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Wall Street buyouts have potential conflicts of interest

By ASSOCIATED PRESS
Published August 2, 2006


Merrill Lynch & Co. Inc., best known for its retail brokerage network, has become a powerful player as an investment banker for companies looking to buy other firms or sell parts of their operations. Last week, the firm took on a new and potentially troubling role in the huge buyout of hospital chain HCA Inc.

Besides being HCA's long-term adviser, Merrill was one of the principal investors in a consortium that bid $21.3-billion to take over the Nashville company. It advised that group on the deal and how to finance it.

That involvement showcased Merrill's initiative to build its private-equity business, something it plans to grow by tapping its existing business connections.

The strategy is paying off: Earnings in its private-equity segment nearly tripled in the second quarter from the year before. While Merrill declined to give specifics, a report from Sandler O'Neill Partners put that figure in excess of $700-million in revenues, and estimated that such gains contributed 19 cents a share to Merrill's per-share net of $1.63.

It's not surprising that the securities firms are attracted to the private-equity business.

That market is booming with a rush of buyouts, especially in the health care, retail and transportation sectors.

This year, buyouts have totaled a record $372.6-billion, more than double the $176.9-billion over the same period in 2005, according to Dealogic.

Now, Wall Street firms want a piece of the action. To succeed, they must tread carefully.

Put simply, it raises questions over whether they are placing their activities ahead of their clients' concerns when they start stepping up their private-equity business.

In the case of HCA, Merrill joined Kohlberg Kravis Roberts & Co. and Bain Capital LLC in what is being called the largest leveraged buyout ever, with the bid including $21.3-billion in equity and the assumption of $11.7-billion in debt.

According to the Wall Street Journal, Merrill's bankers learned of HCA's interest in going private and they connected the company's executives with Merrill's private-equity team, who came up with the buyout deal. Merrill advised the group of private-equity investors and put up its own money in the buyout bid.

With such connections, "the potential for conflict is certainly there," said Colin Blaydon, who heads the Center for Private Equity and Entrepreneurship at Dartmouth College's Tuck School of Business.

That's why he suggests companies with many hands in a given deal "create an open and transparent process" to avoid accusations of ethical lapses.

He did note, though, that Merrill took some careful steps to insure itself against major conflicts.

As more Wall Street firms advise, invest and finance private-equity deals, their involvement has to be closely watched.

There is plenty of room for conflict to take place, but that doesn't mean it has to happen.

Rachel Beck is the national business columnist for the Associated Press. Write to her at rbeck@ap.org.

[Last modified August 2, 2006, 01:10:53]


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