"Mr Paulson has not banned the use of Goldman Sachs equity in hostile bids because the bank has never used its own equity to finance such bids and does not plan to," Lucas van Praag, global head of corporate communications at Goldman Sachs, told EuroWeek yesterday (Thursday).
"We have had a long-standing policy that we will not invest as a principal — in other words using equity under our control — in the takeover of a public company without the recommendation of the board of that company," van Praag said.
On Tuesday the Financial Times reported on its front page that Paulson had told a meeting of the bank's management committee that "using its own money to finance hostile takeover bids... threatened the bank's standing with corporate clients, which he said was more important than profits from any single deal."
The report followed controversy over Goldman's involvement in approaches to four UK companies — pub group Mitchells & Butlers, Associated British Ports, airports group BAA and broadcaster ITV.
Senior managers of some listed companies are worried that investment banks, which they rely on for advice, are also now active private equity players, and may turn out to be potential predators.
After protests from the corporate sector, some investment banks have distanced themselves from their private equity arms, like Deutsche Bank, or backpedalled their involvement, like JP Morgan.
But the FT report, quoting a Goldman executive, exaggerated what Paulson had said. He did indeed warn the management committee that Goldman's reputation could be affected if a public company rejected an approach from a private equity consortium including Goldman Sachs.
But Goldman already had a policy of not backing hostile bids. It does back unsolicited bids, but if the target's board rejects the offer, Goldman will back out of the consortium. Goldman's problem can arise with the language companies use when rejecting bids, and the way that is interpreted in the media.
"Goldman Sachs will continue to make unsolicited approaches," said van Praag. "Mr Paulson is concerned that bankers be super-sensitised to the way in which any company they approached was likely to react."
Paulson was not asking Goldman bankers to hold back from deals, but to be alert to how the target company might react and the risk of a rejection being publicised or leaked and damaging the bank's reputation.
Paulson was speaking to about 20 senior bankers at a management committee meeting at the beginning of last week.
A banker familiar with Paulson's remarks said: "It would appear that the trigger for what he said was the approaches made to ITV and Mitchells & Butlers. He was talking about the robust language used by some companies when rejecting bids, and how that might affect Goldman's reputation."
Rejections prompt reflection
ITV issued a statement on March 22 confirming that it had received and rejected an approach from a consortium of Apax Partners, Blackstone Group and Goldman Sachs's Principal Investment Area.
ITV's board met again on March 30 and decided to reject a revised offer from the same bidders. It cited — among other reasons — an "unduly risky" leverage multiple. The bid has been shelved.
Mitchells & Butlers, the UK company that owns the All Bar One and Harvester pub chains, last week rejected a £2.7bn offer from the R20 investment vehicle led by Robert Tchenguiz and backed by equity from Apax Partners, HBOS and Goldman Sachs.
Bankers say Goldman Sachs pulled out of the equity financing when the bid was rejected, but that R20 may press ahead with a revised bid without Goldman's equity backing.
"A hostile bid by our definition would be making an offer directly to shareholders after the company's board has rejected an approach. We won't do that," said van Praag.
BAA, the former British Airports Authority, said in a statement on April 16 that on March 30 it had received a "preliminary, highly conditional and confidential approach ... from a consortium including Goldman Sachs Infrastructure Group" valued at 870p a share.
BAA rejected the approach and confirmed last Sunday that it had received no further communication from the Goldman consortium.
BAA did, however, reject yesterday a third hostile bid from a consortium headed by Spanish construction company Ferrovial, which first expressed its interest in BAA in February.
A consortium of Goldman Sachs International, Borealis Infrastructure Management and GIC Special Investments, the private equity investment arm of Government of Singapore Investment Corp, was reported this morning (Friday) to have raised its offer for Associated British Ports, but this could not be confirmed as EuroWeek went to press.
ABP's board had rejected the consortium's indicative offer of 730p a share on March 27.
In all these cases, Goldman followed its policy of negotiating only with company boards and not approaching shareholders without their approval.
No conflict between divisions
Goldman Sachs also denied that it was concerned about potential conflicts when the bank took advisory and financing roles.
"The bank is happy to be involved in a bid for a company as an adviser, as a debt arranger and as an equity provider, but will only proceed with the equity financing so long as there is board approval [from the company]," said van Praag. "But we will continue to act as an adviser on hostile takeovers, and to provide debt financing."
Bankers say Goldman's policy of withdrawing its equity once a bid is deemed hostile is in line with the strategy practised by most private equity firms, which seldom proceed with bids that have been rejected by the target company's board.
"If a private equity firm was to sit by the telephone waiting for a company to contact it with a proposal for a friendly takeover it would have very little business," said one banker.