TIME INC. STRIKES BACK : Hostile Takeover Bids Put Big Banks on the Hot Seat
Takeover battles such as the fight between Time, Warner and Paramount are putting big banks on the hot seat as they juggle commitments to longtime clients with prospects of lucrative fees.
The dilemma was highlighted last week by a $1-billion lawsuit filed against New York’s Citibank by Warner Communications.
Warner claimed that the nation’s biggest bank had violated an agreement not to finance unwanted takeover proposals that would interfere with the merger of Warner, which is a Citibank client, and Time Inc.
The dispute arose when Citibank turned up in the lead role to raise funds for Paramount Communications’ hostile $10.7-billion bid for Time. For committing $1 billion itself and agreeing to bring in other banks for the remainder, Citicorp stands to collect an estimated $10 million in fees.
‘Transaction-Driven’ Banks
But the incident demonstrates the pitfalls awaiting banks eager to gain a larger share of the rich fees generated by mergers and acquisitions when the deals involve bank clients.
“I don’t think there is any question that commercial banks are transaction-driven these days,” said James J. McDermott Jr., director of research for Keefe, Bruyette & Woods, the New York investment house. “They certainly want the market share that investment banks have grabbed.”
Fees from takeover deals have become an important part of earnings for big banks, particularly such New York institutions as Citibank, Chase Manhattan and Bankers Trust.
Financing Unfriendly Bids
Banks collected about $380 million for committing $13.6 billion to finance Kohlberg Kravis Roberts’ tender offer for RJR Nabisco. And Friday, when Time launched its friendly bid for Warner in an attempt to salvage their deal, Manufacturers Hanover and Bankers Trust were selected as co-managers to raise $14 billion from banks. Fees for the deal are expected to exceed $250 million.
In this new atmosphere, it is inevitable that banks find themselves confronting the prospect of financing unfriendly bids for customers or foregoing big fees. More and more frequently, they are opting for the fees.
“Five years ago, there was a strong policy in this place that we didn’t do anything against our friends, but that’s gone,” said an executive at Chase Manhattan, who asked that his name be withheld.
That was not the case in 1985 when Texas oilman T. Boone Pickens Jr. went after Unocal. The Los Angeles-based energy company discovered that one of Pickens’ lenders was Security Pacific, Unocal’s chief bank for 40 years. Unocal sued Security Pacific, claiming that its lending to Pickens violated its longtime business association with Unocal.
Security Pacific’s loans to Pickens were for general corporate purposes, not to finance the takeover bid. But even before the suit was filed, the bank discovered that part of the money was being used to buy Unocal stock and began trying to get out of the loan agreement with Pickens.
The suit was dropped after Pickens backed off, and even today few banks are willing to risk alienating a client as important as Unocal. But executives at some of the nation’s big banks said in interviews Friday that their policy is to review each case on an individual basis, even if a client is the target.
Money Is on the List
“We are much more willing to finance an unfriendly takeover against a target that is not a client, but we review each instance individually,” said a top credit executive at a big bank.
Citibank is one of the most aggressive takeover lenders; its policies allow the bank to finance for both sides of a deal. But a spokesman said Citibank gives consideration to the fact that a target is a longtime client.
Several factors determine whether a bank backs an unsolicited assault on a client. Along with the prospect of losing the client, banks consider the potential for legal disputes and adverse publicity. Money is also on the list.
“If you bet on the wrong horse, you can find yourself losing one or maybe a couple of clients,” said one top banker. “On the other hand, betting on the right horse can cement a continuing income stream, and the deals themselves are very attractive to banks.”
Big customers claim that the banks have confidential information that could help the other side. They are trying to protect themselves with written agreements with their banks not to finance hostile offers against them.
While the tactic is new and still rare, the pacts have added a new term to the lexicon of takeovers, “bankmail.”
For instance, in a move to preserve its deal with Warner, Time paid a group of its banks about $1 million each to sign agreements not to finance a hostile move on the company for a year.
Rather than paying a fee to Citibank, Warner agreed to continue its banking relationship with the bank, according to the lawsuit. In exchange, Citibank sent a letter to Warner on March 8 promising to avoid participating in an unsolicited bid for Warner for 90 days.
An outside lawyer representing Citibank said the company will argue that the agreement was not enforceable because Warner did not pay for it and that the Paramount bid is for Time, not Warner.
