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TOKYO, Oct 21 (Reuters) - The $687 million fee Japan's Olympus Corp paid its financial advisers for the $2.2 billion purchase of a British medical equipment maker is one for the record books, literally.
The payment is the largest M&A fee ever made, Thomson Reuters data on fee estimates shows, surpassing the previous record of $217 million involved in the 70 billion-euro takeover in 2007 of ABN AMRO by RFS Holdings, a vehicle set up by Royal Bank of Scotland and others.
"That number can't be right," the Asia-Pacific head of M&A at a large European investment bank said of the Olympus fees. The banker declined to be identified due to the sensitive nature of the matter.
Olympus made the payment to obscure advisory firms as part of its $2.2 billion acquisition in 2008 of Gyrus, the medical equipment maker.
The payment is equal to about a third of the acquisition price, jaw-dropping by normal standards where advisers usually take home about 1 percent or less of the transaction value for their M&A advisory services.
The payment is at the heart of a scandal at Olympus that prompted the endoscope and camera maker on Friday to say it would set up an independent panel to examine its past M&A deals, responding to shareholder demands for an explanation.
Last week, Olympus announced it had fired its British CEO Michael Woodford over management issues after just two weeks in the job. Woodford says he was fired after querying the payment and has called on authorities in Britain and Japan to investigate. Olympus denies any wrongdoing.
Standard M&A fees start at 1 percent for a roughly $500 million deal, and then go down, the larger the transaction. On average, a $3 billion deal would result in a 50 basis point advisory fee, or $15 million.
The Olympus deal was unusual because a large portion of the payment to advisers was in preferred shares that ballooned in value, ultimately raising fees from an originally agreed $100 million, according to a PricewaterhouseCoopers report commissioned by Woodford.
"This is not business as usual," said a Tokyo-based M&A banker, who spoke on condition of anonymity. "Everyone is surprised by this fee. It is in no way in the normal range."
In a statement on Wednesday, Olympus gave a breakdown of the $687 million, making a distinction between what it considers payment for financial advisory services and payment for the $443 million jump in the value of the preferred stock.
But even the difference of $244 million that it defined as remuneration for advisory services would be unprecedented.
Olympus said it paid its advisers a basic fee of $5 million in June 2006 to unearth targets and provide standard services.
In an Oct. 11 letter to the board, Woodford says it was the creation of a new agreement in June 2007 that led to the extraordinary payouts.
That agreement set the completion fee at 5 percent of the target value. Of that, 15 percent would be paid in cash and 85 percent in share options and warrants.
The next payment was a $12 million cash bonus on Nov. 26, 2007, one week after the deal was announced. The transaction closed on Feb. 1, 2008.
In September 2008, Olympus bought the warrants for $50 million and issued preferred shares to settle the options that were valued at $177 million.
Olympus has not given details on the identities of the advisers other than acknowledging that the fees were paid to two firms, AXES and AXAM Investments.
In the letter, Woodford says the advisers insisted on preferred stock as part of their payment. Olympus agreed, going against the advice of auditor KPMG and Weil, Gotshal & Manges to pay cash. The decision proved costly.
In November 2008, Olympus was asked to buy back the preferred shares at triple their $177 million value of just two months earlier. Olympus sought the advice of Shinko Securities, which estimated the value at $557 million.
Olympus eventually bought back the shares for $620 million in March 2010, bringing the total payout to the advisers to $687 million. ($1=76.87 yen) (Editing by Muralikumar Anantharaman and Neil Fullick)