View from City Road: Fees need not be based on bid value

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The Independent Online
Lasmo and its employees have good reason to be grateful to Schroders, Goldman Sachs and NatWest. They conducted a sterling defence against the pounds 1.6bn bid from Enterprise, which not only kept Lasmo independent but also helped to rehabilitate its shaky reputation.

None the less, pounds 16m is a lot of gratitude. Can any adviser really be worth pounds 400,000 a day? Even if they are, does a company really need three of them, not to mention the array of accountants, lawyers, spin doctors and other advisers who collectively swallowed up a further pounds 8m.

Enterprise was relatively lucky: because bidders usually negotiate success fees (a requirement implicit in defence advisers' job specification) it got away with a mere pounds 5.7m. Many would say even that was excessive given the incompetence with which its advisers handled the task, but there you are.

Had it succeeded, Enterprise could have expected to pay at least pounds 30m. That would have meant that City and other advisers would have picked up pounds 55m - almost pounds 1m a day - equal to more than 3.4 per cent of the bid value. Even estate agents charge only 2 per cent.

In its defence, Lasmo argues the fees were not unreasonable by City standards; it beat down the amount initially demanded by its advisers. At 1.6 per cent of the bid value, the costs were only slightly higher than the average for recent hostile bids, even though the defence was the first to be conducted in the US as well as here.

There is, however, no earthly reason why bid fees should be be based on the bid value at all. While there may be a bit more work involved in fighting off a pounds 1.6bn bid than, say, a pounds 100m one, most of the requirements - defence documents, institutional visits and so on - are the same. Nor does the argument that percentage fees act as a powerful incentive to get the highest bid possible bear much serious analysis. The only purpose of having merchant bank advisers at all in these situations is to maximise value for shareholders.

A company facing a hostile bid is unlikely to want to quibble about fees; that is the nub of the problem. Directors will agree almost anything if it increases the chance that they will keep their jobs and independence. For the time being the gravy train is therefore likely to carry on collecting passengers. In the meantime, Lasmo still has much to do in satisfying shareholders it was money well spent. The headline figure of pounds 24m equates to a dividend payment of roughly 3p a share. This year, shareholders will get just 1p and there is nothing to accompany yesterday's interim figures.