Sometimes, it pays to lose.
Morgan Stanley & Co. and Goldman, Sachs & Co. - hired last fall to help First Interstate Bancorp fend off Wells Fargo & Co. - will net more than $22 million apiece now that Wells' takeover bid has succeeded.
Those amounts include the $10 million each received for arranging First Interstate's "white knight" agreement with First Bank System Inc., plus $12 million apiece in "secondary transaction" fees.
A little-noticed provision in the First Bank agreement allowed the investment banks to collect secondary fees based on a percentage of the difference between First Bank's offer and the price at which any second deal, such as that with Wells, ultimately closes.
The more than $44 million being split between the firms is by far the biggest fee ever paid by a bank to investment bankers for a merger. It is more than double what advisers to the victorious Wells received.
Some observers said the months of investor meetings, litigation, and proxy work in the contested merger justified the generous compensation package.
But some investment bankers and merger-and-acquisition lawyers, noting that the advisers were guaranteed the fee for arranging the First Bank bid, suggested a perverse incentive may have been created when they were given an opportunity for the even larger payment.
"Often, if the first transaction may not be the final one, advisers will look for some sort of understanding like this," said John P.C. Duncan, a lawyer at Jones, Day, Reavis & Pogue. "But you don't want to give an adviser an incentive to sign on to a preferred deal and then the right to go find a better deal. They will naturally go out and find another deal in the running."
One lawyer, who requested anonymity, said it was not unusual to find advisers on a deal that falls apart going back to work and earning fees on a new deal for the same client.
But this lawyer added that the contract with First Interstate may have been unprecedented: "I have never seen a disclosure in a proxy that says, 'The deal is fair, but if a higher deal comes in, we will get even more.'"
Representatives of First Interstate and Goldman would not comment on the compensation package, and Morgan Stanley did not return calls seeking comment.
The lucrative merger battle was set in motion after Wells made a hostile bid for First Interstate in mid-October.
In early November, with Goldman and Morgan Stanley advising it, Interstate signed a friendly agreement with First Bank, after having been contacted by Banc One Corp. and Norwest Corp.
The incentive provision in the First Bank agreement may have been a recognition that another bank could still make a better offer, one investment banker said.
Under the provision, if a second deal were signed, then each adviser would get 0.655% of the excess between and the $10.4 billion First Bank deal and the new agreement. The clause capped the overall compensation for each adviser at 0.175% of the overall deal.
Wells' offer is currently valued at $12.6 billion, meaning each adviser would take home more than $12 million on the secondary deal.
Wells, meanwhile, is to pay $10 million to each of its advisers, CS First Boston Corp. and Montgomery Securities, plus a $10 million reimbursement to First Bank for its expenses during the bidding battle.
Before this transaction, the most paid to advisers in a bank deal had been the $22 million NCNB Corp. paid its investment bankers during the bank's acquisition of C&S/Sovran in 1991.
Irving Bank Corp. paid its advisers, Goldman and J.P. Morgan & Co., $10 million in its failed attempt to repel Bank of New York Co.'s hostile bid in the 1980s.
Goldman got an additional fee for the eventual merger with Bank of New York but would have received more had Irving's white-knight alternative succeeded.
