Super consortia

THE San Miguel group winning the Ninoy Aquino International Airport contract got me reflecting why major consortia with many leading players often lose competitive bids. This becomes even clearer when you see who was financially in second place. It was the disqualified group, not the most storied group. The group with the greatest number of major players actually made the lowest financial bid.

I see that result as common in competitive bids. By contrast, the strongest consortium or group usually wins in negotiated ones. It has parallels in what I saw in my career with joint lead underwriters in equity deals, especially initial public offerings (IPOs). Let me show the analogous situation first then explain what I think happens with consortia that have many major members.

After I left Macquarie for Evercore in 2009, my new employer did not underwrite equity and debt deals, and was solely concentrated on advisory services like mergers and acquisitions, capital market advisories, arranging financing, and the like. I did not think we would win a lot of capital market advisories but was pleasantly surprised when one of my prospects who I met while at Macquarie asked me to lead their IPO.

When I explained I was no longer with an underwriting firm, he told me to advise anyway and help select the underwriters and guide the process. That was Puregold, and the deal won Best Mid-Cap IPO from Finance Asia and started a treasured relationship with the company’s owners and management, and led to many other capital market advisory mandates for other clients as well. Thank you again to Lucio Co and Leonardo Dayao for their continued trust and confidence, and for inviting me to join the board of PBCOM two years ago as independent director.

A client reorganized a listed company he acquired and wanted to do a follow-on offering. My team and I advised on how to restructure the company and what assets to put in and at what valuation, and so on, then arranged for underwriters to present to lead the equity placement. Initially, there were three who the client wanted to mandate jointly given previous work for the client.

We didn’t like their fee proposal and typical for international investment banks of some accomplishment, they were wrangling and backbiting each other on their roles, fee levels and economics (the term for what they would be paid, and the share of the placement fees each would get). If you think egos are rampant in showbiz, wait until you deal with global investment banks and add inordinate greed into the mix.

Rather than crack the whip as I often have had to, I foolishly suggested the following to the client, and he agreed. So, I told the three banks, all of whom I knew well and previously worked with and with success, here is what we are unhappy with (the fee quoted given the size of the transaction was quite large), how we wanted the deal documented, and the three of you work out among yourselves your roles and economics, and come back with a proposal.

I told them to work it out like adults (big mistake to assume these three firms would cooperate and subsume their egos, individual and corporate). I emphasized we were serious and two of them knew I meant it as I fired them when I was adviser to another IPO that we ended up doing anyway without them, which won deal of the year as well. And I downgraded the role of the third in another deal that also won deal of the year. They knew I wasn’t bluffing. They had also dealt with the client before so knew he was serious. What happened?

They came back with a higher fee and ignored our preference on how to document the deal. The first was to assuage themselves and ask for the minimum fee each wanted, and the second was because although one was fine with the way we wanted to document it, and the other was frankly clueless on whether they could or couldn’t, but the third insisted on it being done a different way.

So, the lowest common denominator on fees and structure resulted rather than accommodating anything the client wanted and my clear instructions to them. The joint proposal dealt with what they collectively wanted rather than being responsive to the client.

The client followed my subsequent recommendation which was as follows. I told the three banks that they were fired before they were even mandated. Each of them should submit their own individual proposal, and we will also invite one additional firm to propose. They should also accommodate up to one-third of the economics going to a second firm that will join them in placing the deal. The new firm, which was the biggest among the four banks invited, submitted a fee that was 25 percent of the group proposal and one of the members, 50 percent.

We accepted the 50-percent fee proposal even if it was the lowest. We weren’t the government with their manias, and we had more confidence in the ability of the one that proposed 50 percent, as they clearly understood how to document the deal the way we wanted having done it the way in other markets, and the cheapest one had much less experience in Philippine equity deals.

I told the one that quoted 25 percent that I did not tell the winner of their fee level but just to include them with the fee at their level. Though one of the losers was really a sore loser and kept badmouthing the deal and team to the client who then complained to me, and I had to tell the loser to stop acting like a crybaby and shut up. And I had to tell him that many times which lowered my opinion of him. The deal was done, and the amount sought was

raised and in the manner we wanted.

What was the lesson from this that I think also happens way too often in consortia made up of multiple major players? Instead of jointly sacrificing, they first insist on their individual minimum wants. Then add ego and corporate or individual pride. Then factor what they want financially and on the other terms, so the bid or proposal reaches the lowest common denominator of the group rather than primarily the highest value to the client or the seller.

Let’s apply this thinking to a bid group. Assume there are three major members, and one wants an IRR of 20 percent, the other 18 percent and the last 15 percent. They also may have different assumptions on growth rates, and the like.

Unless one can persuade the others, they will most likely demand an IRR of 20 percent on the lowest growth assumptions and thus have a lower bid having combined the worst of both. If one has synergies (for example, they can be a supplier like if they are a construction company and have work they can provide, or it benefits another of their businesses) but not the others, then no question the bid will not factor that in if it only benefits one of the members.

Now compare that to a group with a dominant partner who has either something to protect, related businesses that will benefit, or it is of paramount importance for them to win. They will bid that way and can also make accommodations for the other parties in the group, so they will accept the higher bid and lower return. The highest level of interest and winning are the driving forces not the lowest common denominator.

The opposite happens in negotiated bids versus competitive ones. Why? Here the other party for example, knows what it wants to achieve and its terms. The groups that bid know what they are bidding for and all commit to the set price and terms. Then the other party can select who they believe will do it best and be the most financially capable. That is often when super consortiums win.

Rarely is that the case in competitive ones. Look at most corporate mergers and acquisitions for control deals. They are generally one buyer outbidding others, not groups against other groups. I understand the requirements for group bids for certain types of government assets but this is the reality of what the expected results will be.