Conflict of interest in Qantas and Alinta buyout transactions

Conflict of Interest in Financial Institutions

Conflicts of interest are of great concern in recent years and months, especially since the recent, highly-publicized buyouts involving Qantas and Alinta. In efforts to protect clients and mitigate risk in the financial sectors, conflicts in interest must be addressed suitably. These two buyouts have highlighted many of the worst issues pertaining to conflicts in interest in financial institutions. The result is that customer confidence has been shaken and general public concern for the trustworthiness of financial institutions and advisers has risen. This heightened awareness and wariness hurts the market by creating consumer concern where only a few financial players were acting questionably.

How questionable are the actions made by Qantas and Alinta management? What specific actions were taken (or not taken) in terms of conflict mitigation? What is the views of the Takeovers Panel in these matters? This paper seeks to review the existing literature concerning conflicts of interest, outlining the key terms and issues involved. It will additionally cover the recent transactions and conflict of interest issues related to the Alinta MBO and Qantas Private Equity Deal. Finally, it will turn to the views of the Takeover Panel, highlighting their views on conflicts of interest and, more specifically, their views on the Alinta MBO and Qantas Private Equity Deal transactions.

Section II will focus on the analysis, including background, definitions, evaluation and examples. Section III. Will discuss and analyze the Alinta MBO and Qantas Private Equity Deal transactions, including assessed / possible conflicts, background and discussion. Section IV will discuss the Takeover Panel's views. The sum of these issues will be dealt with in Section V.

II. Analysis

II.1 Background & Definitions

When using terms like "conflicts in interest" it is crucial to clarify the meanings of key terms since the language alone can be misleading. In their evaluation of Conflict of Interest, Mehran and Stulz identify conflict of interest as one party of a transaction having an incentive to take actions that would be detrimental to the counterparty of the agreement. Finding other definitions of conflicts of interest too narrow, this will suffice at the accepted definition in this paper.

Parties in a transaction may be individual investors, companies, consultants or financial institutions. In terms of conflicts of interest, these parties are at risk where they are considered "participating insiders." When participating insiders take advantage of the information specific to their position for their own direct or indirect gain, they are likely abusing their position and are in a position of conflicted interests.

Conflicts of interest often shock shareholders and the general public since they often blatantly ignore the basic requirements and duty expectations of those involved. For example, a bank that abuses a conflict of interest by recommending services that they know are not the best for a customer comes under public scrutiny for abusing the basic trust assumed in a banking relationship. A bank may suggest such services because they receive a higher interest rate or because they do not offer competitive services. This takes advantage of the lack of knowledge of the consumer, who often looks to the bank as a trusted consultant. Individuals and investors have come to assume some trust in banking and finance relationships, and most would agree that this is not an unreasonable assumption.

As will be discussed further in Section III, Qantas and Alinta are under scrutiny because managers from each stand to substantially gain from the buyouts of these companies. Since there would be personal gain, questions arise as to whether these individuals have acted in their own interest or, as their duties require, in the interest of company stockholders.

II.2 Evaluation

Conflict in interest can obviously create negative outcomes for those involved. Despite the substantial public outcry, I agree with Mehran and Stulz that the market should be allowed to regulate itself to some extent. However, Mehran and Stulz do not effectively solve the problem by explaining that "rational" buyers will be willing to pay more and recognize the value for a greater product. While in an ideal market buyers are informed and know what risk is involved, the essential issues in conflict in interest discussion surround the fact that clients and investors are almost always less informed that consultants and financial institutions.

The drawback of "hands-off" market regulation is that some individuals will get caught in the middle of transactions that later turn out to be ill-advised or tainted by conflict of interest. For example, brokers who perpetually suggest buying stocks or funds that they themselves are selling will end up hurting their own reputation when a client finds out. Self-regulation leads to the broker gaining a reputation as untrustworthy and unlikely to do further business, thereby taking care of the problem.

For those who demand legal guidelines, the Takeover Panel has suggested actions that companies can take to mitigate conflict of interest risk, particularly in the case of buyouts. This will be discussed further in section IV.

