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Oil slicks

1 March 2012 By Reynolds Holding, Christopher Swann

The unsavory conflicts of interest in the sale of El Paso deserve a second hearing. A Delaware judge was right not to stop Kinder Morgan’s $21 billion acquisition of its rival over the skewed motives of Goldman Sachs, Morgan Stanley and the target’s chief executive. But it’s also a good idea for El Paso shareholders to keep up the fight.

It doesn’t seem that those meant to have been fighting their corner were given the proper incentives to do so. El Paso CEO Douglas Foshee was quietly looking into a side deal that, as Judge Leo Strine noted, gave him some incentive to sell El Paso at a lower price. The company’s initial adviser, Goldman, had a $4 billion investment in Kinder Morgan and yet continued to play a role in the deal. One of its bankers involved also failed to disclose a personal stake in Kinder. And Morgan Stanley, which was brought in to provide independent advice, was to be paid only if El Paso was sold.

Blocking the deal probably would have hurt shareholders more than it helped. They can still vote against it or sue later. A lawyer for the shareholders told Reuters they would press ahead with the case. Goldman and the others might be reluctant to dig in their heels too deeply. Cases like Southern Copper’s 2005 purchase of Minera Mexico from Grupo Mexico show how a full-blown trial can turn out ugly – and costly.

At the very least, a strong case can be made that El Paso’s advisers should lose their fees. Goldman was paid $20 million and Morgan Stanley $35 million. A court might also frown on the $7 million severance package given Foshee following the deal – only a small part of his $91 million overall package.

Last year’s Del Monte lawsuit is instructive. A legal action by shareholders in the food company’s leveraged buyout forced Barclays Capital to surrender over $40 million of fees it earned for advising the seller while simultaneously lending money to the buyers. Penalizing banks and bosses for misaligned incentives is the best way to stop them.


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