Tuesday, July 31, 2007
Midwest Air Group, Inc., parent of Midwest Airlines, announced today that it has formed a special committee to explore strategic and financial alternatives for the company. According to the announcement:
While the board of directors has not changed its recommendation regarding the unsolicited exchange offer by AirTran Holdings, Inc., the committee intends to commence discussions with AirTran regarding its proposal to acquire all outstanding shares of Midwest. Additionally, the committee intends to hold discussions with other strategic and financial parties that have recently expressed interest in pursuing a transaction with Midwest.
Airtran's battle for Midwest has been one of the most vigorously fought takeover battles of this decade. The formation of a special committee by Midwest is likely driven by increasing shareholder protest at their board's scorched earth resistance to Airtran's "hostile" bid. Last week, hedge fund Octavian Management LLC, Midwest's largest shareholder with a 7.5% stake, called the Airtran bid "extremely compelling" and stated that it was "irresponsible and wrong for the company not to abide by its fiduciary responsibility to engage with AirTran" in negotiation. The Midwest committee will therefore serve to cover the board's liability exposure, but it is also likely to lead to a serious exploration of the AirTrans offer. If Airtran succeeds in acquiring Midwest it will be a powerful statement about the ability of any public company to "just say no" and resist a transaction, but it will also serve as a reminder of the immense transaction costs our current takeover system imposes by permitting the use of anti-takeover devices.
Nelson Peltz, Chairman of the Triarc Companies, Inc. yesterday wrote a letter to the Chairman of the board of directors of Wendy's International concerning the inability of the two companies to reach agreement on several significant provisions of a confidentiality agreement governing Triarc's participation in the auction of Wendy's. In the letter, Peltz also stated that Triarc presently anticipates that it would be prepared to offer consideration in the range of $37 to $41 per share to Wendy's shareholders. Triarc currently owns the Arby's restaurant chain as well as 9.8% of Wendys itself.
Triarc filed the letter on a Schedule 13D amendment, showing that the letter is more for public negotiating position more than anything else. In the letter, Triarc alluded to concern over a provision requiring any bidder to use seller stapled financing. Wendy's here appears to be following the fairly common practice of requiring any bidder participating in its auction to use pre-packaged financing offered by Wendy's financial adviser, termed stapled financing. Since the financing is on the same terms for all of the bidders it permits the seller, in this case Wendy's, to better assess the competing bids. Triarc is objecting to this provision since, as an industry buyer, it thinks it can obtain better terms in the market.
Stapled-financing has always been a bit problematical. The reason is that it puts the seller's financial adviser on both sides of the transaction. The adviser wants to simultaneously obtain the highest price for the seller, but also wants a price that is not too high so as to cause trouble for the buyer in making its future debt payments. The banks have papered over this conflict by having third party investment banks retained to provide the seller an independent fairness opinion. But, as I have said before, fairness opinions, though they have been a great source of income for the independent investment banks such as Greenhill, are manipulable and in today's market rather unreliable. Consequently, there is still reason to be concerned with the issues raised by stapled financing even if a fairness opinion is obtained. But here, the issue is different. Triarc is objecting because it believes it can obtain better terms for its own financing. The appeal of this argument is convincing and likely why Triarc highlighted this dispute in its letter rather than covering any of the other disputed provisions. What these are, Triarc did not disclose.
The Board of Directors of Bausch & Lomb Inc. yesterday responded in a letter to Advanced Medical Optics' proposal to acquire B&L for $75 per share in cash and AMO stock. B&L currently has an agreement to be acquired by affiliates of Warburg Pincus for $65 per share in cash.
In their letter, the B&L board and special committee expressed uncertainty as to the ability of AMO to complete an acquisition of B&L. ValueAct Capital, the owner of 8.8 million shares of AMO common stock, representing 14.7% of the outstanding AMO shares, has publicly stated it will vote against the acquisition. AMO is required to have its own shareholder vote on the proposal in order to approve the share component of the offered consideration. Given this completion risk, the B&L board stated that the $50 million reverse termination fee proposed by AMO was too low.
