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SYDNEY - It may be a case of one deal too many. Macquarie Bank Ltd's role in the buy-out of an investment banking client has stirred potential conflicts of interest and already led to the loss of business.
In a market where private equity investors are driving a takeover frenzy, Macquarie's move to back a management buy-out of gas and power utility Alinta Ltd highlights problems for investment banks with arms that buy out companies with the aim to turn them around and sell them at a profit.
Alinta on Tuesday agreed that Macquarie, which had been advising the company on deals in the past, could stay in the buy-out. But it ended the bank's advisory role .
Indeed, investors are wary that Macquarie's pursuit of fees and deals could damage its corporate relationships.
"There is some growing caution or unease with the recent deals," said Rohan Walsh, head of equities at INVESCO Australia. "They need to be doing things to assure clients that there are no conflicts."
Macquarie was the top adviser on mergers and acquisitions in Australia last year ahead of UBS , according to Thomson Financial data. Looking to boost growth, it's sinking its own money into deals, apart from providing advice to takeover bidders and helping them raise debt and equity to seal acquisitions.
The strategy sometimes puts it at odds with its clients.
"The scenario is one where CEOs and boards are looking over their shoulders all the time. They're conscious of the fact that even their very advisers may one day turn around and say we are a participant in a bid for the company," said Ian Ramsay, professor of corporate law at the University of Melbourne.
On Tuesday, Macquarie said it was only contacted by the MBO group in early January, and was advised Alinta directors had been aware of the buy-out proposal for some time.
It is common for investment banks to face -- and resolve -- conflicts of interest. As advisers they are privy to confidential information from companies, while also running trading operations, and can later go on to advise rival companies.
Last year, British satellite broadcaster BSkyB dropped Goldman Sachs as a corporate broker, while Deutsche Bank AG stepped aside as a joint broker to Britain's BOC Group, to allay potential conflict issues.
But this time, investors want reassurance that Macquarie is not hurting Alinta shareholders.
"Obviously on face value, it looks like they have crossed the line," said Bob van Munster, head of equities with Tyndall Investment Management.
Legal experts said there are two issues for Macquarie:
- Does Macquarie have confidential information it got as an adviser to Alinta that is now relevant to the management buy-out bid? If so, it must ensure the information is not communicated to the Macquarie bankers advising on the Alinta bid.
- Second, is there a "fiduciary obligation" to avoid, not just manage, a conflict of interest?
Both issues are being tested in an insider trading case that the Australian Securities and Investments Commission has brought against Citigroup on how it handled information while it was advising transport group Toll Holdings Ltd. The case is due to go to trial later this year.
"There's a view that the market best regulates things like this -- if Macquarie gets a reputation for disloyalty, its image will suffer and it will lose work," said University of Sydney law lecturer Andrew Tuch, who has written extensively on the issue.
"But this is an imperfect form of discipline because of the time lag involved," he told Reuters in an email.
The conflict of interest issues are not going to go away, as Macquarie looks to boost its growth.
Its shares lagged the S&P/ASX 200 Index's gains in 2006 - its first underperformance in three years - after it failed in several takeover attempts around the world, including a bid for the London Stock Exchange .
Macquarie's investment banking arm -- which includes private equity business, contributed about 54 per cent to Macquarie Bank's first half fiscal 2007 profit. UBS estimates that private equity investments will account for about a tenth of Macquarie's estimated net profit of A$1.3 billion for fiscal 2007.
Fund managers and legal experts said Macquarie Bank could be putting its corporate advisory business at risk.
"That is the risk obviously, if confidence wanes," INVESCO's Walsh said. "But I am sure they will do what they can to protect their position."
Several top local clients of the investment banks are seen as prime targets for private equity buyouts, including Coles Group Ltd, Wesfarmers Ltd, CSR Ltd, Amcor Ltd, Foster's Group Ltd and Brambles Industries Ltd.
"Obviously the company (Macquarie) has got great skills and capabilities, which people want to utilise. But they want some assurances that they are not being compromised in using those skills," Walsh said.
- REUTERS
