Friday, June 29, 2007
The Hidary Group, a New York-based investor group, announced today that it had raised its offer to acquire Everlast Worldwide Inc., the boxing equipment manufacturer. The increased offer is for $31.25 per share in cash. The new offer comes one day after Everlast terminated its prior agreement to be acquired by Hidary for $26.50 per share. Everlast terminated the agreement to accept a competing bid made by Sports Direct International PLC for $30 per share. In connection with this termination, Everlast paid $3 million as break-fee.
The new Hidary offer includes an option for Everlast shareholder to roll up to 50 percent of their shares into the new entity. This is an increasingly used feature (seen in the Clear Channel and Harman deals) and will lower the cost of the acquisition for Hidary. In their new offer announcement, Hidary disclosed that it had secured commitments from Everlast shareholders holding approximately 17.7 percent of Everlast’s outstanding stock to participate in this plan.
According to the initial Hidary merger agreement, Everlast had a go-shop which would have expired on July 1. In addition, Hidary had a matching right for any superior offer which might be provided. Therefore, this minuet of termination and subsequent offer is a bit puzzling. It likely spells a bit of disarray in the process and either some problem with the Hidary offer or some to-be-discovered bias. Still, chalk up Everlast as one of the few deals with a go-shop provision to actually find a higher offer.
The Wall Street Journal is reporting that yesterday a Tokyo court issued a landmark ruling upholding the use of a poison pill defense by Bull-Dog Sauce Co. The court held that Bull Dog, a condiment maker, could employ the defense to fend off an unsolicited offer to be acquired from Steel Partners Japan Strategic Fund (Offshore) LP, a U.S. fund. Steel Partners is offering Yen 1,700 per share, a 25.8% premium to Bull Dogs's 12-month average closing share price. Steel Partners is one of the best-known takeover funds in Japan and is seen as a symbol of shareholder activism in that country.
Steel Partners had sued Bull-Dog alleging that the poison pill was discriminatory and therefore in violation of Japanese law. Last Sunday, 80% of Bull Dog's shareholders had voted to approve the issuance of stock acquisition rights underlying the poison pill at its annual general meeting of shareholders. The Tokyo District Court relied heavily on this vote to find that the poison pill was not discriminatory because the company's shareholders had approved it. According to the Journal, the poison pill will dilute the fund's holdings to less than 3% from more than 10% if triggered.
The decision is a bit of a surprise since in at least two other cases the Japanese courts had invalidated the use of a poison pill. But the big difference here appears to be the shareholder vote. Poison pills are often decried as denying shareholders the right to make their own decisions concerning a sale of their company. Yet here there was a shareholder vote which overwhelmingly validated use of this mechanism. And Bull Dog's pill is a relatively mild one providing for limited dilutive effect. The case can therefore be distinguished on these grounds and likely confined to justifying the use of a pill to fend off unsolicited bids in Japan in those instances where shareholders overwhelmingly oppose the transaction.
For U.S. purposes, the decision also highlights a more democratic use of the pill. One where shareholders get a say on its use to deter unsolicited offers. This is a path which many activists in the United States have called for. And it is one which permits shareholders a say in the important takeover decision, one they are today often deprived of. For more, see Ronald J. Gilson, The Poison Pill in Japan: The Missing Infrastructure.
Today's friday culture choice is the film Wall Street. Wall Street is Oliver Stone's comment on the 1980s, sometimes affectionately known among deal-types as the decade of greed. It tells the story of young stockbroker Bud Fox (played by Charlie Sheen) who is seduced into an insider trading scheme by corporate raider Gordon Gekko (played by Michael Douglas). But the story is mere back-drop to the wider landscape of the eighties takeover scene. Thus, you have Gekko (modeled on the real-life Ivan Boesky) doing battle for Bluestar Airlines with Sir Larry Wildman (believed to be modeled on the real-life Sir Gordon White of Hanson PLC). And you have Gordon Gekko repeating the now famous line justifying his break-up of Teldar Paper:
The point is, ladies and gentlemen, that: Greed, for lack of a better word, is good. Greed is right; greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms, greed for life, for money, for love, knowledge — has marked the upward surge of mankind and greed, you mark my words — will not only save Teldar Paper but that other malfunctioning corporation called the USA.
The movie is pure fun and likely to bring some recognition as you watch the characters lunch at 21 and use out-of-place Wall Street terminology. It is also sure to bring a bit of nostalgia as when Gekko extols the technological wonder of his portable phone.
Dealogic's preliminary M&A activity figures for the half year are out. The numbers are record-setting. M&A activity was $2,780 billion during the first half of 2007. The pace was set by private equity takeovers which reached a record high of $568.7 billion representing 20% of total M&A activity. This was 23 percent higher than the previous record set in the second half of last year of $459.2 billion. In the United States, private equity accounted for 35 percent of total merger volume, up from 22 percent in the first half of 2006.
