JPMorgan M&A fee spat has fuzzy logic

March 18, 2010

Imagine a world where bankers are paid according to their actual efforts. A judge in Australia has brought that fantasy a little closer, by denying JPMorgan A$31 million ($28.6 million) of fees it claimed for defending a company from a takeover that turned into a bidding war. But the implied logic — that advisers should get paid for what they did, not for what eventually happened — is fuzzy.

Granted, it is hard to argue that the eventual A$1.3 billion purchase price for Consolidated Minerals, JPMorgan’s client, was entirely the result of the bank’s labors. Rising metal prices and some exuberant competing bidders played their part too.

And paying bankers only for the sweat of their brows sounds alluring. Takeover defense advisors routinely get paid for work they do not do. While terms of engagement vary, an advisor’s fee is often linked to the value of the final offer — even if the target company’s share price is boosted by a rising market.

Yet clients don’t do so badly from the status quo. When bids fail, the bank advising on defense may get nothing. Consider BHP Billiton’s offer for Rio Tinto, which dragged on for a year but was never consummated, or Vale’s failed bid for Xstrata.

True, basing fees largely on success may encourage bankers to push for a deal, even if it’s not ideal for their client. But if banks just charged for their actual work, companies on the receiving end of unwanted hostile bids would face large bills if they remained independent. Imposing big fees for failed takeovers might encourage boards to agree to offers they receive regardless of what’s best for shareholders.

In reality, JPMorgan’s fee spat is unlikely to do much to change the way advisors are retained and paid. It may, though, lead some clients to quiz their bankers more closely about what fees really cover. JPMorgan’s claim apparently included A$100,000 in expenses, including A$6.32 for a Big Mac. Whatever happens, at least the Wall Street bank has one consolation: when the deal eventually closed, it got full league-table credit.

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