Friday, March 2, 2012
One wonders why investment bankers get a bad rep? Well, they certainly didn't cover themselves in glory in the El Paso transaction. This from the El Paso opinion describing the fee arrangements - including the fee to pay Morgan Stanley, who was hired to balance Goldman's structural bias in favor of doing a transaction with Kinder Morgan:
Even worse, Goldman tainted the cleansing effect of Morgan Stanley. Goldman clung to its previously obtained contract to make it the exclusive advisor on the spin-off and which promised Goldman $25 million in fees if the spin-off was completed. Despite the reality that Morgan Stanley was retained to address Goldman’s bias toward a suboptimally priced deal with Kinder Morgan and thus Morgan Stanley’s work in evaluating whether the spin-off was a more valuable option was critical to its integrity enforcing role, Goldman refused to concede that Morgan Stanley should be paid anything if the spin-off, rather than the Merger, was consummated. Goldman’s friends in El Paso management – and that is what they seem to have been – easily gave in to Goldman. [..] This resulted in an incentive structure like this for Morgan Stanley:
- Approve deal with Kinder Morgan (the entity of which Goldman owned 19%) – get $35 million; or
- Counsel the Board to go with the spin-off or to pursue another option – get zilch, nada, zero.
This makes more questionable some of the tactical advice given by Morgan Stanley and some of its valuation advice, which can be viewed as stretching to make Kinder Morgan’s offers more favorable than other available options. Then, despite saying that it did not advise on the Merger – a claim that the record does not bear out in large measure – Goldman asked for a $20 million fee for its work on the Merger. Of course, by the same logic it used to shut out Morgan Stanley from receiving any fee for the spin-off, Goldman should have been foreclosed from getting fees for working on the Merger when it supposedly was walled off from advising on that deal. But, Goldman’s affectionate clients, more wed to Goldman than to logical consistency, quickly assented to this demand.
Here's the El Paso opinion. Of course, it wasn't just them. El Paso CEO Foshee doesn't come across as someone you'd trust to hold your wallet, either. Anyway, where might this go from here? That's a good question. As Strine notes, Foshee and Goldman's actions in connection with this sale still make out a reasonably good claim for a loyalty violation:
At a time when Foshee’s and the Board’s duty was to squeeze the last drop of the lemon out for El Paso’s stockholders, Foshee had a motive to keep juice in the lemon that he could use to make a financial Collins for himself and his fellow managers interested inpursuing an MBO of the E&P business. The defendants defend this by calling Foshee’sactions and motivations immaterial and frivolous. It may turn out after trial that Foshee is the type of person who entertains and thendismisses multi-billion dollar transactions at whim. Perhaps his interest in an MBO was really more of a passing fancy, a casual thought that he could have mentioned to Kinderover canapés and forgotten about the next day.
It could be.
Or it could be that Foshee is a very smart man, and very financially savvy. He did not tell anyone but his management confreres that he was contemplating an MBO because he knew that would have posed all kinds of questions about the negotiations with Kinder Morgan and how they were to be conducted. Thus, he decided to keep quiet about it and approach his negotiating counterpart Rich Kinder late in the process – after the basic deal terms were set – to maximize the chance that Kinder would be receptive.
Hmm. So there may be a case against Foshee, but the court recognized that monetary damages against Foshee may be an imperfect remedy - damages might be upwards of $500 million and Foshee, as well off as he might be, simply isn't worth that much. Also, aiding and abetting against Goldman is tough to prove. So what to do? Absent a competing offer on the table, Strine opted to let shareholders - who one presumes are autonomous and smart enough to determine what's in their best interests - decide for themselves whether they want to accept this tainted premium offer.
It's an imperfect result, but it may be all that's possible.