By region, Europe, the Middle East and Africa M&A activity was at $1,230 billion or 44 per cent of total volume. In the United States, M&A volume totaled $1,005 billion, up 36 percent from the same period a year ago. The number of U.S. deals, though, fell 12 percent. April was the busiest month of the year in the United States, with $210.5 billion in deals, while June was the slowest month with $124.2 billion in deals. In the Asia- Pacific region M&A activity reached $353.4 billion. China and India were particularly hot. In China there were 1,159 deals valued at $55.2 billion in the first half of the year -- up 40% from 1,022 deals valued at $39.4 billion a year ago. In India there were 548 M&A deals valued at $39.4 billion in the year through June, a figure more than double the comparable last year period, when there were 457 M&A deals valued at $18 billion.
Goldman Sachs was the leader in the M&A league tables for the period. Goldman advised on 223 deals with a total value of $844 billion. Goldman was followed by Morgan Stanley ($805 billion), Citigroup ($769 billion) and J.P. Morgan ($724 billion).
Naysayers are likely to highlight the drop in activity from April to June as a sign that the M&A bubble is deflating. But, while it is uncertain when the M&A boom will end, this year is still likely to be a record one for M&A. If the current pace is sustained, 2007 will have about $5,600 billion in merger volume, compared with about $3,800 billion for 2006. Another good bonus year for bankers and hopefully lawyers.
Thursday, June 28, 2007
As I write, Blackstone is now trading at $30.32 per unit, slightly below the initial public offering price of $31 a unit. And many a commentator is now saying the completed ipo is not a success because the trading price is now below the initial offering price. But is this right?
It is certainly not typical. Most companies experience a sharp rise in their share price on the first trading day of their ipo. According to data prepared by Jay Ritter, this rise has averaged approximately 19% since the 1960s. But it has varied greatly over the years: averaging 21% in the 1960s, 12% in the 1970s, 16% in the 1980s, 21% in the 1990s, and 40% in the four years since 2000 (mostly due to the inclusion of the last years of the technology bubble).
But is this really a good thing? Isn't this rise a sign that these ipo shares were underpriced, the sellers simply leaving money on the table? Certainly public perception is that the rise is such a good thing; who can forget those internet bubble days when the latest offering popped more than 100% and the masses cheered. But, this begs the question as to why sellers would repeatedly and deliberately leave money on the table. And this is a question that is one of the great puzzles of corporate finance. There is a great deal of literature on this subject, and theories can be grouped into four different explanations: asymmetric information, institutional reasons, control considerations, and behavioral approaches. According to Alexander Ljungqvist "[i]nstitutional theories focus on three features of the marketplace: litigation, banks’ price stabilizing activities once trading starts, and taxes. Control theories argue that underpricing helps shape the shareholder base so as to reduce intervention by outside investors once the company is public. Behavioral theories assume either the presence of ‘irrational’ investors who bid up the price of IPO shares beyond true value, or that issuers suffer from behavioral biases causing them to put insufficient pressure on the underwriting banks to have underpricing reduced." For more on these theories see Alexander Ljungqvist, IPO Underpricing: A Survey.
But with no agreed explanation for persistent ipo underpricing, ultimately, a successful ipo becomes one of perspective. For Peter Peterson, the senior chairman of the Blackstone group and who is retiring, the lower price is yet another good deal. He has sold his shares and reaped $1.9 billion appearing to leave very little money on the table. But for those who bought into the ipo on the first day, his gain has come at their expense.
On the heels of the handwringing on the plight of today's investment banker in Jonathan Knee's the Accidental Investment Banker, William Cohan has an op-ed in today's Financial Times entitled Shed no Tears for the Legendary Wall Street Banker. Cohan, who authored The Last Tycoons: The Secret History of Lazard Frères & Co., writes:
So how are all those overpaid and overworked M&A bankers feeling these days? Not so great, in fact. At the very same moment when they have never been busier - flying round the world in private jets to attend infinitely ponderous and desperately important meetings - M&A advisory revenue has never been more irrelevant to their firms' bottom lines.
He goes on to make the now common observation about the demise of brand-name bankers and the rise of private equity as a force minimizing the need for M&A bankers. And he quotes one corporate lawyer as stating that "Bankers are [now] sitting in coach." Well, there is schadenfraude for you.
But the thing that caught my eye is the common-theme complaint here about advances, technology etc. making the traditional role of M&A investment banker less relevant and the need for reinvention. Well, I think the foregoing need is one that every white collar worker today has to deal with. Blue collar workers are in a worse position as they find it harder to reinvent themselves. Welcome to the real world M&A bankers.
General Motors Corp. today announced that it agreed to sell its Allison Transmission commercial and military business to The Carlyle Group and Onex Corporation for $5.75 billion. In its press release, GM did not disclose any of the terms of the transaction including any financing contingencies. The transaction is not significant for GM so it will not be required to file the transaction agreement. According to Onex, an equity investment of approximately US$1.5 billion in Allison will be split equally between Onex and The Carlyle Group. The transaction is expected to close in the third quarter of 2007.
