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Deal diary
by Dennis Fitzgerald Posted 02:28 EST, 6, May 2005
Investment banks have been vigorously courting and serving AT&T Corp. ever since J.P. Morgan himself
provided financing for Theodore Vail, who founded the Bell System back in the early 1900s. So with AT&T set to
be absorbed into SBC Communications Inc., now is the time for Ma Bell to pay its banks for past services
rendered. That may help explain the relatively sizable fees some Wall Street firms are reaping in the phone
company's $16 billion sale to SBC — a deal negotiated not by the banks but mostly by James Kahan, senior
executive vice president for corporate development at SBC, and Thomas Horton, chief financial officer at AT&T.
The deal, we're told, is the brainchild of Edward Whiteacre, chairman and CEO of SBC, and his AT&T counterpart,
David Dorman, who used to work for Whiteacre at SBC.
AT&T is paying Credit Suisse First Boston a $29 million fee, while Morgan Stanley is getting $24 million,
according to a filing with the Securities and Exchange Commission. Both firms were retained in January 2003 but,
according to a source, did little more than provide fairness opinions in the deal, although CSFB did crunch some
numbers for the AT&T board. A person familiar with the situation says CSFB and Morgan Stanley are mainly
being paid in recognition for providing AT&T with crucial debt when it spun off its wireless unit and sold its
broadband unit. Paul Taubman led the team for Morgan Stanley, while Christopher Lawrence headed CSFB's
effort.
Getting an undisclosed fee, according to an AT&T spokesman, is Eric Gleacher, founder of Gleacher Partners,
who from 1985 to 1990 was head of global M&A at Morgan Stanley. He was retained in July 2003 and advised
AT&T along with CSFB and Morgan Stanley in negotiations with Bell South Corp. that didn't lead to a deal. His
fee is mainly in recognition for that work. A person close to AT&T says the company isn't required to disclose
Gleacher Partners' fee under securities rules because the firm didn't provide a report, opinion or appraisal. The
fees paid to SBC's financial advisers — Lehman Brothers Inc.'s Woody Young and Jack Callaway, Evercore
Partners Inc.'s Roger Altman, Eduardo Mestre, Michael Price and Tim LaLonde and Rohatyn Associates LLC's
Felix Rohatyn and Gil Ha — have also not been disclosed.
Ever intrepid on the fee front, we hear that Lehman Brothers Inc. and Morgan Stanley, respective advisers to oil
refiner Valero Energy Corp. and rival Premcor Inc. in their $8.7 billion cash and stock merger, played no role in
negotiating the deal. Instead, Premcor chairman Thomas O'Malley and Valero chairman and CEO William
Greehey were closely involved in the discussions, while Lehman and Morgan Stanley were largely confined to
doing fairness opinions. As such, Morgan Stanley's fee is between $2 million and $3 million, our spy tells us.
Carlos Fierro led the Lehman team advising the buyer, Valero, while Stephen Munger is in charge of the Morgan
Stanley team advising Premcor.
O'Malley and Greehey, we're told, spoke about a potential merger of Valero and Premcor in May 2004, but the
discussions didn't lead anywhere and Valero broke them off. The companies returned to the negotiating table
about three weeks ago. In the past year, both companies have seen their shares spike.
Edward Herhily is leading a Wachtell, Lipton, Rosen & Katz team representing Valero along with his partner,
Lawrence Makow. We're told that Herhily, known for his work in banking, has a professional tie with Valero's
Greehey. Tom Smith and Peter Love, Washington-based partners at Jones Day, are handling Valero's antitrust
issues. Representing Premcor is a Stroock & Stroock & Lavan LLP team led by Martin Neidell, who was outside
counsel to Tosco Corp. when O'Malley was chairman of the refiner and retailer. Stroock represented Tosco when
Phillips Petroleum Co. acquired it for $7 billion. Neidell recently needled O'Malley by saying, "You keep selling
clients out from under me." The law firm began working with Premcor shortly after it went public in April 2002.
(Simpson Thacher & Bartlett LLP was the issuer's counsel in Premcor's IPO.) David Gelfand of Cleary Gottlieb
Steen & Hamilton LLP is handling Premcor's antitrust concerns. Like Neidell, he represented Tosco when
O'Malley was its chairman.
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Much has been made of the extraordinary role Goldman, Sachs & Co. played in brokering the merger of New
York Stock Exchange Inc. and the electronic stock exchange Archipelago Holdings Inc. But largely overlooked
is the complex array of relationships that form the backdrop to Instinet Group Inc.'s three-part agreement with
Nasdaq Stock Market Inc., Silver Lake Partners and Bank of New York Co. We're told that Nasdaq, which is
buying the core of Instinet, and Silver Lake, which is buying its institutional brokerage unit and convertible
securities in Nasdaq, decided to team up shortly after Instinet made the move to auction itself off.
Silver Lake has had more than a casual interest in electronic stock exchanges over the years. The buyout firm
was a shareholder in Island ECN Inc. when Instinet acquired it three years ago. After that deal closed, Silver Lake
co-founder Glenn Hutchins served for a time on Instinet's board.
