Goldman Said to Suffer Rebuff in Bid for Medco Advisory Role

Goldman Sachs Group Inc. (GS), ranked second among takeover advisers this year, would be No. 1 if the bank had its way after a call made to Medco Health Solutions Inc. (MHS) following its $29.1 billion sale to Express Scripts Inc. (ESRX)

Days after the second-largest takeover this year, Medco received a request from Goldman Sachs to be credited for helping to arrange the deal, said four people with knowledge of the matter, who declined to be identified because the conversation was private. In the July 21 statement announcing the transaction, JPMorgan Chase & Co. (JPM) and Lazard Ltd. (LAZ) were identified as Medco advisers. Credit Suisse Group AG (CSGN) and Citigroup Inc. (C) worked with Express Scripts.

During the discussion between Goldman Sachs and Medco, a Goldman Sachs banker reminded Medco of the firm’s past work for the company and Medco’s role as a manager of pharmacy benefits for some Goldman employees, the people said. Medco considered the discussion of its business relationships as pressure to put Goldman Sachs on the deal and was concerned the bank would yank the benefits contract if it weren’t credited, the people said.

People close to Goldman Sachs said the banker was highlighting its relationship with Medco, and the firm deserved recognition for previous work related to the transaction.

Photographer: Mike Mergen/Bloomberg

Medco decided not to award Goldman Sachs credit on the deal despite the phone call, relaying the conversation and decision to Express Scripts, said one of the people. Close

Medco decided not to award Goldman Sachs credit on the deal despite the phone call,... Read More

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Photographer: Mike Mergen/Bloomberg

Medco decided not to award Goldman Sachs credit on the deal despite the phone call, relaying the conversation and decision to Express Scripts, said one of the people.

Michael DuVally, a spokesman for New York-based Goldman Sachs, and Lowell Weiner, a spokesman for Franklin Lakes, New Jersey-based Medco, declined to provide comments.

‘All’s Fair’

For all of its efforts to persuade Medco to credit Goldman Sachs as an adviser in the takeover, the firm was unsuccessful, said the people familiar with the matter. Medco relayed the decision to Express Scripts, one of the people said.

Thom Gross, a spokesman for St. Louis-based Express Scripts, declined to comment.

The campaign to be included as an adviser is typical of the competition among investment banks in high-stakes takeovers. Firms sometimes try to get on a deal just before or after an announcement, and league table rankings are used by bankers to win new business.

“All’s fair in love and war, and M&A league tables are war,” said David Hilder, an analyst at Susquehanna Financial Group in New York who rates Goldman Sachs shares “positive.” “I cannot think of any technique I’d be surprised by.”

Medco Relationship

Firms will often agree to provide financing or other services to get credit on a deal they played almost no role in, said bankers who declined to be identified. Banks have used contracts with technology clients to get credit on their deals, even bringing chief information officers along to meetings, according to the bankers. Firms have also threatened to pull a client’s line of credit or end a trading relationship if they aren’t given credit, they said.

Goldman Sachs has advised Medco on previous deals and helped underwrite a $1 billion sale of senior notes for the company in September 2010. Medco, which has lost contracts to competitors in recent months, negotiates prescription-drug prices for Goldman Sachs, which has about 35,500 employees. Most pharmacy-benefits management, or PBM, contracts last two or three years.

A top spot among M&A advisers is a sign of prestige on Wall Street because it indicates that the bank has the trust of chief executives and corporate boards.

This year, JPMorgan has advised on deals totaling $343.5 billion, just ahead of Goldman Sachs, which has advised on $329.7 billion, according to data compiled by Bloomberg.

“Every M&A department has a group of people who do virtually nothing but try to make sure they get as much league- table credit as possible.” said Susquehanna’s Hilder.

NYSE Credit

Advisory credit is important because bankers seeking new business often show clients pitch books that include market- share rankings. For mergers-and-acquisitions work, the tally most commonly used in such presentations is a list of banks in order of the dollar value of transactions on which they have advised. The ranking by dollar value makes credit for work on large transactions such as Medco crucial.

Goldman Sachs was absent from the year’s largest deal, AT&T Inc. (T)’s proposed $39 billion purchase of T-Mobile USA Inc. The bank was one of several to make a last-minute pitch to get credit for advising NYSE Euronext (NYX) on its planned merger with Deutsche Boerse AG (DB1) this year. NYSE, led by former Goldman Sachs executive Duncan Niederauer, used bankers at Perella Weinberg Partners LP in the negotiations for more than two years, the exchange operator said in a May regulatory filing.

M&A Fees

Shortly before announcing the accord in February, NYSE agreed to credit BNP Paribas (BNP) SA, Goldman Sachs, and Morgan Stanley with offering additional advice, said people with knowledge of the matter. Citigroup Inc. was added as an adviser later on. In the May filing, NYSE said it would pay Perella Weinberg $27.5 million for advice and didn’t disclose payments to any other financial advisers.

In quarterly press releases, Goldman Sachs and rivals typically highlight their position in the league tables even though the business accounts for a fraction of overall revenue. Fees from takeover advice contributed $994 million, or 5.2 percent of Goldman Sachs’s $19.2 billion of revenue in the first half of this year, according to the New York-based firm.

JPMorgan made $1.03 billion in advisory fees during the same period, or 2 percent of overall revenue, and Morgan Stanley (MS), the No. 3-ranked takeover adviser, took in $918 million, or 5.4 percent of revenue.

Bouncing Back

Goldman Sachs, whose website states its No. 1 business principle is that “our clients’ interests always come first,” suffered a reputational blow last year after being accused by the U.S. Securities and Exchange Commission and a Senate subcommittee of misleading customers in a 2007 mortgage-linked investment. The bank paid $550 million in July 2010 to settle the SEC’s lawsuit, without admitting or denying guilt, and said it made a mistake in the marketing materials.

Goldman Sachs had declined 25 percent this year through yesterday in New York Stock Exchange composite trading.

The controversy raised questions about whether clients would do less business with Goldman Sachs. The firm, which held the top spot among M&A advisers from 2001 through 2008, was in second place in 2009 and 2010, Bloomberg data show. After the first quarter of this year, the firm was in third place after Morgan Stanley and JPMorgan, and Goldman Sachs’s quarterly earnings press release didn’t mention the bank’s M&A ranking for the first time in a decade.

Goldman Sachs rebounded in the second quarter and ended June holding the top spot in global announced takeovers. The ranking was prominently featured in the second-quarter earnings release.

When Gary D. Cohn, Goldman Sachs’s president and chief operating officer, spoke at an investor conference in June, the analyst who introduced him noted Goldman Sachs had the No. 2 position in announced mergers & acquisitions.

“Before I start, I just want to clarify one thing to make sure you don’t think we’ve lost our competitive instinct,” Cohn said, as he began his presentation. “We are No. 1 in M&A. Okay? I didn’t want that to go unsaid.”

To contact the reporters on this story: Jeffrey McCracken in New York at jmccracken3@bloomberg.net; Christine Harper in New York at charper@bloomberg.net.

To contact the editors responsible for this story: Jennifer Sondag at jsondag@bloomberg.net; David Scheer at dscheer@bloomberg.net.

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