As Northrop Grumman Corp.'s financial team met the one representing Westinghouse Electric Corp.'s defense business, a banking surprise awaited them.
Looking at the group of advisers on the other side of the table for the first time, in the middle of December, Northrop Grumman's treasurer and corporate vice president, Albert F. Myers, noticed a player that was a lead lender on his team - Chemical Bank.
"To see Chemical show up on both sides of the table was a bit of a surprise," said Mr. Myers. "That was a case of us not doing enough homework."
Mr. Myers says he is confident that the bank acted in the best interest of both companies. But other executives said seeing the same commercial bank on both sides of an acquisition might make them worry that the adviser was putting the borrower's interest first.
To date, the potential problem has cropped up only occasionally. But the reaction to the high-profile Northrop deal underscores an issue that could become a major concern as more banks, bent on winning more market share, start offering investment advisory services in addition to loans.
For Chemical, the leading loan syndicator, the issue is especially important, because the bank has become a leading advocate of just such a one-stop-shopping strategy.
"The greater the breadth and depth of your investment banking businesses, the more conflicts you run daily on a worldwide basis," said James B. Lee Jr., the head of global investment banking at Chemical. "You have to be very diligent and careful about how you manage your conflicts. Any one of the big firms or banks faces these issues daily, if they have a well-developed investment banking business."
Underscoring Chemical's commitment to developing synergies between the bank's lending and advisory arms, Mr. Lee who is well-known in the loan syndication arena, personally led the Chemical team that advised Westinghouse.
In that capacity the bank assessed the financial wherewithal of potential bidders and wrote the fairness opinion on the sale to Northrop.
Across the table, Chemical's loan syndication group joined Chase Manhattan Corp. and BankAmerica Corp. on a $4.3 billion loan to Northrop to support the acquisition.
Mr. Lee said the situation was not unusual, and cited a handful of other deals in which his bank has taken a dual role. Parties to several of the deals were not able to provide details on Chemical's role.
Corporate executives said the situation was highly unusual.
"I have never heard of a bank on both sides of a transaction," said a chief financial officer at a Fortune 500 company.
Executives said they put little faith in the firewalls that are supposed to separate the banking and investment banking arms of a financial institution.
"If I'm going to have an adviser, I want to know he has fully my interests at heart and he's working strictly for me," said Linda S. Fowler, the director of treasury at Service Corporation International, a mortuary company in Houston.
Ms. Fowler said she is a traditionalist about bankers, and doesn't like to see banks getting involved in some of the newer businesses.
Northrop's Mr. Myers concurred. Asked whether he would prefer if Chemical had played just one role, he said, "It's hard to say you wouldn't prefer that."
Executives and bankers pointed out that these kinds of issues have cropped up for investment banks, which have been on both sides of the table in the past, underwriting junk bonds for a buyer and advising a seller.
Relationships with commercial banks differ from those with investment banks, said executives, but the differences might change as banks develop nontraditional business lines.
"For better or worse, when we're dealing with an investment bank we know what we're getting," said Barry Fromberg, the chief financial officer and treasurer at Paging Network in Plano, Tex.
"The whole issue (with commercial banks developing these other business lines) has evolved so rapidly. It really is almost changing the rules of the game a little. There are different issues for a lender," said Mr. Fromberg.
But experts said that banks addressed the potential conflicts of interest as soon as they received investment banking powers.
"When I was at Citicorp and we first got the broker-dealer powers, the bank was hyper-sensitive about not only conflicts, but also the appearance of impropriety," said Kevin Meenan, now a principal at Meenan, McDevitt & Co. "Not cheating is not good enough. Avoiding even the remote possibility of cheating is the higher standard of excellence.
"If you look at someone like Goldman Sachs, they've been able to maintain a squeaky-clean image," Mr. Meenan said. "Commercial banks are as well qualified to deal with ethical conduct as investment banks are."
Supporting both a buyer and a seller in an acquisition is legal, even with the current Glass-Steagall restrictions. Additionally, while banks serving as advisers have a fiduciary responsibility to disclose other roles to their clients, lending banks do not, said John P.C. Duncan, a lawyer in the Chicago office of Jones, Day, Reavis & Pogue.
"Making a loan is not considered a fiduciary position," Mr. Duncan said.
Additionally, some executives saw a potential benefit to the influx of commercial banks into the investment banking businesses.
"The only upside is that this business is becoming more competitive," said Mr. Fromberg. "Hopefully, because of that we would expect the fees for these services to come down, and for the market to become more efficient."
Other executives, like Weyerhaeuser Co. treasurer David Edwards, showed little concern with a potential conflict of interest.
"You've got to be mindful of potential conflicts, but that shouldn't be that hard to work around. We expect our banking relationships to practice the proper care over disclosures," Mr. Edwards said.
Nonetheless, several executives were uncomfortable with situations in which one bank assists the buyer and the seller.
"This cuts back to the issue of a banking relationship versus a transaction-based business," said Mr. Duncan. "You've got to decide which business is more important."
Some executives said that bankers can't have it both ways, and added that they would consider removing a bank from a financial team in an acquisition if they realized the bank were supporting the other side.
Nonetheless, corporate executives were resigned to dealing with a single bank on both sides of the table in an acquisition.
"As a practical matter, we'll all have to grin and bear it, barring any significant regulatory changes," said Paging Network's Mr. Fromberg. "Now that Pandora's box is open, I don't see it going back to the way it used to be."