By Brian Bollen
Financial News, 2 January 2001
Continued consolidation between banks makes it more likely the interests of clients will collide, particularly in those sectors dominated by large players
Who wants to talk about conflict management? Not many investment bankers, that's for sure. And certainly not those at the very top of the industry's M&A league tables. 'It's not something we can see an upside to,' said Goldman Sachs, speaking very much de haut en bas.
'It's: not a subject fit for discussion in the pages of Financial News,' said Morgan Stanley Dean Witter, sniffily. Added a third: 'The press in general like finding angles into this and try to pinpoint banks who don't manage conflict of interest very well, and I don't think this is helpful to anyone.'
Beyond the bulge bracket, however, William Rucker, head of corporate finance at Lazard Brothers in London, is happier to address the issue.
He identifies two distinct types of conflict, one being the conflict of interest between clients where one wants to acquire the other, or where clients want to bid for the same target; the second being the conflict that arises where a bank is not only advising but is also providing a range of other services, such as lending, or arranging debt or equity issuance.
'Anyone who is a significant player in M&A has to deal with conflicts of interest, especially if they have a number of clients in a particular sector,' he says. 'The key thing is how you deal with them, not the fact that you have them.'
France Telecom had said it expected Global One to break even in late 2002; as a result of today's deal, it has brought that date forward to late 2001 or early 2002.
Client conflict has undoubtedly become more of a market issue over the past 12 months than it was previously, as consolidation between banks has proceeded apace. This is particularly true in certain sectors where the constituents are a limited number of very large players. Telecoms springs to mind as the most obvious example. 'Having long-term client relationships on more than one side of a transaction precludes us from acting in transactions where we might otherwise have a role to play,' says Lazard's Rucker.
'It was very difficult, for instance, for us to become involved in the Vodafone/Mannesmann takeover transaction because we are an adviser to Vivendi on a worldwide basis.' (Vivendi struck a joint venture agreement with Vodafone, after holding merger discussions with Mannesmann.)
Deciding which side to represent is simple, says Rucker. 'If a company gets in trouble, and is a clear target, and two of our clients want to bid for that target then we would have to look very hard at whether it is practical for both to bid.
'Are they actually two valid competitors for the business? If the answer is yes we would typically manage it on the basis of who was the first to express a serious interest.'
There are few hard and fast rules, other than to be practical and treat all clients fairly. But in the case of a hostile bid, the decision becomes easier. 'We would never advise a client to make a hostile bid against another client. That is one hard rule.
'But we might well be the adviser on the defence, as in the Blue Circle/Lafarge deal in mid-2000. We are the long-term adviser to Blue Circle and have had a close relationship with Lafarge in the past. Lafarge was advised in this instance by Dresdner Kleinwort Benson as we successfully defended Blue Circle.'
David Weaver, head of technology investment banking Europe at Deutsche Bank in London, takes a precautionary approach to conflict management. 'Conflict management and resolution is a pretty important part of our overall business,' he says. 'The best way to avoid it in the first place is to talk constantly to colleagues and partners. If we do find ourselves in a conflict, you need to decide what to do.
'Decisions are made on a case-by-case basis. We tell clients we are conflicted, and withdraw from one side or the other. Very often it is the oldest relationship that wins, but if you've been working on a project for some time, that might tip the balance in another direction.'
'If you have a team of people working on a sector most of their time, it increases the potential for conflicts but also enables you to spot the possibility a long way off. You can thus solve the problem at the same time as you identify it by not taking on certain business.
'We are very selective about the business we undertake. Being hired by the wrong company at the wrong time can virtually write you out of an entire sector.'
Might the opportunities arising from continuing consolidation, and consequent conflicts of interest, spark off the creation of a new wave of boutiques? Perhaps not, says Deutsche's Weaver, at least not on the same scale as in the late 80s and early 90s.
'The dynamics of the industry are different today,' he says. 'There will undoubtedly be interesting opportunities emerging but while the likes of Greenhill, Gleacher, Wasserstein and Perella became stars with an instant brand name, the market today doesn't have the same swashbuckling approach that created the stars back then.'
The conflict phenomenon, though, is having the side effect of creating a new super league of alternative providers of investment bank advisory services, believes John Allen, chairman of London-based ARC Associates, a specialist in telecoms, information, media and entertainment.
In cases where the global bulge bracket firms find it impossible to act, and the second-tier banks below them are found wanting in terms of in-depth industry expertise, ARC and other firms such as Greenhill, Broadview and Hawkpoint are benefiting from the conflict management process.
'We are active purely in M&A advisory and principal investment,' says Allen.
'The prospect of giving the business to a specialist such as ourselves is less threatening than handing it to another bulge bracket firm,' he adds.
Not surprisingly, while this approach has its advantages, it also has its critics among the larger houses.
'The claim that some firms make it better and somehow purer simply because they provide only one service is ludicrous,' responds one banker. 'If the only tool you happen to own is a hammer, everything tends to look like a nail.'
'The best way to avoid conflict is to talk constantly to colleagues and partners' David Weaver, Deutsche Bank
Reproduced from Financial News
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