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ArchiveDecember 1 1999

Sleeping with the enemy

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The role of advisers in M&A deals has come under the spotlight recently with their willingness to work for competing clients and the small pool of advisers to choose from in the first place. Peter Shearlock investigates.

You cannot have too much of a good thing. Well, not when the good thing is investment banking advice that might otherwise be available to the opposition in a contested takeover. Mannesmann's legal challenge to Goldman Sach's role advising Vodafone Airtouch last month put the spotlight on two key aspects of today's M&A scene: the readiness of investment banks to act for competing clients and the increasingly restricted nature of the advisory pool itself.

In simple terms, there are too many deals and too few advisory firms to go round. Hence Mannesmann's attempt to scoop the pool after Vodafone's Chris Gent had come knocking with a $100bn-plus takeover offer. Mannesmann's Klaus Esser recruited no fewer than four firms: Morgan Stanley Dean Witter, Merrill Lynch, JP Morgan and Deutsche Bank.

Keeping four firms of investment bankers in line can be a difficult business (as Olivetti's Roberto Colaninno discovered in the latter stages of his $34bn assault on Telecom Italia), but at least it denies them to the other side. Better to have them inside the tent... In that context, Mannesmann's simultaneous court challenge to Vodafone could have been a tactical masterstroke, cutting its stockpile of advisers in half (it did, temporarily at least).

Fortunately for Vodafone, it had already taken on Warburg Dillon Read as co-adviser. Mannesmann's ploy failed - its application to the court being deemed "completely hopeless" by Judge Gavin Lightman. But, given the number of leading investment banks now tied up somewhere in this deal, the choice of available advisers for anyone else thinking of entering the fray is now very restricted.

Dresdner Kleinwort Benson, for instance, is acting as lead adviser to Orange, whose sale to Mannesmann first persuaded Vodafone it must make a move on the German company. HSBC is in the Orange line-up, too, while Goldman advised Orange's biggest shareholder, Hutchison Whampoa. It was that role, plus previous work for Mannesmann as recently as this spring, that prompted the legal action from Mannesmann when Goldman then popped up as an adviser to Vodafone (with which it has a long standing relationship).

Out of the frame, too, one imagines, is Rothschild, which has long advised BT and may already be mandated to advise it on the Mannesmann affair. Interestingly, BT was reported recently to have offered more than $8bn to buy out the 45 per cent minority in Viag Interkom, but to have been turned down. That leaves only CSFB, Lehman Brothers, Salomon Smith Barney and Lazard among top-tier advisers on whom a counter-bidder/white knight or other interested party could realistically call.

But two or three of those firms may already be counted out. CSFB says it has "no public role" in the present deal, but there are rumours that it has already been mandated by a third party. Lehman (fresh from the Olivetti takeover of Telecom Italia) has, like Goldman, acted recently for Mannesmann. It advised it on its disposal of the steel cylinder and pressfittings businesses to a private equity firm, Bessemer Vogel & Treichl.

The value was never disclosed and was doubtless fairly small. Lehman acted only for the industrial arm of Mannesmann, and may well not be conflicted for the purposes of the Vodafone approach. But Goldman clearly turned down a similar piece of Mannesmann business when it was offered recently - for just that reason. Lehman has also acted recently for MediaOne, selling a package of wireless assets in eastern Europe to Deutsche Telekom for $2bn.

For its part, Salomon Smith Barney is almost certainly involved in the developing situation. It will neither confirm nor deny that it has been retained by France Telecom, which has signalled its interest in buying Orange from Vodafone if the latter wins Mannesmann. Salomon advised the French company on its $5.5bn investment in NTL, which provided the platform for NTL's subsequent purchase of Cable & Wireless Communications' consumer cable, telephone and television division (Morgan Stanley acted for the US company).

That deal, worth around $13.5bn, gave the French company a stake in the largest cable business in the UK, with 2.8 million customers. But, like all the other leading investment banks, Salomon has not been shy about acting for a wide variety of telecoms companies in the past year, many of them competitors of one another. The roll-call of clients includes SBC Communications (a rumoured counter-bidder for Mannesmann and for which Salomon advised on a $1.7bn takeover of cable TV and wireless telephone group Comcast), Ameritech ($3.3bn of disposals to ensure it got it merger with SBC approved), Global Crossing, Cincinnati Bell, MetroNet of Canada, AAPT of Australia and Singapore Telecommunications.

Similar promiscuity is apparent among Mannesmann's advisers. Merrill Lynch's presence on the German company's adviser roster is hardly surprising since, along with Deutsche Bank, it handled Mannesmann's recent $8bn acquisition of Olivetti's telecoms business. It can also claim to have mounted the first ever hostile bid in Germany, unpicking the defences of paper group Feldmuhle Nobel on behalf of the Flick family. That was 10 years ago, but it had to overcome similar voting restrictions to those pertaining at Mannesmann.

But, more recently, it has acted for Bell Atlantic in its $31bn joint venture with Vodafone Airtouch, a deal that has still to complete. Bell was strongly tipped at one stage as a possible white knight for Mannesmann, but has since ruled itself out. Chairman and chief executive Ivan Seidenberg said the price was "too high". Merrill was also lead adviser in the string of disposals by Cable & Wireless earlier this year, which included the sale of One2One to Deutsche Telekom for $11.3bn, and is acting for AT&T in the $62bn acquisition of MediaOne and subsequent disposal of cable assets.

Other clients this year include BT (in its purchase of a stake in Japan Telecom), BellSouth, Global Crossing, IXC Communications, Cox Communications (in three deals worth $8.2n), Alltel, Bell Canada and Hellenic Telecom (in its takeover of Bulgaria Telecom). Among Mannesmann's other advisers, Morgan Stanley advised Airtouch on its merger with Vodafone, which theoretically should annoy the Vodafone camp every bit as much as Goldman's role annoys Mannesmann.

Other clients have included Singapore Telecoms, Frontier Corporation, Philippine Long Distance Telephone, BT, NTL, IXC Communications and Cox Communications. JP Morgan comes fresh from the fraught Telia/Telenor merger in Scandinavia and it worked on the defence team for Telecom Italia (not necessarily a recommendation, that one). Other clients include AT&T, BT, Telefonica and Siemens.

Deutsche acted for Otelo, the Veba/RWE telecoms joint venture, when it was sold to Mannesmann in the spring for $1.2bn, and has also worked for America's Nextel and PT-1 Communications in the past year. In their defence, investment bankers point to the increasing rarity of long-term client relationships. "A lot of the time, you're only as good as the last idea you took to a client," says one.

Although most of the world's top 500 companies have a small clutch of advisers they turn to over and again, many will hold a beauty parade to pick their adviser when they have major assets to auction. Will the High Court ruling in the Goldman case change that? Mannesmann's case was that Goldman should not be allowed to act for Vodafone because it was privy to certain confidential information - most notably the manner in which Mannesmann's demerger into separate telecoms and engineering businesses was to be effected and the tax savings it would throw up - and because, it claimed, Goldman had given the German company assurances it would not act for a bidder.

All of that was dismissed by Judge Gavin Lightman on the grounds that Mannesmann had provided "false and misleading" information. The hearing was hardly a test of the underlying issue - that an investment bank should not be allowed to throw its lot in with a predator just months after it has worked on some sensitive matter for the target.

But the speed with which the German company's arguments were rejected suggests that nothing short of a contractual commitment on the part of an investment banker that it will not work for a future predator, at least within a given period after its last assignment for the target, is likely to carry much weight. But bankers are most unlikely to give such a commitment without cast-iron guarantees that the client is similarly committed to them.

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