Technology and Deal Making – Robot investment banker?

March 15, 2017

If there was one part of Investment Banking that hasn’t changed since Barbarians at the Gate was written is Corporate Finance Advisory. Go into any M&A or Equity Capital Markets advisory office and, apart from the increase in Reuters and Bloomberg terminals, not much has changed. Pitches are often still on that dreaded power point and called the ‘deck’. The ‘deck’ as we know it also hasn’t changed focusing on showcasing skill followed by analysis of Industry and then company leading to the proposal or pitch. The IM, or information memorandum, hasn’t changed and financial modeling for all practical purposes still runs into a million sheets that some poor analyst has given up every weekend for; using macros is considered being technologically advanced. So when news came out that a team of programmers had descended on wall street’s most uptight offices- Goldman Sachs, analysts began to shift around in their leather chairs with a certain amount of unease. Technology usually means someone is going to be replaced by a machine.

A team of 75 programmers, internally referred to as “strats”, have begun developing been developing technology that hopes to make deal making more productive. These strats are now part of equity underwriting and leveraged buyouts teams. They are analyzing client data to understand how firms can offer better advice. What advice has worked and what hasn’t; algorithms that could possibly evaluate a book building process to glean why some offerings do better than others when everything else holds equal. But how can automation do deals? Isn’t deal making about relationships? Endless rounds of golf and board room relationships? The current management speak is trying to reassure bankers that technology will only take out the grunt work. But junior bankers know what happened when technology hit trading.

Another cause for concern is whether the criteria to become an investment banker is going to be affected as well. Will bulge brackets now look to MIT instead of Harvard and Wharton? What does that mean for twenty-something-year-olds who just finished an expensive MBA and need to pay off a gigantic loan? Will a tech geek take their job?

It is believed that technology is going to lead to a 10 percent reduction in Investment Banking staff over the next few years. Kognetics, a software company that uses artificial intelligence to assist deal makers say that almost a quarter of routine Investment Banking activity can be automated. ‘Sellside’, an application developed by ‘strats’ for Goldman that compiles deal information, is already making some analysts uneasy. But I think it’s quite some time away before an algorithm can decide which two companies should merge. But going by the failure rate of mergers these days, perhaps an algorithm might have better luck.

 

Written by Reshma Krishnan, Imarticus Faculty


 

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