John,
The WSJ article -- the one I read, which is reproduced below -- was notable for what it did not say. McCall mostly devotes himself to taking swipes at Smith Barney in the interview. He missed a golden opportunity to explain to readers, and to the street, what the merger was all about.
----------------------
The Wall Street Journal Interactive Edition -- July 22, 1998
Salomon Smith Barney Loses
A $52 Million Fee After Leak
By ANITA RAGHAVAN and PATRICK MCGEEHAN
Staff Reporters of THE WALL STREET JOURNAL
NEW YORK -- As foul-ups go on Wall Street, this was a costly one.
An inadvertent leak acknowledged by Travelers Group's Salomon Smith Barney Inc. of secret merger talks between HBO & Co. and McKesson Corp. may have been why the $9 billion deal was scuttled last week. The leak ultimately cost the firm $52 million in advisory fees.
The leak, stemming from the accidental dissemination of the proposed merger to Smith Barney's army of brokers, is a black mark for the newly combined Salomon and Smith Barney investment-banking effort. The leak sent HBO stock plunging on July 14, killing any hopes of a deal.
"It's terribly embarrassing," says William Benedetto, at Benedetto, Gartland & Co., an investment-banking boutique. "Deals are tough enough to do and to have something like that happen is just really shooting yourself in the foot."
When Travelers acquired Salomon last year, one of the main goals of the merger was to beef up Smith Barney's fledgling investment-banking operation. Indeed, the combined units are soon to be joined in a $80 billion merger with banking giant Citicorp.
But analysts say the mistake could undermine Salomon's credibility in the investment-banking arena, causing corporate chieftains to question whether they can trust the firm with sensitive information. Keeping mergers secret is highly prized on Wall Street because leaks can often crater a transaction by sparking a sell-off in a stock.
In a note to employees Tuesday, Salomon Smith Barney Co-Chief Executive Officers James Dimon and Deryck Maughan acknowledged a "breach" of client confidentiality. Without mentioning the specifics of the McKesson-HBO deal, the letter said the firm last week was "faced with a breach of policy which prompted a thorough investigation of the facts of the situation. Our investigation concluded the breach was inadvertent."
The letter said Salomon Smith Barney has apologized to the clients who were affected, and it urged employees to thoroughly review the firm's policies governing the handling and disclosure of proprietary information. A spokeswoman for the firm furnished the contents of the note in response to questions about the episode, but declined to elaborate.
Charles McCall, chairman and chief executive officer of Atlanta-based HBO, says that about three weeks ago Salomon investment bankers broached the idea of a linkup between HBO, which provides information systems to hospitals and health-care companies, and McKesson, a drug-distribution company.
The notion of marrying fast-growing HBO with steady McKesson was decidedly counterintuitive, or "outside the box," acknowledges Monika Brown, HBO's director of investor relations. But the bankers convinced Mr. McCall that McKesson had developed some technologies that could lead to synergies in a merger with HBO.
"We were very close in having a deal done" by early July, Mr. McCall said in an interview Tuesday, but "unfortunately both boards still had some issues" to resolve.
On the evening of July 13, Mr. McCall says, he told Salomon investment bankers Benjamin Lorello and David Gately, that HBO's board hadn't approved the deal. At that point, he says, the proposed deal should have been a tightly guarded secret at Salomon.
But he says he later learned that an agenda already had been typed up for the next morning's conference with Salomon's sales force. On tap was a discussion by two of the firm's stock analysts of the HBO-McKesson deal-on the assumption that the deal would by then have been announced.
"They kind of jumped the gun," Mr. McCall says. "They put this on the agenda Monday [July 13] even though the boards hadn't approved it. Somebody there was stupid enough not to have pulled it off the agenda."
At 5:30 a.m. July 14, Mr. McCall says, he talked by telephone to McKesson Chief Executive Officer Mark Pulido, who told him that McKesson's board was balking at some aspects of the deal.
At issue, for the McKesson side, was the length of employment contracts for some of HBO's top officers, people familiar with the situation say. McKesson wanted the officers to agree to three-year contracts while the HBO officers had agreed only to one-year commitments.
Mr. McCall says that by early morning on July 14, he thought the chances of getting a deal done were slim but not entirely dead. Meanwhile, McKesson officials, who decline to comment, have indicated to analysts and to Dow Jones Newswires that they thought the differences could be resolved.
David Risinger, a health-care analyst at Morgan Stanley Dean Witter & Co., said he was told this week by McKesson CEO Pulido that the companies had been close to announcing the merger before the leak last week. "He said they had a roadshow ready to go, a press release to go and a couple of final issues, very very minor, that both boards had to sign off on," said Mr. Risinger said.
In any case, Mr. McCall of HBO agrees on this: Salomon's leak of the merger talks killed any hopes the two parties may have had of pulling off a merger. "I think it's a very major screw-up," he said. "Needless to say, it cost our company over a billion dollars in market cap."
Even as the McKesson-HBO talks were hitting a snag early on July 14, Salomon Smith Barney's brokers were starting to tell clients about the proposed merger based on a note that they received in their morning package indicating that Salomon's McKesson analyst, Lawrence C. Marsh, and its HBO analyst, Christian Hester, would be prepared to discuss the merger between McKesson and HBO that day.
The note didn't offer any analysis from Messrs. Marsh and Hester, and it's unclear if they signed off on the note. Neither of them responded to requests for comment. But by midday, HBO's stock began to tank, eventually closing down 11.2% and losing $1.75 billion of its stock-market value on the day.
To investors, the selling was certainly justified. The merger talks "signaled that the growth rate of [HBO's] business is slowing and the stock's multiple is entirely too high if the growth rate is slowing," says Pat Widner, co-portfolio manager of Warburg Pincus's $60 million Health Sciences Fund.
When HBO's stock started to fall July 14, it forced the two parties to restudy the valuation of the stock transaction. Indeed, in a move that shocked Mr. McCall, Salomon Smith Barney's bankers approached him late that day suggesting that the deal could still be done, though on terms less favorable to HBO's shareholders.
"Even after both our board and the other board had turned it down, Smith Barney was still trying to keep it alive," he says. "I've got to tell you those bankers even having the guts to come back and propose that lowered my estimation of them another couple of notches."
At Salomon Smith Barney, there was finger-pointing this week. Typically, at Salomon, analysts can disseminate research on a deal they were involved in, as was the case here, only 24 hours after the transaction is announced, people familiar with the firm say.
In this case, these people say, executives in Salomon Smith Barney's research department gave the go-ahead for a mention of the McKesson-HBO deal to be included in July 14's morning package because Smith Barney's retail system, which caters to individual investors, were big holders of HBO stock.
Trouble is, by catering to Smith Barney's smaller clients, the investment bank lost a big client. When asked if he plans on doing business in the future with Salomon Smith Barney, Mr. McCall says: "I'm certainly not talking to Smith Barney any more."
Return to top of page | Format for printing
Copyright c 1998 Dow Jones & Company, Inc. All Rights Reserved. |
