'Disturbing' Deal Reveals Goldman Sachs Conflicts
NEW YORK ( TheStreet) -- Wall Street's dark side can be seen in the largest merger of 2011 after a judge said negotiations were muddied by "conflicts of interest," "disturbing behavior" and "disloyalty."
Delaware Chancery Court Judge Leo Strine decided not to block a $21.1 billion acquisition of El Paso (EP) by Kinder Morgan (KMI) in spite of findings that El Paso management and its banker, Goldman Sachs (GS) , led a sale process rife with conflicts and poor disclosure, according to a court statement released late on Wednesday.
The tie-up was cut in October 2011, valuing El Paso shares at a 37% premium, or roughly $26.87 a share. The company sale was a change in direction for El Paso after it previously announced a spin of its oil and gas exploration unit, hiring Goldman Sachs to conduct a sale process. In February, a private equity investor consortium bought the exploration unit for $7.15 billion, in the biggest U.S. deal of 2012.
Shortly after the October sale was announced, a group of pension fund investors in El Paso sued the company on the sale process. Their contention was that El Paso's financial adviser Goldman Sachs had an economic interest to not fetch the highest price possible, an obvious sin in the M&A game.
Through its private equity arm, Goldman Sachs has a 19% stake in Kinder Morgan, holding two board seats.
Judge Leo Strine agreed with shareholders, finding added perverse incentives in the sale. "Although Goldman's conflict was known, inadequate efforts to cabin its role were made," said Strine in a Delaware court. While Strine decided not to block the sale, he added that the deal had additional problems. "The record is filled with debatable negotiating and tactical choices made by El Paso fiduciaries and advisors," said Strine.
Goldman's lead investment banker on the deal, Steven Daniel, may have also had a personal conflict in not finding a high priced bid for El Paso because of a $340,000 holding in Kinder Morgan's stock, according to lawsuit..
For Goldman's Kinder Morgan stake and Daniel's personal holding, an expensive takeover bid could have been a hit to their shares. "Goldman's staggering conflict of interest was obvious from the outset: With a stake in KMI worth over $4 billion, every dollar shaved off the buyout price represented $150 million of savings for Goldman," the pension funds argued in their suit.
Meanwhile, El Paso's Chief Executive Douglas Foshee may not have had an economic interest in fetching the highest price for the company's assets, noted plaintiffs and Judge Strine in court proceedings. As Forshee shopped El Paso's exploration unit, he simultaneously worked with other managers on a buyout of the division without alerting the company's board; a move that may have lessened his interest to fetch the highest price.