How does a CEO keep his hand from shaking when he writes a $25 million check to his M&A adviser?

The cynical answer? It’s no problem. The CEO gets that much in his annual compensation.

The right answer? Sometimes, M&A advisers actually earn the fee.

meanstreetIt is easy to regard the hundreds of M&A bankers on Wall Street as little more than overpaid yes-men. Very few have ever seen a deal they didn’t like. Even when they are getting laid off en masse, they attract little sympathy.

I am a former M&A banker filled with the healthy skepticism–make that cynicism–of the ex-practitioner. But guess what? If I had a company I wanted to sell or buy, I would hire a good M&A adviser in a jiffy.

M&A advisers do a bunch of important things for a buyer or seller. They can run an organized sales process. They can provide cheap financing–well, at least until recently they could. And they can serve as the CEO’s or board’s insurance policy against looking stupid or getting sued.

But none of that is where the M&A banker really adds value. The value comes in critical judgment calls made in difficult situations.

These calls are what justify the astronomical fees paid to bankers.

Almost a decade ago, as a Goldman Sachs banker, I advised a European client on buying a U.S. publicly traded company for a couple of billion dollars. We had worked for months on the deal, and in a few days of negotiations, hammered out the terms with the board of the U.S. company.

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Our client was overjoyed. We had negotiated hard for a purchase price that was 6% above where the shares were then trading.

Effectively, a no premium deal. An M&A banker’s dream. Or nightmare.

It turned out that none of the U.S. company’s large institutional shareholders tendered their shares. They didn’t like the price. We had an agreement to buy the company, but no company.

So now we had to go back to the U.S. shareholders with another price. But how much to offer?

We talked to about a dozen large shareholders. Forget the 6% premium. Now, it was highway robbery. The shareholders demanded takeover premiums of 50% to 75%. That meant another $500 million straight out of my client’s pocket.

That was unacceptable. So my client asked me at what price we could get the deal done. A tough judgment. The team talked it over. We consulted colleagues. In the end, the call was based on gut instinct. Another 25%. No more. No less.

At the close of the tender, we gathered about 55% of the shares, just barely above the 50% needed to close the acquisition.

The good call saved our client several hundred million dollars.

Did we earn our fee? You betcha.

Were we lucky? You betcha. The deal could have easily ended badly.

This complex two-stage tender deal was much more the exception rather than the rule. There are many more plain vanilla M&A deals where plain vanilla advice leads to mediocre outcomes for clients.

As a junior banker, I was fortunate to learn the M&A trade at the feet of two superb bankers–John Thornton, former president of Goldman Sachs, and Ken Jacobs, currently a vice-chairman at Lazards.

As a team at Goldman in 1987, we were the first U.S. bank to act as sole adviser to a British publicly traded company. That was a big deal then. This was way before the U.S. investment banks dominated Europe as they do today.

Working beside Thornton and Jacobs to sell this company remains one of the business accomplishments of which I am most proud. Goldman Sachs created huge shareholder value under tough circumstances; a troubled company with only one real buyer.

At one board meeting, our client’s lawyers actually tried to kill the deal. They relentlessly questioned its legality. But it wasn’t that it was illegal. The deal was simply without precedent, which made the board nervous.

Then Thornton strode into the room. He bullied the lawyers. He harangued the board. He cajoled the executives. He wouldn’t accept that the deal wouldn’t work. And he won the day. It was a master class in the art of persuasion.

In the end, Goldman’s advice earned the shareholders at least an extra $100 million to $200 million.

I remember the deal’s closing dinner held in a glittering banquet room at the Ritz in London. This was the mid-1980s, the peak of glamour for that M&A boom. And I recall thinking, wow, bankers can actually make a difference.

Nowadays, I think back and say, wow, bankers can actually earn their big fees.

At least, every now and then.