Financial News, 8th - 14th April 2000
Heightened activity in the telecoms sector is causing headaches for top bankers. Although fee income has never been healthier, relations with clients are becoming increasingly complicated as fears over possible conflicts of interest grow.
As one senior telecoms banker says: "Management of conflicts is one of the biggest issues facing banks in this sector." Merrill Lynch's once close relationship with France Telecom is believed to have ended recently after the US bank helped a rival bidder, Bell South, snap up E-Plus in Germany - a company that the French themselves were on the point of acquiring. Merrill Lynch was not able to comment.
The angry French have hit back by appointing Morgan Stanley Dean Witter, Credit Suisse First Boston and NM Rothschild for a possible bid for Orange, the mobile telephone company that will in due course be sold by Vodafone AirTouch. A rival banker says: "Merrill will never be used by France Telecom again."
There were also anxious moments for UBS Warburg last year when it advised Bell Atlantic on a move on AirTouch, the company for which its long-standing client Vodafone was also bidding.
But such problems will only intensify as telecoms companies become intent on signing up as many banks as they can. Some 30 banks are believed to have been appointed by the many potential bidders for Orange, creating considerable potential for future conflicts of interest if, as seems very likely, deal flow in this sector continues to be strong. As one banker says: "Every serious telecoms player has been appointed to act for somebody on Orange. If you're not involved in this, you can't be any good." Another says, "the companies are clearly trying to put banks offside."
The bankers are said to be working very hard. A source close to Vodafone says that a number of proposals have been received which will have to be considered very closely, even though Vodafone had not expected to start serious discussions before the demerger has been completed.
In such circumstances, another banker says, "conflicts of interests will be difficult to avoid". In particular, BT will note with interest that both of their advisers - Morgan Stanley Dean Witter and NM Rothschild - have been appointed to advise France Telecom. Although BT will not be bidding for Orange, the potential for future conflicts of interest is easy to see in a sector where many more deals are expected. As one banker says: "A lot of deals are waiting to happen - not that many have actually been executed yet. It's like a volcano about to erupt."
Most US banks are reluctant to give undertakings to clients that they will not, in the future, act for competitors on the other side. Some say that engagement letters along such lines would be in restraint of trade. Such difficulties mean that companies are shopping around for advisers far more. This is providing opportunities for specialist boutiques which have less complicated client relationships. One of these is ARC Associates, which is believed to have been appointed by one of the potential bidders for Orange. ARC prides itself on avoiding conflicts. The firm tells clients in letters of engagement that it will not act for competitors in circumstances where the client's interests could be damaged.
John Allen, chairman of ARC, says: "ARC's policy on conflicts aligns our interests with the client's interests in a particular market segment or sector." This could cover a broad area of activity.
"We have had to turn away business, but it's worth having the policy because it changes the relationship with the client."
Even so, ARC has seen its business boom to the extent that it now would not act on deals worth less than £50m (E85m). Two years ago, the limit was as low as £20m. The bank recently acted on a £391m bid by Marconi for MSI working alongside UBS Warburg. This was ARC's biggest deal for a UK client and its second biggest deal in Europe.
Though it is a boutique employing only around 30 people in Europe, ARC insists that it is now moving into an arena dominated by the big investment banks rather than other specialist boutiques.
Reproduced from Financial News ®
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