According to the Wall Street Journal, Allison is a key unit for GM. The auto maker acquired Allison in 1929 and "uses it to maintain a significant role as a supplier to the heavy-vehicle industry, which typically returns higher margins than the higher-volume light-vehicle market. It also uses Allison as an internal transmission supplier for its own heavier-duty vehicles."
Does anyone remember the rules proposed by the NASD to govern the issuance of fairness opinions? Back in November 2004, the NASD sent a minor shock wave through the investment banking community by promulgating a notice to members requesting comment on whether to propose new rules “that would address procedures, disclosure requirements, and conflicts of interest when members provide fairness opinions in corporate control transactions.” More specifically, the NASD requested comment concerning methods to “improve the processes by which investment banks render fairness opinions and manage inherent conflicts.”
The NASD put forth three reasons for requesting comment. First, the disclosure mandated under SEC regulation for fairness opinions could be perceived as insufficient “to inform investors about the subjective nature of some opinions and their potential biases.” Second, fairness opinion are by nature subjective and consequently there has arisen a “perceived tendency” that these opinions often support management. Finally, unaffiliated stockholders sometimes do not receive the benefits in a corporate control transaction that management, directors or other employees do; the NASD hypothesized that this disparity may create biases in favor of the transaction if the people involved in the current or future hiring of the investment bank are those with a differential benefit.
The NASD subsequently proposed Rule 2290 in response to its solicited member comments. Rule 2290 was announced and filed with the SEC for approval on June 22, 2005. Well, that was 2005. Since that time, the rule has been stuck in the SEC approval process. Presumably at SEC behest, it has been amended three times since then. The latest amendment was on June 7, 2007 (access the rest of the amendments here).
The broad scope of intended topics in the initial notice to members led some to think that the NASD would finally act to address many of the deficiencies in current fairness opinion practice. However, the initially promulgated rule was a disappointment, and after three amendments at the SEC's behest it has now been watered down into meaninglessness. The NASD ultimately did not go so far as to require member investment banks to disclose “any significant conflicts of interest” as it initially considered. Instead, disclosure requirements in the Rule with respect to contingent consideration and relationships largely overlap with current federal securities law. There are two other disclosure obligations in the Rule concerning opinion committees and independent verification of information. These will likely be met with more boiler-plate responses – a practice which the Rule effectively permits. Furthermore, in the amending releases the NASD also watered down the Rule in its interpretation; removing a good bit of the potential for it to go beyond SEC regulation. For example, the NASD took the position in the amending releases that disclosure of contingent compensation and material relationships under the Rule can be descriptive and not quantitative; a statement as to whether it exists or not sufficient. Yet, the number is the important element here: if the amount is high it has more potential to result in bias. In addition, the Rule does nothing about the subjectivity inherent in fairness opinion preparation. It simply addresses the conflicts issue with redundant disclosure requirements that permit the investment banks to engage in the same practices as before with little, if any change.
Given the current state of the Rule, the NASD would be better to simply pull it until such time as the SEC is more willing to contemplate reform. Unfortunately, the SEC does not appear ready to act any time soon on these issues.
Monday, June 25, 2007
On June 14, 2007, Vice Chancellor Strine issued an opinion in In re Topps Shareholders Litigation, 2007 WL 1732586 (Del.Ch. June 14, 2007). Vice Chancellor Strine, a well-respected member of the Delaware Chancery Court, preliminarily enjoined the shareholders meeting of The Topps Company to vote on Topps´s agreement to be acquired by a group consisting of The Tornante Company LLC and Madison Dearborn Partners, LLC for $9.75 per share in cash. The Tornante Company is headed by former Disney CEO Michael Eisner. Topps is also subject to a competing proposal to be acquired by The Upper Deck Company for $416 million offer or $10.75 per share. (For a history of this transaction so far, see my prior posts The Battle for Topps and Trading Baseball Card Companies).
In his opinion, Vice Chancellor Strine issued a preliminary injunction against the holding of a vote on the Eisner acquisition agreement until such time as:
(1) the Topps board discloses several material facts not contained in the corporation's “Proxy Statement,” including facts regarding Eisner's assurances that he would retain existing management after the Merger; and (2) Upper Deck is released from the standstill for purposes of: (a) publicly commenting on its negotiations with Topps; and (b) making a non-coercive tender offer on conditions as favorable or more favorable than those it has offered to the Topps board.
