal for Cantor Fitzgerald was inspired not by market valuations from an avalanche of sophisticated data, but through a tip from a friend. “My neighbor was a publisher in the after-market auto parts industry and he was feeding me names for our buyer, W.R. Grace,” he said. “It was under $20 million, which was a very large private transaction for that time.”
Investment bankers once worked under clearer guidelines. A formula developed by Lehman Brothers was used to evaluate the fees for virtually any transaction: 5 percent of the first million, 4 percent of the second million, 3 percent of the third million, 2 percent of the fourth million, and 1 percent of everything thereafter above $4 million.
“There’s so much more capital today,” Israel explained, “that fees are negotiated on a deal-by-deal basis, no matter the size of the acquisition. Last year at our (Association for Corporate Growth) conference, we had 100 private equity groups saying: Bring us your deals. We’ve got money!”
Three or four decades ago, the sense of urgency that drives modern dealmaking didn’t exist. Smith remembers that land was plentiful and cheap $8,000 per unit to build 39 apartments in Fullerton. Vetting the principals of a deal required only basic financial statements and gut instinct.
“On that Ontario deal,” he said, “the lender got back in the car with me and said, ‘A guy willing to get his hands dirty’ was his kind of borrower. And that was about it.”
While the personal touch has been taken out of dealmaking, there are some pluses. “The flow and quality of the data is so much better,” Smith said. “We used to have to drive downtown to canvas lenders all day with our packages. Today you send an e-mail with an attachment and worksheet and in a few hours you have a quote and expression of interest. We did less than $150 million in deals when I moved into income property financing in 1969. Last year we did $2.8 billion.”
