Ha ha… speaking of M&A/IPOs/ibank conflicts….
Sure folks, I’m sure all for tech IPO’s/M&A, they are different…unlike these, and are actually meaningful non-bank driven… wink wink….
Goldman Sachs appears to be everywhere in a $21.1 billion buyout of a pipeline and energy giant – or at least on every side where money can be made.
In wearing different hats in Kinder Morgan’s proposed acquisition of the El Paso Corporation, Goldman may have done nothing improper. Still, a lawsuit challenging the deal raises some important questions about how investment banks do business.
Goldman has a long, close-knit history with Kinder Morgan. The investment bank was instrumental in helping Kinder Morgan’s chief executive, Richard D. Kinder, take Kinder Morgan private in 2006. Goldman’s private equity arm owns 19.1 percent of Kinder Morgan and has two appointees on its board. Goldman then led Kinder Morgan’s initial public offering last year, earning billions for Mr. Kinder and Goldman’s private equity investors. And the main investment banker representing Goldman on Kinder Morgan’s acquisition had worked with El Paso for about eight years.
But when Kinder Morgan first approached El Paso about a combination, Goldman was advising El Paso on a possible spinoff of its exploration and production business.
So Goldman’s interests on both sides of this transaction would appear to be a clear conflict.
Indeed, both El Paso and Kinder Morgan realized immediately that Goldman had too many fingers in the pot. Even Goldman did. Once Kinder Morgan began considering a bid, Goldman’s two director appointees on the Kinder Morgan board recused themselves immediately from discussions about this potential purchase.
Goldman’s own internal conflicts committee reviewed the situation and informed El Paso that Goldman could still advise El Paso, but that another investment bank should be retained. The lucky bank turned out to be Morgan Stanley, which was hired to be El Paso’s main adviser on a potential sale. El Paso was also being advised by the law firm Wachtell, Lipton, Rosen & Kratz.
What happened next is the subject of debate.
El Paso shareholders have brought a lawsuit in Delaware, contending that Goldman’s conflicts resulted in El Paso being sold too cheaply. They say that despite the steps taken to deal with its conflict, Goldman still steered the El Paso directors toward an acquisition, pushing them to ignore the benefits of remaining independent and spinning off the exploration and production business. Goldman, according to the lawsuit, was in league with El Paso executives, who were said to be interested in buying the exploration and production business after a sale of El Paso to Kinder Morgan.
The plaintiffs say that this occurred because Goldman continued to advise El Paso on a sale for a fee of $20 million. The presence of Morgan Stanley as an adviser to the board did not ease the conflict, because at Goldman’s behest, Morgan Stanley was permitted to advise only on the sale and not on alternative transactions, like a spinoff. Because Morgan Stanley’s $35 million fee was contingent on a sale occurring, the shareholders claim that Morgan Stanley did not have an adequate incentive to present all alternatives to the El Paso board.
The plaintiffs also note that Goldman had a powerful incentive to steer the process toward a sale of El Paso at a low price. Every dollar shaved off El Paso’s share price would translate into a savings of $150 million for Goldman’s private equity arm. There is even an e-mail that plaintiffs say supports their case. Their lawsuit says that a Morgan Stanley banker wrote the following:
“Over Wachtell’s objection, GS got a letter signed which engaged them as an advisor in the sale of the company. …Between that fact and the enormous conflict as a 22 percent shareholder of Kinder. …this is GS at its most shameless.”
Goldman, El Paso and Kinder all dispute the allegations.
In separate briefs filed with the court, each asserts that the conflict was recognized and addressed. On the Kinder Morgan side, the Goldman directors recused themselves; on the El Paso side, an independent investment bank was hired to become El Paso’s main adviser. Moreover, when Kinder started suggesting it might take the bid hostile, Goldman stopped providing advice to El Paso on the sale except for updating some numbers on the potential of a spinoff.
Besides, the premium offered in the acquisition was rather large – 37 percent over the closing price per share the day before. As for that e-mail, Goldman Sachs said in a court filing that it was a “selective” quote and the parts eliminated showed that Goldman had a significantly reduced role in the sale. Clearly, fighting between Morgan Stanley and Goldman Sachs is nothing new.
El Paso and Kinder Morgan argue that the plaintiffs’ claims are innuendo. Goldman’s private equity division is separate from its investment banking unit. Goldman’s conflict, they say, was recognized, disclosed and managed.
The plaintiffs’ complaint feeds in part off Goldman’s public reputation as a “vampire squid,” greedy and overreaching.
Yet the real test of their case will come on Thursday, when a Delaware State Court will consider the shareholders’ request that the El Paso sale be halted until the company retains a third independent adviser and runs a new sales process, one that allows for full consideration of a spinoff.
It does seem odd that El Paso’s board didn’t appear to consider more seriously completing the spinoff and selling the remaining pipeline business to Kinder. The board appeared to decide that this was not a viable option, perhaps because Kinder Morgan threatened a hostile approach. When Kinder Morgan increased its bid by $2 a share, or 11 percent above its initial offer, El Paso agreed to a deal.
Delaware courts have been quite hard on investment banks of late, most recently in the litigation over the $5 billion buyout of Del Monte Foods. In that case, the court found that Barclays Capital had unduly influenced the sale process for Del Monte. The case was settled for $89.4 million.
The El Paso case will be the next test of how the Delaware court manages banker conflicts. Yet, unless the court finds that Goldman or management deliberately steered this process toward Kinder Morgan, the plaintiffs will have a hard time winning.
The El Paso board consisted of 11 independent directors. Goldman might have done better in stepping back from the transaction, but the sale decision was made based on advice from Morgan Stanley. (Goldman declined to comment for this column.)
The market is changing. The conduct of investment banks is increasingly scrutinized and any ties are inherently suspicious. There have been too many examples where management or a banker appears to have steered a deal.
In this light, some may argue that Goldman should have fully recused itself from Day 1. Instead, it tried to still advise El Paso and bowed out only when things started to get heated. While recusal may not be required legally, it may be the better practice.
In any case, the dispute shows that is hard being Goldman these days. Being on all sides of a deal is becoming increasingly more difficult. And when it happens, as in the El Paso-Kinder Morgan deal, it is only a misstep or an embarrassing e-mail away from liability or another public relations disaster. And that is not a good place for any investment bank to be.