The opinion is 67 pages and worth a full read for the nuggets it contains, but I want to point out two important parts:
Go-Shops. In the opinion, Vice Chancellor Strine broadly endorses the use of ¨go-shops¨ as a way to meet Revlon´s requirement that in a sale the board must take reasonable measures to ensure that the stockholders receive the highest value reasonably attainable. Here, the Eisner merger agreement had contained a 40-day "go-shop" period with a lower 3.0% termination fee during the "go-shop" period and matching rights for the Eisner group. Thereafter, the fee rose to 4.6%. Vice Chancellor Strine stated:
Most important, I do not believe that the substantive terms of the Merger Agreement suggest an unreasonable approach to value maximization. . . . Critical, of course, to my determination is that the Topps board recognized that they had not done a pre-signing market check. Therefore, they secured a 40-day Go Shop Period and the right to continue discussions with any bidder arising during that time who was deemed by the board likely to make a Superior Proposal. Furthermore, the advantage given to Eisner over later arriving bidders is difficult to see as unreasonable. He was given a match right, a useful deal protection for him, but one that has frequently been overcome in other real-world situations. Likewise, the termination fee and expense reimbursement he was to receive if Topps terminated and accepted another deal-an eventuality more likely to occur after the Go Shop Period expired than during it-was around 4.3% of the total deal value. Although this is a bit high in percentage terms, it includes Eisner's expenses, and therefore can be explained by the relatively small size of the deal. . . . Although a target might desire a longer Go Shop Period or a lower break fee, the deal protections the Topps board agreed to in the Merger Agreement seem to have left reasonable room for an effective post-signing market check. For 40 days, the Topps board could shop like Paris Hilton. Even after the Go Shop Period expired, the Topps board could entertain an unsolicited bid, and, subject to Eisner's match right, accept a Superior Proposal. The 40-day Go Shop Period and this later right work together . . . .In finding that this approach to value maximization was likely a reasonable one, I also take into account the potential utility of having the proverbial bird in hand.
The important point here is that Strine is merely endorsing the use of a ¨go-shop¨as one way to satisfy Revlon duties. But it does not appear that he is going so far as to suggest that this is a requirement that a "go-shop" be included any time there has not been a full auction in advance of signing a merger agreement when Revlon duties apply. However, as ¨go-shops¨become increasingly common, it may be likely that at some point the Delaware courts more firmly embrace their use under Revlon (though this is my own conjecture).
Standstills. Vice Chancellor Strine found that the Topps Board had violated its Revlon duties by favoring the Eisner bid by, among other things, continuing to require Upper Deck to honor its standstill agreement. In making this ruling, Strine emphasized that it is important for a board which has not previously engaged in a shopping process to reserve the right to waive a standstill if its fiduciary duties require. However, Strine also noted that standstills provide "leverage to extract concessions from the parties who seek to make a bid" and in a footnote contemplated that in certain circumstances such as a full auction it may be appropriate for a target to agree not to waive standstills for the losing bidders. Strine then held that the Topps board´s refusal to waive Upper Deck´s standstill likely was a breach of its Revlon duties since the:
refusal not only keeps the stockholders from having the chance to accept a potentially more attractive higher priced deal, it keeps them in the dark about Upper Deck's version of important events, and it keeps Upper Deck from obtaining antitrust clearance, because it cannot begin the process without either a signed merger agreement or a formal tender offer.
The opinion is also notable as another instance where a Delaware court found the proxy disclosure concerning a financial advisor´s fairness opinion to be deficient. I´ll post more on this point later in the week.
The Topps opinion was followed the next day by In re Lear Corporation Shareholders Litigation, 2007 WL 1732588 (Del. Ch., June 15, 2007). Here, the Chancery Court also granted preliminary injunctive relief because the Lear ¨proxy statement [did] not disclose that shortly before Icahn expressed an interest in making a going private offer, the CEO had asked the Lear board to change his employment arrangements to allow him to cash in his retirement benefits while continuing to run the company.¨ However, the Court refused to grant injunctive relief on the plaintiffs´other claims stating that ¨the Lear Special Committee made an infelicitous decision to permit the CEO to negotiate the merger terms outside the presence of Special Committee supervision, [but] there is no evidence that that decision adversely affected the overall reasonableness of the board's efforts to secure the highest possible value.¨
Sunday, June 24, 2007
GLG Partners, the leading European hedge fund adviser with over $20 billion in assets under management, today announced that it would go public in the United States. GLG will accomplish this transaction through a reverse merger with Freedom Acquisition Holdings, Inc, a special purpose acquisition company currently listed on the American Stock Exchange. Upon consummation of the transaction, FAH will rename itself GLG Partners, Inc. and re-list on the New York Stock Exchange. The transaction values GLG at $3.4 billion dollars and FAH´s current shareholders will hold 28% of the new entity.
GLG was formed by three former Goldman Sachs wealth managers in 1995 as a division of Lehman Brothers. GLG is now independent, but Lehman still owns a stake in the company, and last week GLG co-founder Jonathan Green sold some of his ownership stake to, Istithmar, an investment arm of the government of Dubai and Oppenheim, the largest private bank in Germany, giving each a 3% stake.