AMO had previously been designated by B&L as a party who B&L could continue to negotiate with despite the end of the "go shop" period in the Warburg Pincus merger agreement. However, in yesterday's letter the B&L board threatened to withdraw this status if AMO was not more cooperative. The effect of such a redesignation would be to require B&L, if it ultimately accepts the AMO bid, to pay Warburg a $120 million termination fee rather than the lower $40 million required if a bid was received during the "go shop" period.
B&L's actions appear to be appropriate considering the uncertainty surrounding the AMO proposal. However, the threat of a redesignation of AMO seems a bit odd -- such a move would only hurt B&L shareholders and make it harder for AMO to pay the consideration offered. It therefore seems motivated to assuage likely complaints of Warburg more than anything else. B&L is currently in discussions with AMO's shareholders concerning their intentions with respect to any AMO vote, and apparently is in a dispute with AMO concerning the provision of information to these shareholders. the actions of AMO's large shareholder have clearly thrown a monkey-wrench into AMO's bid and put them in the role of "decider" for this acquisition contest. Another victory for institutional shareholder activists.
The University of Toledo College of Law has updated and redesigned its Financial Regulators Gateway website. According to Professor Howard M. Friedman the site "is the most complete online directory in existence of securities, banking and insurance regulators in every state and in every country throughout the world. Names, addresses, phone numbers, e-mail and website information [are] provided and links are furnished to each agency and in to the laws and regulations they administer."
Monday, July 30, 2007
The Managing and Supervisory Boards of ABN AMRO today announced that they would no longer recommend the Barclays offer to combine with ABN AMRO. Instead, the boards announced that they were not "currently in a position to recommend either" the Barclays offer or the Royal Bank of Scotland consortium "[o]ffers for acceptance to ABN AMRO shareholders". As at the market close on 27 July 2007, the Barclays offer was at a 1.0% discount to the ABN AMRO share price and the RBS consortium offer was at a premium of 8.5% to the ABN AMRO share price; 9.6% higher than the Barclays offer.
This essentially leaves the battle for ABN AMRO in the hands of its shareholders. Nonetheless, there are structural differences which may influence the contest. The RBS consortium is proceeding through an exchange offer structure (see the Form F-4 here, it is a nice precedent for a U.S./Dutch cross-border exchange offer). The Barclays offer is pursuant to a Dutch merger protocol. RBS has launched its offer and Barclays today stated that it intended to make its offer documentation available on August 6. Given the need for all of the parties to obtain regulatory and other approvals, it is likely that they will remain on the same timing track. Thus, ultimately, the contest now largely depends on the share price of Barclays increasing during this time period sufficiently to justify its acquisition proposal: an uncertain prospect in today's volatile markets.
Joseph S. Allerhand and Bradley R. Aronstam at Weil, Gotshal & Manges have recently published an article in the New York Law Journal, entitled New Wave of M&A Litigation Attacks Private Equity Deals. According to an author posting on the Harvard Corporate Governance Blog, the article "addresses several recent decisions from the Delaware Court of Chancery involving private equity firms and management buyouts. The article concludes that, while the players in the M&A market may have changed, the rules of the game remain the same where the board of directors decides that it’s time to sell the company."
Ingersoll-Rand Company Limited today announced that it has agreed to sell its Bobcat, Utility Equipment and Attachments business units to South Korean Doosan Infracore for approximately $4.9 billion. The Ingersoll-Rand press release was sparse on details, but more will come out once the sale agreement is filed with the SEC later this week. Of particular interest will be if there is an Exon-Florio condition in the agreement and its parameters in light of the new CFIUS review legislation which came into effect last week. I'll post more on this once the agreement is filed.
Also, for those who decry the sale of this American infrastructure to foreigners note that Ingersoll-Rand reincorporated from the United States to Bermuda on December 31, 2004 (for details see their 2006 Form 10-K here). This was before Stanley Works attempted the same tax dodge, and, in the wake of the controversy, the American Jobs Creation Act of 2004 made such reincorporation tax prohibitive.
