Morgan Stanley and Goldman Sachs Group Inc. both decided last month that it was worth losing millions of dollars in fees to get credit on a big merger they didn’t work on, four people with knowledge of the matter said.
The investment banks asked for credit in league tables—rankings of advisers on mergers and acquisitions (M&A) maintained by both Bloomberg LP and Dealogic—for working on the $25 billion sale of Forest Laboratories Inc. to Actavis Inc. last month. Neither actually had a role on the deal, said the people who asked not to be identified discussing confidential information.
Instead, the two banks, using previous contracts with Forest, negotiated to get credit for the deal in exchange for millions of dollars in fees they were owed, the people said. The contracts had a clause, commonly known as a tail, that entitled them to fees even if the company was sold by another bank, they said. After the deal was announced they each agreed to cut the fees they were due in exchange for being able to claim the league-table credit.
The trade highlights the importance of league tables to investment banks—which use them to pitch for new business—and the lengths to which banks will go to climb the rankings. Firms also agree to provide financing or other services to get credit on deals they played almost no role in. The Forest deal helped Morgan Stanley solidify its position as the top M&A adviser this year, in both Bloomberg’s and Dealogic’s rankings.
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“Getting league-table credit implies you had something to do with the deal,” said Erik Gordon, professor at University of Michigan’s Ross School of Business, in a telephone interview. “Now, folks who weren’t in the deal but had some minor role show up by cajoling and trading favors. Morgan Stanley isn’t desperate, but the macho bragging rights are huge.”
Andrew Williams, a spokesman at Goldman Sachs, and Mary Claire Delaney, a spokeswoman at Morgan Stanley, both declined to comment on the banks’ effort to obtain credit for the Forest deal. Frank Murdolo, a spokesman for Forest, also declined to comment. Tasha Pelio, a New York-based spokeswoman for JPMorgan, also declined to comment.
In the Feb. 18 statement announcing the deal, only JPMorgan Chase & Co. was listed as the adviser to Forest, a role for which it earned between $55 million and $65 million in fees, said Jeffrey Nassof, vice president of Freeman & Co., a New York-based firm that tracks banking fees. Greenhill & Co. was listed as the adviser to Actavis.
Morgan Stanley was absent from the list even though it had been Forest’s bank of choice for years, even advising the company on its $2.9 billion acquisition of Aptalis Pharma Inc. in January. JPMorgan, which had a relationship with Forest’s new Chief Executive Officer Brent Saunders, introduced him to executives at Actavis at a January health-care conference in San Francisco, two people said last month.
Only once the deal was negotiated did Forest executives call Morgan Stanley to tell them that they were selling, two of the people said. Under its previous relationship, the bank was entitled to a portion of the fees due if Morgan Stanley had sold the company itself. For a company the size of Forest, the bank would’ve gotten around $10 million, three people said.
In the end it accepted less than half of that, they said.
Goldman Sachs had a contract with Forest to help defend against activist investor Carl Icahn, whose boardroom pressure played a role in changing management, two of the people said. It was also owed a small fee in the event of a sale, and sacrificed most of that in exchange for the credit, one of the people said.
“It’s a form of buying league-table credit,” Gordon said. Contract tails are fairly common, and designed to protect investment banks in case a client does a deal shortly after a contract expires.
Dealogic gives banks credit for work on a deal when they claim it and doesn’t automatically give financing banks advisory credit for a deal. If another bank disputes the claim, Dealogic will go to the banks and the client company and ask for the engagement letter that verifies services on the deal, said Ed Jones, a spokesman for the company.
“If the other banks shout out and dispute it, we would take it from there,” Jones said in a phone interview last week. “So it’s self-policed.”
Bloomberg compiles league-table data from sources including press releases and communications with banks and law firms within the market, and also allows challenges to league-table rankings.
Mark Murphy, a New York-based spokesman for Bloomberg, declined to comment beyond the documentation of league-table methodology available on the Bloomberg terminal.
The campaign to be included as an adviser is typical of the competition among investment banks in high-stakes takeovers. Firms sometimes try to get on a deal just before or after an announcement, and can also get advisory credit when they’re providing financing to the buyer.
Bank of America Corp. and Mizuho Financial Group Inc. provided bridge-loan commitments to Actavis for the purchase, according to the Feb. 18 statement announcing the deal. They are both also listed as financial advisers to Actavis by Bloomberg, while Dealogic lists only Bank of America.
Bank of America spokesman John Yiannacopoulos declined to comment on its role in the deal. Mizuho’s New York-based spokesman Patrick Phalon didn’t immediately return a call seeking comment.
Sometimes the efforts don’t work. In 2011, days after the $29.1 billion takeover of Medco Health Solutions Inc. by Express Scripts Inc., Goldman Sachs requested credit for helping to arrange the deal, people with knowledge of the matter said at the time. During the discussion, a Goldman Sachs banker reminded Medco of the firm’s past work for the company and Medco’s role as a manager of pharmacy benefits for some Goldman employees, the people said. It was unsuccessful, the people said.
Morgan Stanley has advised on $176 billion of pending and completed acquisitions globally so far this year, more than any bank, Bloomberg’s league tables show. JPMorgan has worked on deals valued at $142 billion, and Citigroup Inc. ranks third with $112 billion of deals. Goldman Sachs ranks seventh, after having advised on $83 billion of deals, the tables show.
Dealogic’s data also shows Morgan Stanley is the top M&A adviser this year with credit for work on $193 billion in global deal volume through March 6.
Investment banks have long tried to get credit for late-stage roles on deals, like giving fairness opinions or providing financing for a deal, said Antony Page, professor at Indiana University’s McKinney School of Law. It’s unusual for banks to take credit as a result of a tail contract, he said.
“This seems to be one step further than what I have seen before,” Page said in a phone interview. “I would hope that they would be embarrassed about this.”