The GLG transaction comes on the heels of Friday´s successful offering by Blackstone and is yet another U.S. public offering by a private equity or hedge fund fund adviser. It is notable for this and another reason. GLG is using the SPAC mechanism to go public. I´ve blogged before about how the growing presence of SPACs and private equity/hedge fund advisers highlight the absurdities of the Investment Company Act. Public investors are shut off from investing in private equity and hedge funds by this law. However, these investments offer desirable and unique characteristics such as alpha. So, investors desiring these benefits substitute the next best thing, that is the advisers and SPACs. But both of these investments have their own problems and are likely more risky than the funds themselves. GLG is now pushing the envelope by combining the two.
But, there are two good things about this transaction. First, it highlights the strength of the U.S. capital market and its continued ability to attract foreign listings. Second, chalk another one up for Perella Weinberg partners which advised GLG -- after a slow start they are picking up steam in the league tables.
I´m back fresh from a restful break. In this vein, I thought I would recommend some good summer reading for deal junkies and the like. This is the light reading; I´ll recommend some brainier stuff on Friday.
Hedgehogging by Barton Briggs. Briggs was global strategist at Morgan Stanley, but left the position to start the global macro strategy hedge fund Traxis Partners. In Hedgehogging, Briggs spins on the day-to-day life of running a hedge fund by (anonymously) profiling many of the top managers. Hint: get ready to pity these poor managers as they experience unbearable pressure to raise money, earn that twenty part of the two and twenty, and afford their lifestyle. In between, Briggs writes about various hedge fund strategies and trading triumphs. Think Accidental Investment Banker, but for hedge fund types. The book is a good, light vacation read for those who want a taste of what the hedge fund life is like and what hedge fund managers actually do on a day-to-day basis.
Liar´s Poker: Rising Through the Wreckage on Wall Street by Michael Lewis. In this time of a possible private equity/hedge fund/credit/liquidity bubble, its time to revisit a classic from another heated time. In Liar´s Poker, Lewis engagingly describes his four years with the Wall Street firm Salomon Brothers during the 1980s; a time when Salomon´s mortgage trading group ruled Wall Street. The book is filled with trading stories and personalities and describes vividly such Wall Street legends as John Meriwether and Lew Renieri. Sure, Lewis was only there as a junior sales banker for four years, but he ably captures Salomon´s frenzied trading culture and describes the mortgage trading business in a very accessible way. The culture Lewis details would ultimately lead to Salomon´s demise when Paul Mozer, one of its traders, engaged in a rigged bidding scheme for treasury bonds. The gambit would be discovered and would bring down the entire bank in scandal setting off a series of events which ended Salomon´s independence.
Stealing Time: Steve Case, Jerry Levin, and the Collapse of AOL Time Warner by Alec Klein.The story of the America Online and Time Warner merger. At the time announced, this was the largest merger in U.S. history; this deal is also ranked among the most spectacular M&A failures in history. It is therefore a must read for any M&A attorney. And Klein tells the story in news reporter fashion, showing the strategies and personalities which created the deal and led in part to its failure. By the way, not everyone lost on the deal including, most importantly, the lawyers. Cravath represented Time in the transaction and received the astronomical flat fee of $35 million (though still not as sweet as Wachtell´s $20 million flat fee for two weeks work defending Kraft in 1988 against Philip Morris´s unsolicited bid).
Saturday, June 16, 2007
Thursday, June 14, 2007
The winner of the funnest takeover rumor of the week is undoubtedly today's one that Ihop Corp. has made a $2 billion plus offer to acquire Applebee's International Inc. Applebee's current stock-market value is about $1.92 billion. (see the Bloomberg story here). The rumor is not surprising given the heated M&A rumor mill and the significant M&A activity occurring in the restaurant sector. Just earlier this week, Back Yard Burgers Inc., a southern regional burger chain, announced an agreement to be acquired by an investment consortium comprising Cherokee Advisors, Pharos Capital Group, LLC, based in Nashville, Tennessee and C. Stephen Lynn, former Chairman and CEO of Shoney’s, Inc. and Sonic Corp, in a transaction valued at $38 million.
Moreover, Applebee's in particular has come under pressure from the investor Richard Breeden. In April, Applebees settled Breeden's proxy contest for four board seats by giving Breeden and one of his nominees board seats. At that time, Applebee's also announced it had received several takeover proposals.
But enough background -- the combination is simple fun -- the nation's largest pancake house and, well, Applebee's -- which I would definitely call AHop. And think of the potential to achieve tremendous synergies and cost savings in not only pancakes (happy face and otherwise), but pork and other good old American staples. In a similar vein, Dealbreaker calls the combination Ihoppabees and has compiled a list of analysts comments much funnier than mine. Here they are:
“The merger will never go through for antitrust reasons. The resulting chain would be too American, and therefore subject to a host of patent violations."
"A combination of IHOP and Applebees would be an unstoppable force in the American suburb. People wouldn't leave, and the branches would develop into self-sufficient communities like the Arcologies in SimCity 2000 or the Bio-Dome invented by Pauly Shore or your average Wal Mart Super Center.”