Perhaps one of the more interesting papers presented at last week's Law and Society Annual Meeting in Berlin was Holger Spamann's, On the Insignificance and/or Endogeneity of La Porta et al.'s 'Anti-Director Rights Index' under Consistent Coding. Here is the abstract:
I re-code the "Antidirector Rights Index" (ADRI) of shareholder protection rules from La Porta et al. 1998 for 46 countries in 1997 and 2005 with the help of local lawyers. My emphasis is on consistent coding; I do not change the original variable definitions. Consistently coded ADRI values are neither distributed with significant differences between Common and Civil Law countries, nor predictive of stock market outcomes. The revision of the variable definitions in Djankov et al. 2005 salvages some of the original results, but reinforces severe endogeneity concerns regarding the index components that drive the remaining significant results. I review the other index components and conclude that the ADRI is unlikely to be a valid measure of shareholder protection. Results derived with the ADRI in the literature may have to be revisited. Along the way, I develop some general guidelines for consistent coding.
Translating, Spamann looks at the famous article Law and Finance by Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, & Robert W. Vishny (The Journal of Political Economy, Vol. 106, No. 6 (Dec., 1998), pp. 1113-1155). That paper examines the legal rules covering protection of corporate shareholders in 49 countries. It found that common law countries have the strongest protection for investors and civil law countries the weakest protections. And its findings set off a host of scholarship on inter alia the jurisdictional path dependency and origins of corporate and securities regulation, the role of law in economic growth and building share equity premiums, and the relative strengths of various legal systems for investors. By casting doubt on La Porta et al.'s findings, Spamann also throws into question all of this further scholarship. Nonetheless, there has been an observable difference in equity premiums among all of these systems with common law countries generally having higher ones and the U.S. the highest. The paper of La Porta et al. may have dubious groundings and others are bringing forward some good research to also dispute it and its progeny, but on some level all agree that the law and its protection of investors matters for finance, the question is really how and how much?
Friday, July 27, 2007
The President yesterday signed into law H.R. 556,The National Security Foreign Investment Reform and Strengthened Transparency Act, which enhanced the review authority of the Committee on Foreign Investment in the United States (CFIUS). For more information on this Bill, see my prior posts:
Tuesday, July 24, 2007
As the M&A boom simmers along, one of the most interesting developments has been the reemergence of state law. More specifically, with the rising number of takeovers we are once again witnessing the effect state takeover law other than Delaware can have in deciding takeovers. I say once again, because this was an issue last seen in the 1980s as the debate swirled over the constitutional validity of state anti-takeover laws. Well, the states are back. Here are three different ways state law other than Delaware's has recently acted to effect the course of a takeover battle:
1. Differing Merger Requirements. The course of the recently completed Biomet and Clear Channel takeovers were both heavily influenced by their place of incorporation: Biomet was incorporated in Indiana and Clear Channel in Texas. Indiana law requires a 75% approval vote on a merger while Texas requires a 66 2/3% approval vote. In both instances, acquiring private equity consortium were forced into raising the consideration offered to win over shareholders. Undoubtedly, this pressure was exacerbated by their need to obtain approval from more than the bare majority of holders otherwise required under Delaware law.
2. State Anti-takeover Laws. Acquirers are increasingly finding that fourth generation state anti-takeover laws enacted in the late 1980s in the wake of the Supreme Court's CTS decision and which have been seldom triggered since are now affecting their own takeovers. Perhaps the most prominent example of this is AirTrans's hostile bid for Midwest Air Group. Midwest is incorporated in Wisconsin which has a business combination statute, a control share statute, a fair price statute and a constituency statute. Midwest has recently invoked this constituency statute to justify its refusal to accept the AirTrans bid despite a Midway shareholder vote in which 57% of Midway shareholders elected a short slate of directors nominated by AirTrans (it was a short slate because of Midway's staggered board, showing once again the powerful anti-takeover effects of this device).
3. The Interstate Reach of State Anti-Takeover Laws. Perhaps one of the most interesting aspects of this state resurrection is the effects these state anti-takeover laws are now having on companies incorporated outside their jurisdiction. This is being illustrated aptly with Roche Holding AG's hostile bid for Ventana Medical Systems Inc. Venatana is incorporated in Delaware but headquartered in Arizona. Arizona's anti-takeover law, the Arizona Anti-Takeover Act which includes a business combination statute and a control share statute, purports to cover Ventana since it has a substantial presence in the state. Roche has sued in federal district court to have it declared unconstitutional (though it has a weak case under CTS).
