Takeover Mania a $1-Billion Bonanza for Investment Bankers
Investment bankers are the alchemists of modern finance: They can turn paper and promises into gold.
In the current mania of mergers and buyouts and takeovers, they are able to charge staggering fees that would not have been thought possible only a few years ago. A successful buyout of RJR Nabisco for $20 billion or more, for example, could easily generate fees totaling more than $100 million for financial advisers and attorneys.
Already this year, investment banker fees have reached $1.3 billion, according to a study conducted for The Times by IDD Information Services, which collects statistics on corporate and business activities. And these are just the deals in which fees were disclosed to the Securities and Exchange Commission. That compares to a mere $159 million reported only four years ago.
And the huge rewards have bred a hunger for more. As one Wall Street veteran observes: “There are a lot of investment bankers sitting around who earned a million dollars last year saying: ‘I need to put together one of these big deals so I can earn some real money.’ ”
The key to the investment bankers’ enormous value is their flexibility. They are battle-hardened troops able to fight on either side of a war, working either for an aggressor seeking to take over a company or for a defending management desperately trying to keep the outsider from storming the board room.
The leading firms among the investment bankers and deal makers include Drexel Burnham Lambert, Goldman Sachs, First Boston, Morgan Stanley, Shearson Lehman Hutton, Salomon Bros. and Wasserstein Perella. The biggest leveraged buyout specialist is Kohlberg Kravis Roberts.
So far this year, according to IDD records, the biggest fee bonanza has come from the Campeau Corp. takeover of Federated Department Stores. Campeau paid its investment advisers fees totaling $50 million: $40 million to First Boston and $10 million to Wasserstein Perella.
On the defending side, Federated paid $19.8 million to Shearson Lehman Hutton, $17.8 million to Goldman Sachs and $16.3 million to Hellman & Friedman--plus another fee linked to the price of the shares.
In California, American Stores paid Shearson Lehman Hutton $7 million for help and advice in acquiring Lucky Stores. On the defending side, Lucky paid Goldman Sachs $11.3 million and Salomon Bros. $10.4 million.
The numbers grow still larger when the investment adviser has a chunk of the deal itself, as often happens with leveraged buyout firms such as Kohlberg Kravis Roberts. The biggest profits come from owning a share in the company that is taken over and selling out later.
The investment bankers--whether they are advisers or players--have multiple opportunities to make money, collecting fees at different stages of the deals.
The lawyers get work too, though they get paid at hourly rates and do not reap as big a share. “A bigger deal in dollars may not necessarily be more complicated than a smaller transaction,” one mergers and acquisition specialist said. “We just hire the lawyers for the hours we need them.”
A lawyer’s time can range from $350 an hour for a senior partner at a top firm to $90 for a junior attorney, according to rate schedules in larger cities, such as New York and Los Angeles.
Although the lawyers will not earn as much as the investment bankers handling the takeover deals, the work is still highly lucrative, generating millions of dollars in fees. The most frequent players include such powerful New York-based law firms as Skadden, Arps, Slate, Meagher & Flom; Waxchtell, Lipton, Rosen & Katz; Cravath, Swaine & Moore, and Sullivan & Cromwell.
But the real money is collected by the investment bankers. In this era of colossal deals, anything less than $1 billion is considered a small transaction. Such deals are likely to carry a 1% fee for an investment firm’s mergers and acquisitions department.
For those over the $1-billion mark, the fees vary. “As you get bigger, it gets very negotiable. It depends on who you’re working for,” said Charles Nathan, managing director of Salomon Bros. “In these deals, negotiations are very intense.”
Or, in the words of another Wall Street expert: “These deals tend to be like snowflakes--there are no two alike. There are many different ways to make money.”
The investment firm, having already received a fee for setting up the deal, may also arrange “bridge” financing. This is a temporary loan, perhaps two or three months in duration, issued until the buyers of the company get permanent funding. Fees for such arrangements can be as much as 1%.
For permanent financing, the buyers may rely on an issue of high-yield “junk bonds” for sale to the public and institutions such as insurance companies and pension funds. The investment firm may act as manager of this bond issue--and receive yet another fee.
The firms specializing in these deals, the leveraged buyout companies, have the most lucrative opportunities. They hold pools of capital consisting of their own money plus funds from investors eager for handsome returns.
The firm gets a management fee for handling this pool of capital. When it locates a specific takeover target and arranges the acquisitions, it gets all the regular fees normally associated with the deal.
And, most importantly, it gets a partial ownership interest in the company, often for free.
“People pay handsomely because they (leveraged buyout specialists) perform handsomely,” said Nathan of Salomon Bros. “They make profits of 40% or 50% or 60% a year.”
More big deals will be cut by the end of the year, ensuring a bountiful Christmas. Wall Street sources estimate that the leveraged buyout pools of money contain at least $25 billion--and, with the ability to borrow at a 10-1 ratio, this could mean takeover deals totaling $250 billion. And that, in turn, would generate hundreds of millions of dollars in fees.
TOP 10 DEALS BY FEES IN 1988
Status Date Target Federated 1 Completed 6/28 Department Stores 2 Competed 6/29 American Standard Inc. 3 Completed 5/05 Firestone Tire & Rubber Acquisition Group 4 Completed 10/24 Ft. Howard Paper Co. Acquisition Group 5 Completed 6/30 Stop & Shop Batus Inc. 6 Pending -- Farmers Group Inc. 7 Completed 3/01 E-II Holdings Inc. 8 Completed 6/09 Lucky Stores Inc. 9 Completed 2/29 Sterling Drug Inc. 10 Completed 4/25 Singer Co.
Acquirer 1 Campeau Corp. 2 Kelso & Co. 3 Bridgestone Corp. 4 (Morgan Stanley*) 5 (Kohlberg Kravis*) 6 (BAT Industries) 7 American Brands Inc. 8 American Stores Co. 9 Eastman Kodak Co. 10 Paul A. Bilzerian
Target Acquirer Adviser Adviser Fees Fees Target Acquirer ($000s) ($000s) Federated Department Stores Campeau Corp. 119,000 59,000 American Standard Inc. Kelso & Co. 35,000 37,500 Firestone Tire & Rubber Bridgestone Corp. 64,960 5,000 Acquisition Group Ft. Howard Paper Co. (Morgan Stanley*) 3,600 58,000 Acquisition Group Stop & Shop (Kohlberg Kravis*) 10,460 32,000 Batus Inc. Farmers Group Inc. (BAT Industries) 21,764 18,500 E-II Holdings Inc. American Brands Inc. 30,800 8,000 Lucky Stores Inc. American Stores Co. 21,335 7,000 Sterling Drug Inc. Eastman Kodak Co. 28,870 8,000 Singer Co. Paul A. Bilzerian 5,500 29,300
Total Fees & Expenses Paid Target ($000s) Federated Department Stores 178,000 American Standard Inc. 72,500 Firestone Tire & Rubber 69,960 Ft. Howard Paper Co. 61,600 Stop & Shop 42,460 Farmers Group Inc. 40,264 E-II Holdings Inc. 38,800 Lucky Stores Inc. 28,335 Sterling Drug Inc. 36,870 Singer Co. 34,800
*Firm leading acquisition group.
Source: IDD Information Services