“If you thought soccer moms were dangerous now or that ratings of Two and a Half Men were artificially inflated, just wait until IHOP buys Applebees. I don’t think the result will be a society any of us want to live in.”
“The last thing your inspirational high school indoor track assistant coach needs is a stack of pancakes to soak up his tears after learning that his picture made the restaurant wall. That’s what a $16 barrel of oriental chicken salad is for.”
“America is not ready for a Pancake and Riblet Platter.”
There is no humor like analyst humor. Thank you Dealbreaker for compiling it.
On the business law professor listserv, the following question was circulated yesterday:
Are Revlon duties triggered if a corporation receives a(n unsolicited) time-sensitive offer for an acquisition (say 3 days) at an obviously large premium (say twice the valuation of the corporation) and the board is convinced that there can possibly be no better deal down the line?
If indeed Revlon duties are triggered, can one say they are satisfied anyway by procedurally structuring the deal to be an arms-length transaction e.g. getting proper fairness opinion that convinces the board it is in the best interests of the shareholders to sell? Differently put, does the board have to actually seek other potential acquirers (or at least spend some reasonable time seeking) for it to discharge its Revlon duties?
The question generated a number of responses, the most comprehensive was from Professor Stephen Bainbridge, and he has kindly posted it here. It's a worthwhile read.
For what its worth on my front, the answer to the first question is almost certainly no. Revlon duties are only triggered if the board affirmatively decides to initiate a sale or break-up process. The only countervailing case law is Chancellor Allen's opinion in City Capital Assocs. Ltd. P’ship v. Inc., 551 A.2d 787, 800 (Del. Ch. 1988) where he forced a board adopting a "just say no" strategy to redeem its poison pill. See also Grand Metro. Pub. Ltd. Co. v. Pillsbury Co., 558 A.2d 1049, 1061–62 (Del. Ch. 1988). But the validity of Interco in light of Paramount and other, subsequent Delaware decisions is dubious at best. So, the board can "just say no" to the offer though it does need to consider it. Here, the board should be mindful of the procedural requisites of Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985) and allow enough time for it and the company's officers to consider the acquisition and the board's financial advisors to analyze the offer. See, e.g, Weinberger v. UOP, 457 A.2d 701, 712 (Del. 1983) (finding a lack of fair dealing where corporation failed to disclose 'cursorily’ prepared fairness opinion which was brought to the board meeting with price left blank). In this case, three days time for the board to properly consider the offer and the financial advisors to prepare their required analysis is likely insufficient. A week would be more appropriate and is a time frame which has previously passed muster with the Delaware courts.
Bainbridge aptly answers the second part of the question concerning the need for a market-check under Delaware law, and so I will not address it here. I will point out, however, that in In re Pennaco Energy, Inc. S'holders Litig, 787 A.2d 691, 705-06 (Del. Ch. 2001) and In re MONY Group S'holder Litig, 852 A.2d 9, 18-24 (Del. Ch. 2004), the Delaware courts held as reasonable deal protection devices non-solicit provisions combined with >3% termination fees by equity value; and in both cases these provisions were agreed to prior to the acquiree’s solicitation of any competing offers. These holdings were effectively reconfirmed in In re Toys "R" Us, Inc. S'holder Litig., 877 A.2d 975 (Del. Ch. 2005) (upholding termination fee of 3.75% of the acquiree’s equity value and 3.25% of the acquiree’s enterprise value). And when I was in private practice, we regularly advised clients that, in light of these decisions, a no solicit and 3% break-up fee was acceptable without shopping the company pre-announcement provided an initial check was established via the mandatory fairness opinion (small comfort, but one of the last relics of Van Gorkom which effectively requires these anyway). So, in the question at hand, the board could likely agree to this deal and also agree to some rather strong transaction defenses under Delaware law without pre-announcement contact of other bidders. Of course, the board would need to negotiate a fiduciary-out, subject to these break-up fees and other transaction defenses, if a higher, competing bid emerges and is superior.
I’ve been thinking that with the rise of the go-shop, the Delaware courts might claw-back on the above, current case-law and incorporate this practitioner-driven development into its jurisprudence, particualrly the practice of certain go-shop deals to have a lower break-up fee during the solictiation period of approximately 1% of equity value. But I do not have anything in particular to stand on for this (other than my own doctrinal thoughts and some direction gleaned from the tangentially related Netsmart case (2007 Del. Ch. LEXIS 35) in which the Chancery Court held that a board breached its Revlon duties by, in the context of a go-shop, limiting its solicitation to private equity buyers and excluding strategic buyers). If anyone has any better thoughts on this, please feel free to comment.
Highlighting that even investment bankers may need to fear globalization, Merrill Lynch & Co. has announced an $11 million dollar investment in Copal Partners. Copal is an analytics and research Indian outsourcing firm which, according to the Wall Street Journal, specializes in creating "deal books" for corporate mergers and takeovers. Merrill is the third investment bank to invest in Copal along with Deutsche Bank and Citi. The three banks now own approximately 25% of Copal.
