If there was any doubt whether investment bankers prefer to be acting for vendors or purchasers, those reservations would have been quashed after noting how much Origin Energy allegedly paid its financial advisers.
The Financial Review’s Rear Window column yesterday pointed out the inconvenient truth regarding the somewhat hefty investment banker fees being doled out by Origin. According to Rear Window, Origin, which achieved widespread plaudits for its well-timed sale of half of its coal-seam gas business to ConocoPhillips last year, told shareholders that “costs associated with the takeover defence and dilution of Origin’s interest in APLNG” were $122 million.
Origin had earlier knocked back a couple of generous offers from disgruntled suitor, British Gas (of $15.50 per share for the entire company) before entering into a 50:50 joint venture with Conoco to develop its Queensland CSG interests and oil and gas projects in the Denison Trough.
Investment bankers tend to love acting in takeover defenses, especially hostile ones. There is generally less pesky planning than with acquisitions, and the fees, especially in a contested acquisition, can be quite monstrous (as Macquarie found out much to its delight when it advised Foster’s on its sale of the ALH pub business. In that instance, Macquarie collected upwards of $100 million).
Some shareholders contend that investment banks should not receive such a lofty percentage of the eventual sale price, but rather be paid on the basis of actual work undertaken (in the same manner as the far less pricey lawyers are remunerated). This argument holds some merit, given that it is the assets which are sought by the buyer, and the bankers are merely facilitating the sale. If several parties enter into a bidding war, why should the hired help benefit from the assets being more valuable than the vendor originally though?
The contrary argument to that is that for takeover defenses, the relationship with the client almost always ends and future work will dry up. Fortunately for Macquarie, in the case of Origin, that won’t be a problem.
Letters to the editor can be quite a hit and miss affair at times. Yesterday the Financial Review certainly scored a hit, with a letter from Charbel Nader, executive director of Melbourne-based merchant bank, Pitt Capital partners. Commenting on the conflicts faced by financial planners, Nader very percipiently opined that:
Financial planners are paid to sell financial products to consumers. They are, in the main, paid by the creator of the financial product to sell their product, not by their client to advice them…
Financial planners should be given a choice. They can continue doing what they are doing, in which case they should not be allowed to use the title planner, adviser, consultant or the like. They should be termed financial product salesperson and disclose it. Alternatively, they can continue to be called financial planners/advisers and the like. In this case, they should be remunerated only by the client.
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Nader’s suggestion proves that simple answers are usually the best response to a problem. Financial planners (who accept commissions rather than fee-for-service) are salespeople — pure and simple. Calling them that will go a way to solve many of the problems faced by unsophisticated investors who are forced to rely on conflicted advice for what is usually, very poor returns.