Legal experts are beginning to advise their banking clients to take the hit on LBO break-up fees and walk away from their loan commitments. It is cheaper, they reason, to pay now and not have to take write-offs later as the value of the bonds are written down.
According to the FT "this advice from lawyers contrasts with the conventional wisdom that banks would risk serious damage to their reputations if they were to drop out of deals." While it may be more convenient for banks to pay several hundred million in break-up fees instead of writing down billion in loans, it is not that simple. Banks may even be willing to alienate big corporate clients in the name of saving their own hides.
What is not in the equation is the liability the banks may have with the public companies that they leave holding the bags. Angry boards may elect to bring suits against banks for lost shareholder value. In a big deal like the buy-out of BCE, that figure could be in the billions of dollars.
Even if boards do not have the appetite for litigation, shareholders may decide to form class action groups and get aggressive litigators to take their cases to court.
Stiffing shareholders at buy-out targets is not the best answer for banks.
Douglas A. McIntyre
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