And Copal is a growth business. Founded only five years ago, it is officially based in the United Kingdom but maintains a research staff of about 540 near New Delhi. Initially focused on the business of outsourcing by investment banks of research and deal preparation tasks, Copal is now expanding into other research opportunities, including research in credit and equity, as well as starting up a consulting business. As Copal and other Indian firms grow their experienced talent base in this area, expect the investment banks to shift even more junior preparation work abroad.
Wednesday, June 13, 2007
Ivy Asset Management in conjunction with Columbia Business School released two studies today related to hedge funds. According to the press release:
The first is entitled, "Do Activist Hedge Funds Create Value", and looks a hedge fund shareholder activism. According to the study, based on nearly 800 events in the United States from 2001-2005, hedge fund activists are significantly more successful than other institutions, such as pension funds and mutual funds, in their activist efforts. Two thirds of the time they are successful in achieving their stated goals or gaining significant concessions from their target. The study finds that activist hedge funds generate above benchmark returns of 5% to 7%. Interestingly, hostile activism received a more favorable market response than non hostile activism.
The second study entitled, "Which Shorts are Informed? A Practitioners Guide", found that over 12.9% of the volume on the New York Stock Exchange was generated from short selling both large and small stocks and that this number has been increasing over the last few years. This study shows that
institutional short sellers have in fact " ... identified and acted on important value-relevant information that has not yet been impounded into price" and that within 30 days the most heavily shorted stocks did indeed change in relative price by 1.43% (19.6% annualized). In addition, the findings showed that short sellers " ... are important contributors to more efficient stock prices."
I'll add links to the actual studies once they are posted (a quick search on the SSRN found nothing). But these new studies are likely to add to the growing body of literature finding substantial beneficial micro and macro market effects in the rise of hedge funds.
The New York Times Dealbook has made posts two days in a row about the perils of "covenant-lite" deals. First, yesterday Dealbook drew parallels between the current problems in the subprime housing mortgage market and "covenant-lite" loans which banks have been providing to private equity shops. "Covenant-lite" loans do not contain the usual heavy restrictive high yield covenants which require maintenance of debt ratios and limit operations and significant transactions. Then today, Dealbook asserted that the possible problems with these loans were leading banks to distance themselves by collateralizing them in the market. Dealbook went on to report that:
Covenant-lite loans have grown to about 15 percent of bank debt outstanding, from 1 percent at the beginning of 2006, Goldman Sachs estimates. But U.S. banks hold 7 percent of the leveraged loans underwritten, compared with 30 percent or more in the mid-1990s, the report noted. Instead, institutional investors, including collateralized loan obligations, hold 75 percent of the high-yield loans, compared with 16 percent in 1995.
Investors have replaced the banks. The amount of collateralized loan obligations rose to $47.3 billion this year, up from $32.8 billion in the same period of 2006, according to S&P’s Leveraged Commentary & Data unit. Collateralized loan obligations rose to a record $47.3 million last year.
Dealbook's posts seem a bit stretched. First, the leverage loan market is populated by very sophisticated parties involving the largest banks and investment banks lending to private equity advisers, analogizing it to the subprime market with its fly-by-night lenders and mortgage brokers and lower income, unsophisticated customers is a bit tenuous. Moreover, Dealbook misses the main point. The most important figures for private equity loans are the leverage ratios and cash generated. It is only when leverage is too high and cash is not generated sufficiently that the ratio covenants truly matter. And here, the reports are indeed a bit worrisome. According to one report, average debt levels are a record 5.9 times cash flow, and debt multiples of eight or nine times are common. And according to the Wall Street Journal:
Companies that have gone private in buyouts are generating cash that exceeds their debt interest payments by just 1.7 times, versus 2.4 times last year and 3.4 times in 2004, according to Standard & Poor's Leveraged Commentary & Data. The ratio is at a 10-year low and shows how the margin for error for companies is shrinking as their profit growth is slowing.
It is in these times that covenant-lite provisions can actually help. They provide flexibility for debtors to avoid default if they enter into a riskier cash-flow situation. True, the downside is that the banks cannot take early action in case of possible default -- but more often then not tripping your debt covenants means simply paying your banks a fee for a waiver, and the banks through inspection and financial statement convenants can still obtain early warning if not take early action. And covenant lite debt provides companies greater leeway to operate more effectively, generate more income, and thereby avoid these credit crunches. Ultimately, this may lead to lower levels of default than if banks exercised early control in these situations -- the companies, after all, likely know best how to operate themselves.
Finally, the second days' point about collaterilization is a non sequitor. Any sophisticated financial institution these days collateralizes its debt as part of prudent risk management and to maintain tier capital requirements for additional loans. The fact that the collateralization rates have gone up over the years speaks to nothing other than the increasing thickness of this market and greater ability for banks to collateralize this debt. Ultimately, the jury is still out on "covenant-lite" deals and likely only to be fully assessed once more information comes in about default rates. For this, we'll have to wait for the next downturn.
