Finance

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

Goldman Sachs has characterized its role in the controversial 2015 sale of BHS as providing unpaid "preliminary observations" to owner Philip Green. At the time, this may have felt like low-risk informal advice. The intense public scrutiny of the transaction shows there can be no such thing.

Retail tycoon Green sold BHS for 1 pound to an owner that lacked the financial muscle to put the struggling retailer back on its feet. BHS collapsed in April, leaving a massive pension deficit and thousands out of work.

In a six-hour parliamentary hearing into the affair on Wednesday, Green told lawmakers that Goldman didn't actually "do" the BHS sale. Instead, the investment bank's work was about looking over the aspiring purchaser, Dominic Chappell, because Green didn't know anything about him.

The evidence presented by Goldman to lawmakers fits with that up to a point. The work done by the bank certainly looks low-key compared to the sort of intense activity of a full-blown takeover or merger. There were no "all-nighters" of protracted negotiations, no long conference calls with dozens of rival advisers, and no detailed drafting of lengthy offer documents. There were just three meetings and 13 calls between late October 2014 and early March 2015.

Goldman's difficulty is that that while it wasn't working particularly hard for Green, this ad hoc, pro bono advice was coming from one of its most senior bankers -- Anthony Gutman, then head of U.K. investment banking at the firm.

"Preliminary observations" take on an inescapably formal status when the people providing them operate at such a high level. That's especially the case when the observations are about a possible transaction involving one of Britain's biggest retail employers. The average corporate client would probably pay a lot more for the knee-jerk thoughts of the head of M&A of a bulge-bracket firm than for an army of inexperienced juniors working on a formal mandate.

What's more, Goldman wasn't merely operating behind the scenes. It was the intermediary between BHS and Chappell. So to at least one outsider, it would have given the impression of "doing the deal".

Fast forward to today and it's clear that informal help given by senior advisers can ultimately carry a similar level of accountability as formal advice given in the context of a specific mandate. Three senior Goldman bankers -- Gutman, Michael Sherwood and Michael Casey -- have been called in to give evidence to parliament.

Goldman has exposed itself to being positioned as the adviser on the BHS sale: Green told lawmakers that he wouldn't have sold BHS to Chappell had Goldman said not to do business with him. As it happens, Gutman did raise questions about the buyer's operational experience and financing but didn't go so far as to categorically advise against a deal.

It's surprising Goldman didn't see the risks of getting sucked into controversy here. But most senior advisers find it hard to say no when asked for a bit of help by longstanding clients if it's not going to be time-consuming. It's part of the job. From now on, though, bankers may need to have an awkward conversation with the client first to determine whether they should say nothing or agree terms and conditions.

The ramifications of Goldman's offer to do Green a favor could be far reaching for the entire advisory business.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Chris Hughes in London at chughes89@bloomberg.net
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net