Barclays, ABN Amro Know Most, Pay the Least for Takeover Advice (Neutral)

April 10 (Bloomberg) -- Ask Barclays Plc and ABN Amro Holding NV how much takeover advice is worth and they'll prove it's a lot less than what companies in any other industry pay banks for arranging acquisitions.
Bankers hired for the proposed merger of Barclays and ABN Amro may share about $100 million for what would be the biggest marriage in financial services based on comparable fees from previous deals. That's about one-third less than advisers charged last year for AT&T Inc.'s $73 billion purchase of BellSouth Corp., estimates compiled by New York-based Freeman & Co. show.
``Financial institutions understand particularly well the fee world because they live in it,'' said Frederick Lane, a founding partner and chairman of Boston-based investment bank Lane, Berry & Co. and a former co-head of mergers at Donaldson, Lufkin & Jenrette Inc., which Credit Suisse Group bought in 2000. ``They know what they should be paying.''
Companies like Amsterdam-based ABN Amro and London-based Barclays can reduce their bill because they typically have in- house bankers. Financial-services acquisitions are often larger, less frequently hostile and arranged by executives who have worked with each other on behalf of clients.
Banks also are more active issuers of stocks and bonds, meaning advisers are willing to accept lower payment for the chance of winning multiple fee-generating assignments.
Skimpy Fees
``Banks know the fee scales and they know how much the other guys will discount,'' said Philip Keevil, a senior partner at investment bank Compass Advisers LLP in London and a former head of Citigroup Inc.'s European mergers group. The fees ``are notoriously lower than within industrial companies.''
Barclays, the U.K.'s third-biggest bank, may offer 76 billion euros ($100 billion) for ABN Amro, the largest Dutch bank, analysts at Keefe, Bruyette & Woods Ltd. estimate, exceeding Travelers Group Inc.'s $70 billion purchase of Citicorp. Any offer from Barclays may be trumped, the Keefe Bruyette analysts wrote in a March 30 note to clients, speculating that Royal Bank of Scotland Group Plc and Spain's Santander Central Hispano SA may make a joint bid.
The nine advisory firms on Barclays's potential tie-up with ABN Amro could share as little as 0.1 percent of the deal value, according to estimates from Freeman, based on past transactions including New York-based JPMorgan Chase & Co.'s $58 billion purchase of Chicago-based Bank One Corp. in 2004.
`Market in Tehran'
``The service banks give their clients is one of the rare services where there's no technical reason offered for why the price is A not B,'' said Sylvain de Forges, head of financial operations at Paris-based Veolia Environnement SA, the world's biggest water supplier, which has made more than 10 acquisitions in the past year. ``At least lawyers and accountants provide an estimate of the hours worked.''
Barclays spokesman Robin Tozer and ABN Amro spokesman Piers Townsend declined to comment.
Similar-sized healthcare and consumer mergers, including Procter & Gamble Co.'s $55 billion friendly takeover of Gillette Co. in 2005, generated fees of almost 0.2 percent, Freeman said. Fees aren't disclosed for most mergers and acquisitions in the U.S. and Europe.
Fees that the banks would split from ABN Amro-Barclays may be in line with sums of about $60 million squeezed from the $59 billion acquisition of Bank One by JPMorgan and $50 million from Bank of America Corp.'s $49 billion purchase of FleetBoston Financial Corp., according to Freeman. By contrast, advisers raked in $90 million from Procter & Gamble's takeover of Gillette and $141.9 million for the AT&T-BellSouth deal.
No Deterrent
Senior managers at the banks usually ``know each other so well that deals are negotiated among the principals from the beginning,'' said Compass's Keevil, helping explain why the fees may be lower.
The string of bankers in the ABN Amro bid highlights how fees are no deterrent to banks vying for deal credit amid record takeovers. About $1.07 trillion of acquisitions were announced in the first quarter, almost 10 percent more than a year earlier, according to data compiled by Bloomberg.
Fees from advising on mergers and acquisitions accounted for little more than 5 percent, or about $6.4 billion, of the combined revenue last year at Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co. and Lehman Brothers Holdings Inc., the four biggest New York-based securities firms. By comparison, fixed-income and equities trading generated about half of the firms' revenue and underwriting accounted for almost 9 percent.