Hired to run the auction last fall were UBS Investment Bank's John Adams, a financial institutions group banker
who defected to UBS from Credit Suisse First Boston with Michael Martin and Olivier Sarkozy three years ago,
and Wachtell, Lipton, Rosen & Katz's Andrew Nussbaum. The bank and the law firm worked with Instinet when
it tried to buy the electronic stock exchange Brut ECN LLC, which Nasdaq ended up buying from SunGard Data
Systems Inc. A Thomas Weisel Partners LLC team led by Bob Kitts and Cole Bader, a pair of former Morgan
Stanley bankers, advised Nasdaq. Their boss, Thomas Weisel, left the Nasdaq board last October. About that
time, his firm began working closely with the stock exchange on strategic matters, and he wanted to avoid concern
over conflicts of interest.
During their Morgan Stanley days, Kitts and Bader worked on the late '90s merger of the electronic stock
exchanges Brut and Strike Technologies LLC. Later, after the pair moved to Thomas Weisel Partners, they
advised Brut when it was sold to SunGard.
For outside counsel, Nasdaq used Eric Friedman of Skadden, Arps, Slate, Meagher & Flom LLP, who started
working with Nasdaq in 1999, when it began a two-step demutualization. Last year, he represented Nasdaq when
it bought Brut. Richard Muglia is the Skadden partner who worked with Nasdaq in connection with the sale of $205
million in convertible notes to Silver Lake and Hellman & Friedman LLC. Advising Reuters Group plc, the
majority owner of Instinet, was Lee Einbinder of Lehman Brothers Inc. and a Morgan Stanley team led by Jane
Wheeler and Charles Smith. Three years ago, Einbinder advised Instinet and Wheeler advised Reuters when
Instinet acquired Island ECN.
Archipelago and the New York Stock Exchange participated in the Instinet auction, but we're told that NYSE was
no longer actively involved when Nasdaq signed an exclusivity agreement with Instinet about three weeks before
the electronic stock exchange's sale was announced. A Goldman Sachs team led by David Schwimmer — the
same team that brokered the NYSE-Archipelago deal — advised Archipelago in the Instinet process, but we
haven't been able to determine whether NYSE used an investment bank or law firm in the Instinet auction. We are
told that if there was a law firm, it wasn't Wachtell, Lipton, Rosen & Katz. A Wachtell team separate from
Nussbaum represented NYSE in its Archipelago buy. Along the same lines, while a Sullivan & Cromwell LLP
team led by John Evangelakos represented Archipelago in its sale to NYSE, we're told that another, undisclosed
law firm represented Archipelago in the Instinet process. Sullivan & Cromwell's Donald Walkovik represented
Bank of New York in its agreement to acquire Instinet's commission-recapture operation.
BNY operated independently of the Nasdaq/Silver Lake tandem. Another source tells us that tax considerations
made Instinet and Reuters eager to carry out an omnibus deal, as opposed to selling Instinet off piece by piece.
Most acquisitions are pretty straightforward: Company A decides to acquire Company B, or Company B decides it
needs a buyer and finds Company A. But in the case of the $1.4 billion acquisition of video game retailer
Electronics Boutique Holdings Corp. by rival GameStop Corp., the answer wasn't as easy as ABC. According to
one banker who worked on the deal, once the companies determined a merger was in the best interests of both
companies, they still had to decide which one would be the buyer. "The companies had been more competitive
than ever and their valuations were fairly comparable, and I think it could have worked out where either company
could have bought the other," the banker tells us.
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In the end, the banker says, Electronics Boutique founder and chairman James Kim determined it was best for
GameStop chairman and CEO Richard Fontaine to run the combined combination, though the banker says the
34% premium Electronics Boutique received made his decision a little easier. "I think all of the parties saw the
need and the benefits for the companies to combine," the banker adds. "It was just a matter of finding the right
structure to combine, " he says.
Grapevine, Texas-based GameStop used Citigroup Global Markets Inc.'s Michael Eck, managing director and
head of the global consumer group, as well as Tim Sullivan and Scott Moses. Salomon Smith Barney was an
underwriter in its 2002 initial public offering. Eck says the two companies had discussed merging for several years
before finally putting the deal together. "I think the industry dynamics and global growth opportunities made it
compelling," Eck says.
Steve Baronoff and Jeffrey Kaplan of Merrill Lynch & Co. along with Greg Elinsky of West Chester, Pa.-based
Keane Advisors LLC, served as financial advisers to Electronics Boutique, also based in West Chester. Merrill
was an underwriter in the company's 2001 secondary offering. Jeffrey Hornstein, Jennifer Herber, Lee Schutzman
and Michael Yau of Peter J. Solomon Co. in New York rendered a fairness opinion. Michael Rosen, Jay Dorman,
Gary Wolff and Jill Grappell of Bryan Cave LLP's New York office provided counsel for GameStop.
Leonard Klehr, Barry Siegel, William Matthews III and Michael Rittinger of Philadelphia-based Klehr, Harrison,
Harvey, Branzburg & Ellers LLP were primary counsel for Electronics Boutique, while Richard Posen, Michael
Schwartz, William Rooney and David Park of Willkie Farr & Gallagher LLP's New York office dealt with antitrust
concerns.
Klehr Harrison has a long relationship with Electronics Boutique, having represented the company in its 1998 IPO
and its acquisitions of groups of video game stores in Germany, Italy and Scandinavia. Klehr, founding partner of
the law firm, called Electronics Boutique "one of those great American success stories," noting its rather humble
beginnings. "This business was started in 1977, when Jim Kim's wife, Agnes, opened a kiosk in the King of
Prussia Mall in Philadelphia selling Korean digital watches," Klehr tells us. "Now, 28 years later, they have a
2,000-store chain doing $2 billion in sales that sold for $1.4 billion. It's just a Horatio Alger story. — David
Shabelman
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5/10/2005