Monday, March 10, 2014

A Tale Of Two Very Different Cultures -- Legacy Merck-Medco, Contrasted With Legacy Schering-Plough

First, a bit of background (by way of a fairly-rough analogy) on how large public company M&A deals work, in order to clearly understand this story: If you've ever sold your house through a real estate broker, you will have likely noticed that the brokers' contract usually recites that if you sell your home within say six months after the listing agreement formally expires, the broker still gets a commission. That is called a "tail", in the trade. The idea behind it is that the broker put in significant effort showing your home, advertising, hosting open houses and the like -- and may well have ginned up the interest that led to your buyer appearing, even after the listing contract had formally expired.

So too, in the selling and buying of companies. Even big public companies. One investment banker may make many introductions on a deal, and it may take years for the relationships to progress to a written deal-sheet.

But in investment banking, the "tail" is almost never only six months in length. No, the tail is often a couple of years, especially if the company is pretty desparate for a sale (and as we see below, Mr. Saunders was). In some of those situations, the tail is essentially permanent -- if company X (seller) does a deal with a specific company (i.e., a named buyer) that was originally introduced by the i-banker to said company X, then some flat fee (often into the higher teens of millions of dollars), is payable -- even if the banker stopped advising on any deal three or four (or more) years earlier.

Got it? Good. So, here's what's new, in this game -- as bankers become ever more brazen. And here's how it highlights the culture that permeated legacy Schering-Plough, a culture that was (and remains) mostly absent at Merck (and Medco before it).

We mentioned over the weekend (shout out to Salmon!) that Brent Saunders had sold Forest to Actavis after only a few months on the job, as CEO. JP Morgan actually introduced Saunders to the Actavis CEO at a dinner, toward the end of its San Francisco Healthcare conference, earlier this year. However, according to published reports, both Morgan Stanley and Goldman Sachs had much earlier taken minor advisory engagements (Goldman actually only ever advising large Forest shareholder Carl Ichan -- not the company, directly) around Forest. All parties apparently agree that Morgan Stanely and Goldman Sachs played no role in actually structuring the current Actavis deal. [All of this is per a fantastic Bloomberg article, overnight. See below.]

What happended next, then, is a tale of bankers' greed -- and a corporate CEO's acquiescence to it -- as part of his long-established cultural "payola" mindset. Mr. Saunders -- according to published reports -- agreed to let each of the two banks claim credit for the Actavis deal, and list it in their league tables of closed transactions, if each would reduce the payments under their "tail" clauses. Each readily did so.

Now, dial the way-back machine to 2011, when Medco was being bought by Express Scripts. Goldman tried the same gambit. And the legacy Merckers who then ran Medco simply said "no." No payola. No workie; no checkie.

No league table credit, and no pay for a deal you did not do. That is, in my opinion, the old "most-admired" Merck pedigree. And the opposite was what Fred Hassan taught a then-younger Mr. Saunders, while at legacy Schering-Plough (in my opinion). . . "just pay all these Pullman porters, to keep the train runnin' on time." [And actually, I take that back -- that metaphor insults the hard-working, honest helpful porters of that by-gone era. These bankers lift no luggage, clean no chambers and do no real work, least of all on the Actavis deal with Forest. Yet there they are, with their hands out. Ugh.] From the really terrific Bloomberg article then -- a bit -- but do go read it all:

. . . .The investment banks asked for credit in league tables -- rankings of advisers on mergers and acquisitions maintained by both Bloomberg LP and Dealogic -- for working on the $25 billion sale of Forest Laboratories Inc. (FRX) to Actavis Inc. (ACT) last month. Neither actually had a role on the deal, said the people who asked not to be identified discussing confidential information.

Instead, the two banks, using previous contracts with Forest, negotiated to get credit for the deal in exchange for millions of dollars in fees they were owed, the people said. The contracts had a clause, commonly known as a tail, that entitled them to fees even if the company was sold by another bank, they said. After the deal was announced they each agreed to cut the fees they were due in exchange for being able to claim the league-table credit. . . .

Sometimes the efforts don’t work. In 2011, days after the $29.1 billion takeover of Medco Health Solutions Inc. by Express Scripts Inc., Goldman Sachs requested credit for helping to arrange the deal, people with knowledge of the matter said at the time. During the discussion, a Goldman Sachs banker reminded Medco of the firm’s past work for the company and Medco’s role as a manager of pharmacy benefits for some Goldman employees, the people said. It was unsuccessful, the people said. . . .

It has always been "Pirate Rules," at the i-bankers, I guess. . . but they aren't even playing by "the Guidelines" anymore -- it would seem.

Even so, I think the fault lies within the halls of these public company C suites -- they think the shareholders' money is theirs to so casually toss to the wind. In this case, the wind was bluster blowing off of the Goldman and Morgan Stanley bridges. Medco resisted. So too, should/could have Brent Saunders. Thanks again, Fast Fred -- from B+L, to Forest Labs -- these are your protégés' legacies (and at Pharmacia and Upjohn, before that sickening Schering-Plough train wreck). End of rant.


Anonymous said...

Oh~~~you must have been offline...but, I did flag this for you back on 18Feb2014.

Condor said...

I am so sorry, Anon.

I do see that now. . .

I do think this wrinkle -- about crediting the uninvolved, and paying public company shareholders' money in so doing -- is new, as of last night.

But as ever, thank you so much!

Please keep contributing your pick-ups!

I promise to focus more closely here.

And boy -- oh boy -- is that Brent a piece of work! Do check back in, here. . .


Anonymous said...

Thanks~~I was just busting....

Be well!