When Armstrong World Industries, a $2 billion US company, announced in early June that it was launching a $354 million hostile takeover of Domco, a Canadian floor-products maker controlled by Sommer Allibert of Paris, investment bankers were surprised to learn that the company's long-time investment banker, Goldman Sachs, was not advising Armstrong.
They will be in for a bigger surprise when Goldman's name comes up in an upcoming court battle with Armstrong surrounding the transaction. In one of the more bizarre twists to the changing nature of client relationships, Goldman has gone from being Armstrong's sole investment banker to being a global competitor fighting over the same deal. At stake is a huge share of the US flooring market. Domco has annual sales of $238 million.
The drama in which Goldman plays a key role will begin at a US federal court hearing scheduled for September 30. The hearing is the first step in a legal action Armstrong has undertaken as part of its hostile bid.
Based on what it alleges is a breach of a confidentiality agreement, Armstrong is requesting the courts for a preliminary injunction to stop Sommer's own recently-announced merger with a third party: Tarkett of Germany, a company in which Goldman Sachs Capital Partners has a 32.5% stake. Goldman also acted as Tarkett's adviser in the Sommer merger transaction, which is valued at $565 million.
Though based in Canada, Domco also has operations in the US. If the Tarkett deal with Sommer goes through, control of Domco will give Tarkett a number-two position in the US market, behind number-one ranked Armstrong. Currently, Armstrong has close to a 50% market share in the vinyl floor-covering business.
According to Frank Riddick, Armstrong's chief financial officer, during its negotiations Armstrong was led to believe it was in exclusive talks with Sommer. During that time, it was using Goldman as an adviser on other matters in the US. But just two days after Sommer turned down Armstrong's offer, Sommer announced a friendly deal with Tarkett. "We were completely unaware that Tarkett, and Goldman Sachs, were talking to Sommer," says Riddick. Armstrong had hired JP Morgan and Lazard Freres to represent it in its talks with Sommer and later used them to launch its hostile bid for Domco.
Tarkett and Armstrong's position as global competitors in the home-flooring market had already begun to create tension between Goldman and its US client, Armstrong. Since the mid-1980s Goldman had been Armstrong's sole adviser, according to Riddick. But things got touchy in 1992 when Goldman made its investment in Tarkett. The firm's investment bankers tried to placate Armstrong by saying it would not be appropriate to work for them as an adviser in Europe. "No shit," an Armstrong executive is said to have to replied.
Tarkett's deal with Sommer was the last blow. "Shocked and stunned" is how Riddick says he felt on learning of Goldman's role as adviser to Tarkett.
Armstrong's legal action is against Sommer, Tarkett and Sommer's chief executive Marc Assa. Armstrong's complaint alleges that Sommer "fraudulently induced" Armstrong to provide confidential information to Sommer during negotiations and that such information was used to fashion the Sommer/Tarkett combination. Assa has described Armstrong's claims as "ridiculous".
At the September hearing, the court will consider whether Sommer and Tarkett used confidential information from Armstrong in what the company alleges is a violation of a confidential agreement between Armstrong and Sommer. "The hearing will confirm who knew what when," says one person close to the situation. Sources at Goldman Sachs say it knew nothing of Armstrong's bid until after its deal was agreed upon, and Armstrong went public with its hostile offer.
"Armstrong has been an important and valued client for over a decade. But we do not represent Armstrong in Europe," says a Goldman Sachs spokesman.Michelle Celarier