Seeking Credit
At least 80 bankers are involved in the Barclays and ABN Amro deal, said one executive with knowledge of the talks who declined to be identified. Morgan Stanley, UBS AG, Lehman and N.M. Rothschild & Sons Ltd. have been hired by ABN Amro. Barclays has retained Citigroup, Deutsche Bank AG, Credit Suisse, JPMorgan Cazenove Ltd. and Lazard Ltd. The list excludes Goldman and Merrill, which have previously advised Barclays's Edinburgh-based rival Royal Bank of Scotland.
The most senior bankers working on the potential Barclays- ABN Amro transaction include Citigroup's Hamid Biglari, 48, who runs the New York-based bank's financial institutions advisory group, and Piero Novelli, 41, UBS's co-head of global takeovers. Novelli and Biglari declined to comment.
Banks count on assignments such as Barclays-ABN Amro to secure a place high in the so-called league tables, which give credit to every adviser no matter how much it gets paid or how small its role.
The merger, which would be equivalent to more than 10 percent of the takeovers in Europe in the past 12 months, would propel Citigroup past Goldman to the global No. 2 slot this year behind Morgan Stanley, and Credit Suisse would move up to fourth, Bloomberg data show.
`Bragging Rights'
``It may not be the same profit margin as many other deals, but it's not bad business if you can get it,'' said Scott Moeller, a professor specializing in M&A at City University's Cass Business School and a former adviser at Morgan Stanley and Deutsche Bank. ``There are the bragging rights from working on that particular deal given how large it is.''
The banks can use the league-table credit to win other assignments, said Teck Tjuan Yap, a managing director at Freeman in New York. Share sales in Europe typically command fees of 2.3 percent and fees from debt offerings average about 1.6 percent for high-yield bonds, according to Bloomberg data.
Citigroup, Deutsche Bank, ING Groep NV, JPMorgan and ABN Amro advised buyout firms, including Thomas H. Lee Partners LP in Boston and Kohlberg Kravis Roberts & Co. in New York, on their 8.9 billion-euro leveraged takeover of Dutch media company VNU Group BV last year. They also arranged the financing package, which included a $5.17 billion term loan in euros and dollars, a $688 million revolving credit and $2.4 billion of bonds.
Hohn's Hedge Fund
After Citigroup and Goldman advised Telefonica SA on its acquisition of U.K. mobile-phone operator O2 Plc in October 2005, they also helped arrange an 18.5 billion-pound ($37 billion) loan, the biggest in five years, to pay for the purchase.
Advisers including Citigroup may have been hired by Barclays and ABN Amro to help deal with shareholders such as London-based TCI Fund Management LLP. The London-based hedge fund, which owns more than 1 percent of ABN Amro, sparked the debate about the future of the bank in February by calling for it to be broken up.
Citigroup's Biglari advised NYSE Group Inc. CEO John Thain last year on his successful bid for Euronext, Europe's second- largest stock exchange. TCI, led by Chris Hohn, had favored an alternative approach by Deutsche Boerse AG.
Boards retain external advisers to ``demonstrate to shareholders that they have looked at the deal with an independent view,'' said Moeller of Cass Business School.
Companies including General Electric Co. tend to ``pay less to outside advisers because they have internal teams, who can play the role of investment banks,'' he said.
Possible Counteroffer
Hiring multiple advisers shrinks the pool of potential rival bidders for ABN Amro. Citigroup, the biggest U.S. bank, joined the list advising Barclays on March 28, squashing speculation that the company would make a counteroffer.
Freeman said its estimate for fees from a merger of Barclays and ABN Amro -- $90 million to $110 million -- may be low. It doesn't account for additional earnings that might be caused by the emergence of competing offers or regulatory obstacles.
Fees in the U.S. are ``notably higher,'' said Jay Ritter, a professor of finance at the University of Florida in Gainesville. ``The legal liability for U.S. investment bankers and the chance of getting sued is much higher and that gets built into the fees.''