Goldman Surprised To Find Carl Icahn Being Kind Of A Dick

Sell-side M&A work is mostly a pretty good and lucrative business model but it has a few flaws. Try to spot a key one here: (1) you represent a target; (2) you spend your days fighting tooth and nail with the buyer to try to make them pay more and give up optionality, and generally to get more of the benefits of the deal for the target than for the buyer; (3) then the buyer acquires the target, fires all the directors and officers, changes the locks, and replaces the stationery; (4) then you get paid. Did you spot the problem? Carl Icahn did:
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Sell-side M&A work is mostly a pretty good and lucrative business model but it has a few flaws. Try to spot a key one here:
(1) you represent a target;
(2) you spend your days fighting tooth and nail with the buyer to try to make them pay more and give up optionality, and generally to get more of the benefits of the deal for the target than for the buyer;
(3) then the buyer acquires the target, fires all the directors and officers, changes the locks, and replaces the stationery;
(4) then you get paid.

Did you spot the problem? Carl Icahn did:

Goldman Sachs Group Inc on Thursday sued CVR Energy Inc, an oil refiner controlled by Carl Icahn, contending that the billionaire investor will not let the company pay $18.5 million of fees and expenses it owes.

In a complaint filed with a New York state court in Manhattan, Goldman said CVR in March hired it to provide financial advice on Icahn's tender offer for its stock, and agreed to pay a fee based on the size of any transaction.

CVR requested an invoice, which Goldman sent on May 3, but four days later advised the bank that "Icahn had instructed CVR not to pay the invoice," according to the complaint.

Hahahahahaha you just know he did, right? The complaint is here but there's not much to it beyond Reuters' report. GS sent CVR an invoice on May 3, Icahn acquired CVR on May 4, and CVR DK'ed that invoice on May 7. At a guess I'd say GS is likely to win this one: GS and CVR signed a contract, that contract seems pretty standard and valid, and CVR seems not to be following it. So bad work Icahn.

Still it's sort of interesting that you don't see more of this.* The public company sell-side/raid-defense M&A fee is somewhat magical in that boards and directors want good advice (and to avoid selling cheaply or often at all), but they don't exactly need to pay for it out of their or their shareholders' pockets: the bulk of the fee is normally payable only if the deal closes, which means that it's paid by the (possibly enraged) buyer. The target shareholders get their $X per share whether the M&A fee is 1 basis point or 100. This means that targets should be a little more cavalier with the buyer's money than they would be with their own - and that buyers should be less enthused about paying for services that were used against them than they would be for services that they used themselves.

Of course the buyer normally knows about the fee, particularly in a diligenced friendly deal, and so in economic theory should reduce the price it's willing to pay by the amount of the fee. In practice, though, if the fee isn't egregious it's hard to negotiate down a price just because diligence reveals a bigger deal fee than you expected. And in a hostile deal the buyer may not even learn what the fee is until after closing.

Goldman's 52.5bps fee here doesn't seem way out of line, but look at it from Icahn's perspective. CVR retained Goldman on February 15, and signed the current engagement letter on March 21. It did this in response to Icahn's January/February efforts to get it to sell itself, and Icahn announced his tender offer - at $30 per share plus a contingent cash payment right - on February 16. Goldman was presumably instrumental in negotiating some modifications, including a lengthening of the contingent cash payment period, but basically - Icahn ended up buying 80% of CVR's shares for $30 plus a contingent cash payment.

So you can sympathize a little with Icahn here. The CVR board hired Goldman basically to fend off Icahn or, failing that, to maximize value for shareholders. Icahn was not fended off, though he was presumably pissed off by the attempt. And Goldman's value add for shareholders was, to a rough approximation, zero-ish: Icahn paid the same cash price as he offered before Goldman came along. So if shareholders got nothing, and Icahn got nothing but aggravation, why is he paying (80% of) $18mm for the privilege?

That is I suppose an argument that a noted defender of shareholders like Icahn could mount. But a contract is a contract. And Icahn doesn't look too good here, since he signed an agreement with CVR pretty much explicitly endorsing the GS engagement letter.** Pushing back on excessive fees would have made more sense if he'd done it before agreeing to let CVR pay them - though it's probably more fun now.

Goldman sues CVR Energy over Icahn deal fees [Reuters]
Goldman Sachs v. CVR Energy

* Part of why is that it is, shall we say, a known risk. Once upon a time I worked on a sell-side M&A transaction, as a very junior person, and it was a pretty straightforward deal and I was more or less left to my own devices to coordinate the closing. Except that it was strongly impressed upon me that my most important job was to get our fee paid. Because: our fee was large. And if it's not paid in the magical moment of closing, its odds of getting paid goes down. I got calls from my boss every ten minutes on the closing date, asking "did we get paid yet?" We got paid.

** See section 4.8 of the Transaction Agreement:

Section 4.8 Investment Bankers. The Company represents, warrants, covenants and agrees that it has not and will not modify or amend the provisions of its existing engagement letters with Deutsche Bank Securities Inc. (dated January 23, 2012 and March 23, 2012) and Goldman Sachs & Co. (dated February 15, 2012 and March 21, 2012).

That sure sounds like he knew about the March 21 letter that promised Goldman $18mm and went ahead with the deal anyway.

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