Pzena Investment Management, Inc. today filed an S-1 registration statement to go public. Founded in late 1995, Pzena is, according to its S-1, a value-oriented investment management firm with approximately $28.5 billion in assets under management. Pzena is selling Class A shares with one vote apiece; the current owners and employees of Pzena will convert their holdings in the initial public offering into Class B shares with five votes apiece. In addition and similar to Blackstone, the purchasers of Class A stock in the offering will buy shares in a holding company -- the holding company's sole interest will be shared economic ownership of the main operating company with the Class B shareholders.
The S-1 does not yet disclose the exact offering amount and percentage share of votes the Class A shareholders will acquire post-ipo. But even at this point the offering does not go as far as Blackstone's -- unlike Blackstone, the shareholders here will at least have voting rights and the 23 current Pzena owners/shareholders are not selling in the initial public offering -- the proceeds here are being used to buy-out three former employee shareholders. Since the Pzena offering is not as hot, or maybe public, as the Blackstone or Fortress ipos the Pzena owners maybe felt compelled to at least offer some enfranchisement to purchasing shareholders and maintain standard no-sale ipo practices. Still, the trend among investment management firms to offer dual class stock with low or no votes is troubling, and likely to have ramifications down the line. Given its increasing use, it may be time for the SEC to once again look at the appropriateness of this type of stock as they last did in the 1980s when they promulgated rule 19c-4 (for more on that attempt and its subsequent failure in the D.C. Court of Appeals see Bainbridge's article here). But until then, investors in these initial public offerings have been warned.
And for those who don't care Blackstone announced its ipo date today: June 25. The units will trade on the New York Stock Exchange under the symbol BX.
I'm spending the summer researching and writing on the sometimes irrational effects of SEC regulation of hedge funds and private equity. In this vein, I'd like to recommend a recent short essay on the SEC and hedge funds by Troy Paredes, a law professor at Washington University School of Law. The article is entitled Hedge Funds and the SEC: Observations on the How and Why of Securities Regulation. Here is the abstract:
This short Essay addresses three topics on one aspect of the hedge fund industry - the SEC's recent efforts to regulate hedge funds. First, this Essay summarizes the regulation of hedge funds under U.S. federal securities laws insofar as protecting hedge funds is concerned. The discussion highlights four basic choices facing the SEC: (1) do nothing; (2) substantively regulate hedge funds directly; (3) regulate hedge fund managers; and (4) regulate hedge fund investors. Second, this Essay addresses the boundary between market discipline and government intervention in hedge fund regulation. To what extent should hedge fund investors be left to fend for themselves? Third, this Essay highlights two factors impacting regulatory decision making that help explain why the SEC pivoted in 2004 to regulate hedge funds when it had abstained from doing so in the past. These two factors are politics and psychology.
The essay is a follow-up to his longer article: On the Decision to Regulate Hedge Funds: The SEC's Regulatory Philosophy, Style, and Mission. For anyone with an interest in the SEC's repeated seemingly inexplicable attempts in this new millennium to regulate hedge funds, they are both must reads.
Tuesday, June 12, 2007
It is being reported today that Ford Motor Co. is seeking buyers for its Premier Automotive Group (the potential deal is code-named Project Swift). The group includes the Volvo, Jaguar and Land Rover brands. Ford bought Jaguar in 1989 for $2.38 billion, Volvo in 1999 for $6.45 billion, and Land Rover in 2000 for $2.73 billion. Ford has previously agreed to sell Aston Martin to a U.K. investing consortium led by auto-racing champion David Richards for $848 million.
If it happens, the deal will be a historic one for many reasons, but for M&A history buffs it will mark closure on the first modern-day U.K./U.S. cross-border acquisition. Ford's acquisition of Jaguar plc in 1989 was made via a cash tender offer. However, unlike in other prior cross-border takeovers, Jaguar had a large shareholder presence: Jaguar’s American Depositary Securities were quoted on the Nasdaq and registered under the Exchange Act, at least 25% of Jaguar’s holders were located in the United States, and Ford itself held approximately 13.4% of Jaguar’s securities. The Ford offer was therefore required to comply with the governing takeover codes in two jurisdictions: the Williams Act in the United States and the City Code on Takeovers and Mergers and the Rules Governing Substantial Acquisition of Securities issued by the U.K. Panel on Takeovers and Mergers. According to M&A lore, the first time harmonization of the two systems was quite a nightmare and required extensive cooperation between the regulators of both nations and many a late night for lawyers attempting to coordinate the process across the Atlantic (all prior to the time of email and when phone calls were actually expensive).
But the lawyers and regulators succeeded. It was the first true cross-border acquisition and it stirred the SEC to begin a decade -long process to adopt specialized rules for cross-border takeovers culminating in the Cross-Border Release Exemptions adopted in 1999. Truly a land-mark transaction.