III. The Alinta MBO and Qantas Private Equity Deal

III.2. Possible Conflicts

The reaction of the ASIC, the public, and interested parties from Qantas, Alinta, and Macquaries Bank imply that there is something wrong with the actions of those parties. Yet, Browning and Poynton acted without expectation that they could not manage their positions alongside their new interests. Macquaries responded defensively to all allegations, denying any conflict or maintaining that conflict was manageable through informed consent or an understanding of consultation on a friendly basis. So, is there anything wrong with the actions of the involved parties?

According to the ASIC, there are possible conflicts and the participants had a responsibility to avoid -- not just manage -- said conflicts. Browning and Poynton fall under the definitions for participating insiders, as well as those with a conflict of interest. Further, their conflict of interest is not solely a conflict but a matter of both individuals acting on that conflict of interest in a way that is questionable. Alinta as a company does not appear to be in the wrong, and attempted to alleviate blame by dispensing of both individuals after finding that they were involved in dealings specifically advised against.

Macquaries Bank clearly abused its role as a participating insider, as it tried to profit off of the Alinta buyout in every way possible. It collected fees from Alinta and maintained a relationship as a long-standing financial adviser ot the company; it ignored its first role to become involved -- friendly or not -- with advising the MBO group; and it involved its own shareholders in a buyout that it was specifically involved in on both sides. There is no doubt that Macquaries used its knowledge of the internal workings of Alinta to make decisions about whether or not to involve its own finances.

Qantas and Geoff Dixon attempt to avoid Alinta's problems by keeping Dixon away from the actual buyout dealings. However, the sizeable payout and other financial perks given to Dixon, especially in light of the other corporate abuses going on, seems suspect at best. Overall, the Takeover Panel's suggestion that individuals who are involved in the buyout of their employing company should step down seems the most solid advice in avoiding conflict of interest.

IV. The Takeover Panel and Conflict of Interest

In their Guidance notes, the Takeovers Panel attempts to alleviate or prevent negative outcomes, citing that private equity bids and other buyouts can have major effects. Many of the items outlined by the Takeovers Panel have specific applications in the deals and issues related to Qantas, Alinta, and Macquaries bank.

The Panel cites that its major concerns are to ensure that buyout bids are considered in an unbiased manner, without the influence of participating insiders to move forward with one bid or another. The Panel also lists that companies should ensure that any disclosure of information to buyout bidders is appropriately controlled.

In the case of Alinta, the MBO involving Browning and Poynton was subject to influence by the two men, who kept their positions within the company. Macquaries Bank similarly used its inside influence to make bids for buyout that took advantage of their position. It is unlikely that other bids were provided with the information furnished by the inside parties, causing an unfair advantage for those involved in the Alinta MBO buyout.

The Takeovers Panel additionally suggests ways to address potential conflicts of interest, with few of the suggestions being incorporated into the buyouts in question. The Panel's suggestion to inform the board as soon as participants are approached by a potential bidder may have made it possible to avoid problems in the case of Macquaries, Browning and Poynton. Poynton and Browning in fact went against the board's intentions by seeking out Macquaries' help rather than seeking out board consent before taking action, as the Panel suggests. Overall, the Takeovers Panel outlines a number of cautionary suggestions that could have helped the three companies discussed here to avoid the conflicts that arose from their buyouts.

V. Summary

The cases of Qantas, Alinta, and Macquaries Bank are high profile cases -- they involve large sums of money and the participation of numerous other workers and investors. It appears that poor decision-making on the part of individuals and entire institutions resulted in the abuse of the power and duties entrusted to those participants. If this sort of poor decision-making can happen even in the closely-watched large-scale businesses mentioned here, it can certainly also happen at other levels of business and investment. Where it is happening, loss of confidence and loss of business threatens the markets, individual businesses, and individuals.

To mitigate this risk, businesses can adopt the rigorous guidelines suggested by the Takeovers Panel. In particular, companies involved in a buyout or possible buyout should appoint an IBC to manage the protocols and processes involved. Beyond these internal checks, the most effective way to regulate these issues is sadly through the self-management of the market. By allowing the market to self-regulate some individuals may be taking larger risks; however, investing and other finance procedure is never without risk. In the process of self-regulation, institutions and individuals like Browning and Macquaries Bank will be passed up for others who have maintained a reputation of trustworthiness and avoidance of conflict in interests.