Buyback Attack Risks Damaging Corporate Health, Taubman Says

(Bloomberg) -- In trying to limit share buybacks, Washington risks hobbling corporate America’s ability to weather shocks like the coronavirus pandemic, one of the country’s most experienced investment bankers has warned.

Paul J. Taubman, chief executive officer of PJT Partners Inc., said that the current political vogue for attacking companies repurchasing their shares, while simultaneously supporting dividend payments, runs contrary to prevailing financial wisdom.

“In an ideal world, if you wanted to take some leverage out of the system you would probably favor share repurchases, which are more discretionary, over dividends. But I think in the court of public opinion, it’s reversed, and that’s a paradox,” Taubman said in a Bloomberg Television interview.

High-profile politicians including Elizabeth Warren have railed against buybacks, saying companies are gaming equity markets to boost their share prices while destroying long-term value. The Democratic senator from Massachusetts has called the practice a “sugar high for the corporations,” while others from both parties have suggested banning buybacks for companies that received bailouts during the Covid-19 pandemic.

“I personally believe dividends create more of a fixed charge, and create an implicit sense of leverage in corporate balance sheets vis-à-vis share repurchases,” Taubman said. “You can turn off a repurchase overnight without any consequence. You cut the dividend or suspend the dividend and you run the risk of destabilizing your share price.”

In a rare and wide-ranging interview, the New York-based PJT founder said he would like to see companies use the shock of the pandemic to adapt.

“My hope is that companies will rethink what an optimal capital structure is” and consider the tail risks rather than pricing to perfection, he said. “We are all seeing these black swan events happening with alarming frequency.”

More M&A, More of the Time

After leaving a nearly three-decade career at Wall Street powerhouse Morgan Stanley in 2012, Taubman set up as a one-man-band M&A adviser. He quickly landed a key role advising Verizon Communications Inc. on its $130 billion purchase of Vodafone Group Plc’s stake in its wireless business announced in 2013.

He launched his eponymous investment bank the next year, agreed to merge it with Blackstone Group’s advisory arm and took the combined company public. The business has since grown rapidly, with about 740 employees and 89 partners as of September.

Taubman believes M&A, currently in the seventh year of a record-long boom, will ebb and flow with economic confidence but will have ever greater bearing on the way company boards and managements think about growth.

“M&A always competes against the status quo. And in a world that doesn’t change as frequently, or as dramatically, or as violently, the ability to sit out a transaction typically has relatively modest consequences,” he said. “But in a fast-changing world where competitors are coming up from behind -- literally overnight -- and buying behaviors are changing and regulation is dynamic, the cost of standing still becomes much greater.”

Man vs. Machine

In terms of his own industry, Taubman said disruption is likely to come from the improvements in machine learning that are threatening so many aspects of working life.

“At it’s simplest form, our firm is man versus machine. We are a talent-focused organization and if we can recruit, attract, and retain the best talent -- and create a culture that gets that talent to work together -- we can provide superior advice to clients, superior capabilities and the like,” Taubman said.

Other firms have more infrastructure, and often times the power of the organization trumps the power of their people, he said.

“As you try and extrapolate out, the question is: will there be data analytics and other capabilities that the machine-oriented firms can develop over time that can reduce the influence of the personal touch?” Taubman said. “I am a big believer that it is a hybrid -- that you need data, that you need analytics, you need proprietary insights, but you also need relationships, and experience, and judgment. So we are always thinking about where the disruptive force is and hopefully we’ll stay ahead of it.”

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