The Other Guidant War

Investment banks slug it out for a huge payday.
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While

Johnson & Johnson

(JNJ) - Get Report

and

Boston Scientific

(BSX) - Get Report

do battle for

Guidant

(GDT)

, another war is being fought behind the scenes on Wall Street.

This one is among investment banks, which are slugging it out for the deal's advisory and finance fees. The stakes are huge. In a filing with the

Securities and Exchange Commission

, Guidant and Johnson & Johnson have said they expect to pay a total of $155 million to their respective advisers, lawyers and financiers to get the transaction done.

The takeover saga remained unresolved Friday after Boston Scientific upped its offer to $73 a share and gave Guidant until 4 p.m. EST to declare the bid superior. Johnson & Johnson is currently offering about $68 a share for the Indianapolis-based medical device company.

One investment banking professional estimates that the pot at stake for the banks advising the suitors is $60 million, based on the size of the competing offers and the financing needed to complete them. Even by Wall Street standards, that's a lot of money to be won or lost on the turn of a single card.

All or Nothing

In the cutthroat world of mergers and acquisitions, one thing that bankers will rarely budge on is what they are getting paid. And in deals as big as this one, the battle lines are clear. For both the buy side and the sell side, fee payouts are success-based -- meaning that the big payday comes only if the deal closes.

This means months of toil could translate into virtually nothing for the group of bankers advising the losing bidder. At the moment,

Merrill Lynch

(MER)

,

Bear Stearns

(BSC)

and

Bank of America

(BAC) - Get Report

are advising Boston Scientific, with

Deutsche Bank

(DB) - Get Report

and

Wachovia

(WB) - Get Report

in line for additional financing businesses. Advising Johnson & Johnson is

Goldman Sachs

(GS) - Get Report

.

For Guidant's bankers,

J.P. Morgan

(JPM) - Get Report

, the advisory fee is all but locked up. Typically, the adviser to the company being acquired gets a 50% payout when the deal is announced, and a full check when the deal closes. The identity of the winner isn't a huge consideration. And because the fees in deals of this size aren't usually percentage-based, the price of the winning bid means very little.

For the buy-side bankers, however, the gloves are still on.

In this instance, advisory fees for the buy side could hit $20 million, and financing fees will tack on another $40 million, a banker says, basing his estimate on fees in similar deals. And, unlike on the sell side, the banks that back the winning bidder will usually bask in both the M&A advisory fee and the financing fee.

Mixed Motives

With so much at stake, might bankers have a motive to push their clients into ill-advised moves?

"The unfortunate thing is that they only get paid if the deal goes through. It has the possibility of setting up some perverse incentives to pursue a deal even if the bidding takes a price above

a level that is fair for the stockholders," said Michael Bradley, professor of finance at the Fuqua School of Business.

With Johnson & Johnson, a case can be made for any number of motivations on the part of its bankers. The company already walked away from the table once when Guidant suffered regulatory setbacks in its pacemaker operations. To be sure, it's hard to argue that Goldman's advice was based on its transaction fee at that time.

On the other hand, J&J has not been above the typical brinksmanship in the period since Boston Scientific's offer became public. The company clearly had not yet made what bankers refer to as an "upside bid" at that time -- the highest price its bankers are willing to recommend. Now, with a competitor in sight, J&J and its bankers have joined the battle, perhaps loath to miss a payday when Guidant's acquisition seems assured.

Even if the possibility of conflicts exist, given the importance of companies like Boston Scientific and Johnson & Johnson as investment banking clients, industry experts say the potential for outright shoddy advice is low, and isn't worth the fee.

"Bankers do what their clients want. When one company buys the other, the deal is just the beginning. Advisers know that there is a huge reputation repercussion for advising a client to make a bad decision," said an M&A lawyer who works closely with the banks advising the deal.

Of course, that doesn't mean that people can't get wrapped up in the momentum of the bidding war. "It's human nature to be competitive, especially when you have gone public and said what you are trying to do," he said.