Takeover Game Raises Conflict Issue as Clients of Banks Fear Betrayal

From Reuters

Big commercial banks, as they move into the lucrative mergers-and-acquisitions business, are being accused of abandoning and even betraying some of their longtime corporate customers.

Several controversial cases have sparked debate over whether a bank with intimate knowledge of a borrower's financial secrets should take part in deals that could hurt that company.

The issue may have some implications in the American banks' quest to break into other investment banking businesses, now barred to them by the government.

Earlier this month, Sterling Drug, then the target of a more than $4-billion hostile bid by Swiss giant F. Hoffmann-La Roche & Co., lashed out at Morgan Guaranty Trust Co., its lender for more than 50 years, for advising Roche.

"I am shocked and dismayed by what I consider to be Morgan bank's unethical conduct in aiding and abetting a surprise raid on one of its longtime clients," Sterling Chairman John Pietruski wrote in an angry letter to the bank.

Similarly in Britain, supermarkets group Dee Corp. this month severed its ties with Citibank, which is advising and partly financing Barker & Dobson's $3.9-billion bid for Dee.

Gillette last summer fired Citibank for offering to help investor Ronald Perelman take over the big personal products firm.

Safeguards Cited

Banking groups insist that they have taken great pains not to do anything improper. "We categorically deny the suggestion that any proprietary information has been breached," a spokesman for Morgan said.

Bankers say they have established safeguards to keep their lending businesses completely separate from their other operations. These so-called Chinese walls are designed to make it almost impossible for confidential information about customers--shareholder lists and secret reports showing favorable company prospects--to be passed on to investment banking officials handling mergers and acquisitions.

The banks' ability to manage potential conflict also lies at the heart of the congressional debate over whether to repeal the 1933 Glass-Steagall Act that prohibits commercial banks from underwriting securities.

Some industry experts are not convinced the Chinese walls are totally effective, and borrowers may unknowingly be at risk.

"My guess is that people under pressure will leak information," said James Kuhn, a professor at the Columbia Business School in New York.

Increasing global competition has eroded the gentlemanly bond of trust between banks and their borrowers, he said. "A lot of bankers feel they have to close deals very near the edge," Kuhn said.

Seek Bigger Share

But why would banks risk even the perception of impropriety and possibly damage longstanding relationships? Industry analysts say the shift reflects the changing economics of the industry.

Faced with shrinking profit margins from their traditional lending operations, the big banks in particular want a bigger share of the takeover business, until recently the preserve of Wall Street's investment banks.

"Investment banking is largely fee-driven," said analyst Charles Vincent with Provident National Bank in Philadelphia. "It tends to be stable, reduce credit risk and interest rate risk and requires little capital."

A few banks, however, have found it profitable to steer clear of conflicts. "We have certainly gained clients who have felt unhappy about conflicts of interest," said Marcus Agius, the executive director of Lazard Bros., the British merchant bank that decided not to acquire a brokerage arm.

But most big institutions operate under vague guidelines that offer no reassurance to smaller customers, in particular.

"Our policy is that we don't finance hostile takeovers of important bank clients," said a spokesman for Chemical Bank in New York. Just who is important and who is not "is a decision we make on a case-by-case basis," he added.

Could Backfire

There is no Hippocratic oath that defines banks' obligations to their clients, said a spokesman for the American Bankers Assn. in Washington.

On the other hand, the abuse of private customer information could backfire on the institution and stall its future as an investment bank.

"If a bank has used confidential information improperly and exposes itself to potential liability, a regulator could determine on the basis of safety and soundness that the bank should not engage in that activity," said Dennis Gingold, a banking attorney with Squire Sanders & Dempsey in Washington.

He suggested that banks provide corporate customers with a consent form--something to the effect of "We're in the investment advisory business. Your firm may be a target, but we will not use your information."

That would not only alert customers to the shifting rules of the game but also reduce the bank's potential liability, Gingold said.

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