In June, Spotless Group withdrew its much maligned $556 million takeover bid for it unwilling target, Programmed Maintenance Services. Spotless have up after only garner acceptances for 1.4 percent of Programmed shares largely due to Programmed announcing an earnings downgrade shortly after Spotless’ bid. (Spotless’ shares proceeded to leap 15 percent after the bid fell apart). Despite the failure, Spotless shocked many market watchers by announcing earlier this week that the unsuccessful bid (along with an ownership review) had cost shareholders an astonishing $14.3 million.

Of the $14.3 million, a portion would have been unavoidable fees paid to arrange a debt facility — the remainder would have been paid to lawyers, accountants, consultants and most significantly bankers. Given that legal/accounting/consulting fees would have probably been in the vicinity for $3 million (give or take a million), more than $10 million would have been shared by lead banker Goldmans and the debt providers. (Crikey contacted Spotless but the company was unwilling to provide a breakdown as to fees paid).

While a multi-million fee is certainly not unusual for top-tier investment banks (Foster’s earned $100 million for its work on the ALH float), it is very rare for an investment bank to charge a significant fee for a transaction which is unsuccessful.

In general, the scale of bankers’ earnings dwarf that of their legal or accounting counterparts on a typical transaction. For those who haven’t had the privilege of dealing with them, investment bankers are like high-powered real estate agents. They assist with the purchase or sale of someone else’s asset for the highest (or lowest) price possible and earn a commission (fee) for their trouble. In their defense, bankers are generally highly intelligent and work obscenely long hours, but ultimately, their job is of an agent for another.

When criticized for the quantum their fees, bankers will stridently claim that the reason they charge so much more than other corporate advisers is because they work on a “success” basis. Further, bankers will generally need to “pitch” for work. While a company will simply hire a lawyer or auditor based on past dealings or reputation, bankers will often generate the work themselves by actually suggesting transactions to management (you would think management could come up with their own deals, given it is their job, but alas). Further, if a deal falls through, investment bankers would traditionally received a fraction of their fee. These arguments make a fair bit of sense. Bankers will often spend a significant amount of their time working on transactions which never occur and therefore, when a transaction does happen, the bankers need to charge more to compensate.

This is why the Spotless’ transaction costs are so exceptional. Not only was the takeover bid a failure, but its costs were equal to more than half of Spotless’ 2008 net profits.

This is not intended as a blanket criticism of bankers, especially the well regarded Goldman Sachs, who are entitled to charge whatever they like. It is however a strong indictment on executives and boards who abrogate their responsibility to shareholders by outsourcing much of their strategic role. Shareholders would expect that their highly-paid executives (former Spotless boss, Peter Wilson, earned more than $7 million last year) are capable enough to conduct the corporate strategic affairs of their company without the need for expensive hired help who now appear to be paid regardless of success.

Peter Fray

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