These Energy Round Trips Produce Cash for Wall St.
"Deal making is, of course, what Wall Street does. But with one collapse after
another in the energy and telecommunications industries, the
bankers' business-as-usual approach has raised fresh questions.
Congressional critics have condemned the banks, saying they have conflicts of
interest and helped create a deceptive boom that flooded capital into industries
that were unable to absorb all the new players and capacity."
The New York Times
August 20, 2002
By ANDREW ROSS SORKIN
After making billions in fees for helping energy companies gobble up rivals
and finance their projects when the energy business was booming,
Wall Street investment banks are cashing in again. This time, they are helping
many of the same companies, now desperate for cash, sell some
of those same properties.
Earlier this month, Lehman Brothers helped arrange for Dynegy
to sell a pipeline that Lehman had advised Dynegy to buy from Enron last fall - a
round trip, as they say on Wall Street. Lehman Brothers stands to make about
$2 million on the deal, which helped Dynegy avert a bankruptcy
filing, on top of about $5 million it made the first time around.
The day before, the utility group Aquila, another debt-laden energy trader,
announced that it would sell the British company Midlands Electricity -
a business it had acquired just three months earlier for $2.1 billion.
Deutsche Bank made about $8 million for advising Aquila to buy the company.
Aquila has now hired Credit Suisse First Boston to help it sell the business,
probably for less than it paid, and Credit Suisse stands to make several
million dollars if the sale is completed.
Some energy executives say the banks are growing rich on the backs of
battered companies that they helped push to the brink. "Many of these deals
were massive failures that have traded two or three times, each time for less,"
said Karl W. Miller, a former executive at Enron, the El Paso
Corporation and Pacific Gas & Electric and now an industry consultant.
"Each time the banks get paid. There's no free lunch."
Executives at leading investment banks, including Lehman and First Boston,
declined to be named in commenting on the round-trip deals, saying
they did not want to be associated with any discussion of the topic. They did
note that Wall Street firms often assign scores of bankers to potential
deals for months and even years, only to see them collapse at the 11th hour.
"Our fees are always at risk," said the head of a major investment banking
group on Wall Street. "To think that we're overcharging is an unfair
accusation. And the idea that we're now making money off deals gone wrong is also unfair."
The energy industry is not the only one in which investment banks have benefited
on the way up and again on the way down. The troubled
telecommunications sector, with many of the same problems that confront energy
companies, is ready for a new round of asset sales. With so many
companies out of business, however, there are fewer buyers.
Goldman Sachs was recently hired by the struggling Deutsche Telekom
to advise it on a possible sale of VoiceStream, the United States wireless
carrier. Goldman Sachs knows VoiceStream well, having been its financial adviser
in 2000 when it was sold to Deutsche Telekom for $50 billion.
That deal made Deutsche Telekom one of the most highly indebted telephone
companies in Europe. Its credit rating and stock fell - and eventually,
so did the deal's biggest proponent, Deutsche Telekom's chief executive, Ron Sommer,
who was ousted last month. Goldman Sachs collected $60
million in fees for helping to broker the original deal.
Goldman Sachs executives declined to comment on their dealings with Deutsche Telekom.
Deal making is, of course, what Wall Street does. But with one collapse
after another in the energy and telecommunications industries, the
bankers' business-as-usual approach has raised fresh questions. Congressional
critics have condemned the banks, saying they have conflicts of
interest and helped create a deceptive boom that flooded capital into industries
that were unable to absorb all the new players and capacity.
For their part, once-stodgy utility companies watched avidly as investors piled into energy
and Internet companies including Enron or Global
Crossing that talked of unlimited growth prospects.
"It is safe to say that many of these companies' strategies were driven by a kind
of Enron envy that Wall Street was more than willing to facilitate,"
said Paul Patterson, an independent energy analyst who has worked for Credit
Suisse First Boston and ABN Amro.
In the energy boom, from 1999 through 2001, investment banks advised
on more than 400 energy mergers and acquisitions worth more than $1
trillion, according to Thomson Financial. Morgan Stanley, the top energy adviser
in that period, advised on 46 deals worth $224 billion, reaping
billions in fees.
Many of those banks also began lending energy companies hundreds of
billions of dollars in the late 1990's to finance huge infrastructure projects.
J. P. Morgan Chase alone lent more than $170 billion to energy companies from
1999 to 2001, significantly raising the debt obligations of companies
including Enron, Calpine and AES.
Mr. Miller said that when he worked for Enron, investment bankers barraged him
about possible acquisitions in Australia as Enron was building its
business there. "I had bankers chasing me from Australia all the way back
to Houston, wanting to play golf or do whatever to get a deal done," Mr.
Miller said.
The bankruptcy of Enron and the ensuing crisis in the energy trading industry
have lowered the prices of energy stocks and caused unsympathetic
agencies like Standard & Poor's to lower their debt ratings across the board.
Those rating cuts have created a liquidity crisis for the companies,
taking away their access to new loans to help finance their debts.
That has forced the companies to start selling assets or risk going bankrupt.
The Williams Companies, Duke Energy and CMS Energy are among dozens
of utilities now selling assets that they acquired only last year on the
advice of bankers. El Paso, a client of Credit Suisse First Boston that was still
acquiring companies as recently as six months ago, has turned into a
motivated seller. El Paso announced this month that it planned to sell
$2 billion of assets, including production, pipeline and power plants.
Within the industry, more than $10 billion worth of energy assets are for sale.
That means Wall Street investment banks stand to make more than
$50 million in fees from the energy sector.
Other industries besides energy are being picked over, too. What some people
on Wall Street call double dipping is also happening more often in the
media and entertainment businesses. Vivendi Universal announced plans last
week to sell Houghton Mifflin, which it bought for $1.7 billion last
year as part of an acquisition spree by its chief executive, Jean-Marie Messier,
who has since been ousted. In the purchase of Houghton Mifflin,
Vivendi was advised by Lazard, the former employer of Mr. Messier. First Boston
is Vivendi's adviser on the sale of Houghton Mifflin.
The job of a merger banker is to advise companies on acquisition strategy,
to assess the value of takeover candidates and to negotiate and execute
deals.
Investment banks are paid only if a deal is completed. Bankers justify their high
fees by saying that they take on an unusual amount of risk,
effectively working at no charge until a deal is completed.
Last fall, Lehman made nothing when Dynegy's planned acquisition
of Enron unraveled, even after scores of bankers had worked round the clock for
weeks on the transaction. Ultimately, in fact, Lehman advised Dynegy to abandon the deal.
Some banks have lost billions on loans that will never be repaid. "Our interests are
more aligned than ever with our clients,' " the head of the major
investment banking group said. "More often than not these days, we're holding
the bag on their debt. Their survival means our survival. Any M.& A.
fee pales in comparison to the money we've lost on bad loans."
Still, some energy executives now compare Wall Street bankers during the energy boom to telemarketers.
"I swear, my voice mail machine was jammed every day with bankers trying
to pitch me something," a former energy executive said. "They'd come in
with their PowerPoint slides telling us why we needed to buy this or that
and how if we didn't we'd be left in the dust by the guys down the street
who were doing a deal a minute."
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