Investment banks prefer to stay away from activists

With a few rare exceptions, the banks say they do not work on the side of activist funds. This does not protect them from possible conflicts of interest.

UBS dared to advise activist Eliott in the Qualcomm case at the end of 2017, to the detriment of all the investment banks in the market.

The effect was devastating. In late 2017, UBS advised Elliott to force American Qualcomm to raise its bid on a takeover of activist, Dutchman NXP. A $ 44 billion “deal,” which ended in failure and the bank was nearly banned. “That UBS advising an activist did not appeal at all to many clients, who felt that she was making an alliance with the devil! “, testifies today an internal source.

Pro-activist banks

Banks that dare to partner with activists can be counted on the fingers of one hand. Houlihan Lokey advised Barrington Capital, Marcato and P Schoenfeld funds. The American store confirms today “Continue to have a practice of activist advice, in support of both companies and activist funds”. But Moelis, who came to support Elliott or Starboard Value, has fallen back on defense, like the advisory branch of Blackstone, when it joined PJT in 2015.

Today, all the big names in investment banking swear hand on their hearts that they only work alongside companies to avoid any conflict of interest. Because their large clients hate the idea that they can one day support the adversary who will put pressure on their board of directors and force them to sell cut to size. At the slightest suspicion, banks can give up their commissions.

Activists, support for M&A deals

Even before the threat, they make a very prosaic calculation: the commissions paid in defense are higher than the sums that the activists, very equipped internally, are willing to pay. In one of the costliest battles, Procter & Gamble, for example, spent more than $ 100 million, notably on lawyers and bankers, which is four times more than Trian Partners.

Companies pay consulting fees, which are strategic and ultimately lucrative: “You gain the confidence of the board of directors during critical moments for the manager, which establishes a close relationship over time … and can give rise to subsequent consulting mandates”, explains Rich Thomas, associate of Lazard.

So much so that one can wonder if the interests of investment banks do not ultimately coincide with those of activists, when they demand disposals: a third of the 226 campaigns carried out in 2018 responded to M&A objectives, including the essential for a cession (Suez, Whitbread, etc ..), according to Lazard.

Transactions that can be triggered late. Thus, Nestlé said for the first time at the end of December that it was considering selling its shares in L’Oréal, seventeen months after pressure from Third Point. “If we think that a sale is not in the interest of the company, we will not advise it, retorts a banker. There are about ten situations per year that do not give rise to transactions. “

Conflict with “prime brokerage”

But the most serious conflict of interest that banks have to watch out for is that with their “prime brokerage” jobs, these services provided to alternative funds (financing, lending, securities borrowing, etc.) and their trading desk. . “The reputation of the franchise comes first, so the ‘prime brokerage’ remains a passive activity”, reacts the banker of a large establishment.

In the light of the income generated by each of the two activities, the question is quite quickly settled. According to Coalition, “prime brokerage” generates around $ 17 billion for the 12 largest global investment banks. M&A commissions exceed $ 30 billion, according to Refinitiv.

However, “Hedge fund services teams don’t warn defense teams, and that’s a real topic today, points to an Anglo-Saxon governance consulting specialist. If the leaders demanded it, they would obtain full transparency ”.