BREAKINGVIEWS-Bob Diamond's M&A drive hits a nasty road bump

Wed Feb 16, 2011 2:28am GMT

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-- The authors are Reuters Breakingviews columnists. The -- The authors are Reuters Breakingviews columnists. The opinions expressed are their own --

By Lisa Lee and Jeffrey Goldfarb

NEW YORK, Feb 15 (Reuters Breakingviews) - Bob Diamond's M&A drive just hit a nasty road bump. The Barclays (BARC.L) boss, who built and expanded the investment bank before taking over as group CEO last year, put his firm in the deal advice game with impressive speed. Now his bankers have been spanked by a U.S. judge for how they "secretly and selfishly manipulated" the $5.3 billion leveraged buyout of food company Del Monte DLM.N. The episode suggests processes and controls took a back seat to league tables.

In two-and-a-half years, Barclays has gone from being mainly a top-notch fixed income house to a formidable force in M&A too. Before it bought the U.S. operations of Lehman Brothers LEHMQ.PK, Barclays had little if any merger advisory business to speak of. In addition to his 133 U.S.-based dealmakers, global M&A boss Paul Parker has hired another 124 in Europe and Asia. The firm says it trailed only three of the big boys, including Goldman Sachs (GS.N), in the value of announced mergers it worked on globally last year.

The Del Monte case, as interpreted by one judge, may reveal how some of these strides were made. According to the Delaware ruling, Barclays at various stages of its work hid from Del Monte important information it had about the buyers, Kohlberg Kravis Roberts (KKR.N) and Vestar Capital. The bank also allegedly kept from Del Monte directors that it had been planning to help finance the deal well before getting the board's approval to do so.

What Barclays did may be standard fare in the cut-throat world of banking. Staple financing isn't unusual and conflicts of interest are often gray areas. For its part, Barclays, which wasn't even a named defendant in the lawsuit, says the decision doesn't tell the whole story and that, in any case, it got a good price for Del Monte.

That may be true. But the court's rendition certainly presents the kind of slick back-room dealing outsiders assume goes on everyday on Wall Street. It's just rare the shades are pulled back, particularly in such a run-of-the-mill complaint on behalf of shareholders. Corporate boards and investors won't like what they see.

The judge paints a picture of what Barclays may have sacrificed for its headlong rush into M&A. Diamond and his lieutenants will almost certainly face some uncomfortable phone calls from clients. It could be time well spent, as would using some to conduct a closer review of how its advisory mandates are managed. But that might also slow down Diamond's lofty ambitions.

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CONTEXT NEWS

-- A Delaware judge late on Feb. 14 ordered a 20-day delay for Del Monte Food shareholders to vote on a proposed $5.3 billion leveraged buyout by Kohlberg Kravis Roberts, Vestar Capital Partners and Centerview Partners. The judge also waived a no-shop agreement that prevented Del Monte from soliciting other offers.

-- The ruling criticized the role of Barclays Capital, which was not a defendant in the case filed on behalf of Del Monte shareholders, but which acted as an adviser to the company while also providing deal financing for the buyout group.

-- "Barclays secretly and selfishly manipulated the sale process to engineer a transaction that would permit Barclays to obtain lucrative buy-side financing fees," Vice-Chancellor J. Travis Laster, of Delaware Chancery Court, wrote in his ruling. He added: "On multiple occasions, Barclays protected its own interests by withholding information from the Board that could have led Del Monte to retain a different bank, pursuing a different alternative or deny Barclays a buy-side role."

-- Barclays said it "strongly disagrees with characterizations that are based on an incomplete factual record." The bank added that it was "proud of its role" helping Del Monte secure a $19 a share takeover offer that represented a 40 percent premium to where the shares had been trading on average for the three months before news of a possible sale emerged.

-- Reuters story: Judge delays vote on Del Monte takeover by KKR [ID:nN15192080]

-- Court decision: link.reuters.com/sas97r

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-- For previous columns, Reuters customers can click on [LEE/] or [GOLDFARB/]

(Editing by Jeffrey Goldfarb and Martin Langfield)

((Lisa.Lee@thomsonreuters.com; Jeffrey.Goldfarb@thomsonreuters.com)) Keywords: BREAKINGVIEWS BARCLAYS/

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