Del Monte settlement quantifies cost of conflicts

October 6, 2011

By Jeffrey Goldfarb
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Wall Street just got a bill for its conflicts of interest problem — and Barclays is picking up the tab. The UK bank will surrender a big slug of the fees it earned in the $5.3 billion buyout of Del Monte as part of a legal settlement with the food company’s shareholders. M&A practitioners seem to have read the writing on the wall after a Delaware judge earlier condemned the practice of advising a seller while also financing the buyer. But when banks get spanked on the bottom line, the message resonates louder and clearer.

The Del Monte case stunned the dealmaking world earlier this year. Barclays hadn’t even been named as an original defendant. That didn’t deter a Delaware court from dragging it into the case and saying the bank “secretly and selfishly manipulated” the Del Monte auction to line its own pockets with additional fees. The accusations got the attention of bankers everywhere, who until then hadn’t much seen the problem with so-called “staple financing,” or lending money to a private equity firm so it could acquire a company the advisers were simultaneously helping to sell.

Banks won’t necessarily concede any change of heart. But the evidence so far speaks for itself. While the volume of leveraged buyouts has shrunk considerably, it’s nevertheless hard to find an example since February, when the judge first ruled, of any sizable deal where a bank has engaged in the practice. This week’s $3.9 billion buyout of Pharmaceutical Product Development PPDI.O, for example, included four financing banks for Carlyle and Hellman & Friedman, none of which was a named adviser on the deal.

The now quantifiable cost of such conflicts of interest should help drive the point home. Barclays, though it isn’t admitting any wrongdoing, will kick in nearly $24 million to the $89 million deal with Del Monte shareholders. And the Wall Street Journal is reporting that Del Monte will withhold another $21 million of fees from Barclays to help cover its portion of the settlement. It isn’t easy to alter the methods of bankers. But removing the financial incentive works almost every time.

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