League Table Credit Isn't Always Creditworthy
Investment bankers love league tables -- especially when they're on top. To be ranked among the biggest firms in advising on M&A, IPOs, bond sales, or other transactions is an achievement that serves as a cornerstone in pitches for roles on new deals and one that's often touted to investors and analysts who acknowledge it as one measure of performance.
But exactly how reliable are they? If last month's $14 billion sale of Mobileye NV to Intel Corp. is anything to go by, they don't always reflect the true state of reality. The deal was a coup for Raymond James & Associates Inc., which was named the sole adviser in the March 13 deal announcement. But retroactively, Goldman Sachs Group Inc. was added as an adviser, according to reports and Bloomberg data.
The addition is believable, if only because Goldman has been tight with Mobileye since it invested $130 million in the automotive-technology company a decade ago. The bank even has a dedicated case study about its relationship with the Israeli company on its website, which mentions that early stake, another round of financing in 2013 and its role in the company's 2014 IPO (it landed the coveted spot of "left lead" per the offering documents). 1
But an SEC filing published on Wednesday suggests that Goldman had little hand, if any, in selling Mobileye to Santa Clara, California-based Intel. In fact, the New York firm isn't mentioned once. Rather, Raymond James is named 139 times, taking center stage in the role of the company's financial adviser. And yet Goldman now shares that status in the record books.
Here's where the league tables come in. Because it was credited with work on the Mobileye transaction, Goldman finished first in a ranking of first-quarter U.S. M&A advisers; it would have placed second to Morgan Stanley had the deal not been included. It would have placed fourth rather than second (behind Morgan Stanley, Citigroup Inc. and Bank of America Corp.) in the league tables for first-quarter global M&A. And on a sector-specific basis, it would have dropped all the way to eighth from first, according to the data, on global technology M&A during the quarter.
It's not the first time that a bank found its way onto a deal after the fact, to the benefit of its standing in league tables. Back in 2014, Goldman and Morgan Stanley both sought credit for the $25 billion sale of Forest Laboratories Inc. to Actavis Inc. in exchange for fees in a maneuver that was explained as follows:
Instead, the two banks, using previous contracts with Forest, negotiated to get credit for the deal in exchange for millions of dollars in fees they were owed, the people said. The contracts had a clause, commonly known as a tail, that entitled them to fees even if the company was sold by another bank, they said. After the deal was announced they each agreed to cut the fees they were due in exchange for being able to claim the league-table credit.
It's probable that Goldman landed its after-the-fact advisory credit on the Mobileye sale thanks to a similar clause or agreement. However it came about, the result paints an imperfect picture for investors and prospective clients when filtered through to the league tables, which ought to represent work done.
So what's the solution? To ensure the validity of league tables, such arrangements may need to be eliminated -- or credit could be applied at a fraction of the transaction's size.
Without some sort of clarity, companies across the globe hosting so-called bake-offs or beauty parades -- a platform for banks to flaunt their credentials -- must give league-table rankings less weight in any decision making. That in itself is likely to be good for competition and will only shake things up further.
Goldman also led a secondary offering of shares in 2015, in which it pared its stake in the company.
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