And there are other ways state laws are affecting shareholder rights in takeovers in unexpected ways. For example, Biomet shareholders were denied dissenters' rights in their transaction under Indiana law. Had Biomet been incorporated in Delaware these would have been available.
Thus, state law increasingly matters again in takeovers. This is a development which would certainly warm the heart of Yale law professor Roberta Romano, author of The Genius of American Corporate Law and a leading scholar on the state competition for corporate charters.
Monday, July 23, 2007
I'll be attending the Law and Society Annual Meeting in Berlin for the remainder of the week. There I will be speaking on the panel: Securities Regulation, Corporate Governance, and Corporate Finance: Global Markets, Law, and Culture. I hope to see you there. In the meantime, I will continue to be blogging and will report any noteworthy events from the conference.
Transocean Inc. and GlobalSantaFe Corporation today announced a merger of equals with an enterprise value of approximately $53 billion. Under the terms of the agreement, Transocean shareholders will receive $33.03 in cash and 0.6996 shares of the combined company for each share of Transocean they own. GlobalSantaFe shareholders will receive $22.46 in cash and 0.4757 shares of the combined company for each share of GlobalSantaFe they own. The transaction will be subject to approval by shareholders of both companies.
Notably, financing for the cash consideration will come from a bridge loan by Goldman, Sachs & Co. and Lehman Brothers Inc. for $15 billion. The bridge loan will be for a term one year. The participants decision to obtain an extended bridge loan rather than going straight to the debt markets is likely due to the current choppy state of the debt market. As was reported ad infinitum last week, many leveraged deals are being post-poned and the market is on edge with the Chrysler financing in particular under pressure. Though Cerberus's $4 billion deal for United Rentals also announced today may shore up confidence in the leveraged loan market. There, Cerberus is putting up about $1.5 billion of equity, with the remainder financed through debt financed from the high-yield and asset-backed securities markets, according to the Wall Street Journal. For those interested in buying, the United Rentals deal also has a short 30-day go-shop.
For those who follow such things, Baker Botts L.L.P. is acting as legal counsel to Transocean, and Skadden, Arps, Slate, Meagher & Flom LLP is acting as legal counsel to GlobalSantaFe.
Barclays today announced that it had raised its offer for ABN AMRO. The increased offer is €13.15 in cash and 2.13 Barclays shares for each ABN AMRO share. The increased offer is worth €35.73 per ABN AMRO share based on the July 20 closing price of Barclays. On this basis, the total consideration offered by Barclays is €67.5 billion with approximately 37% in cash. This €2.9 billion increase in offer consideration is still lower than the bid by the Royal Bank of Scotland consortium. That mostly cash bid is offering €71 billion or approximately €38.40 per share. Apparently, Barclays is hoping its share price will increase on the new offer making its bid more attractive to ABN AMRO shareholders.
In connection with the increase, Barclays also announced that China Development Bank and Temasek Holdings will invest €3.6 billion in Barclays. China Development Bank will invest €2.2 billion by buying 201 million Barclays shares at 720 pence a share. Temasek will invest €1.4 billion by buying 135 million shares at 720 pence a share. Contingent upon completion of an acquisition of ABN AMRO, the two parties will invest an additional €7.6 billion in Barclays. Barclays plans to purchase up to €3.6 billion worth of its shares to address the dilution caused by this share issuance.
Needless to say, the twist here is the second large investment by the Chinese government in recent months in a western financial institution. The previous one was the $3 billion invested in Blackstone Group by a financial arm of the Chinese government. According to Barclays, Blackstone also had a role in this purchase, advising the China Development Bank. And, with over $1.2 trillion in foreign reserves, expect more of these investments by the Chinese government.
Sunday, July 22, 2007
The newly-public dispute between Sumner Redstone and his daugther Shari Redstone highlights the perils of minority shareholders in privately-held enterprises. The Redstones currently control their investments through the family holding company, National Amusements Inc., a Delaware corporation. It owns controlling interests in Viacom and CBS, Midway Games and the National Amusements theater chain. Sumner Redstone controls 80% of the company and Shari Redstone the remaining 20%.
According to the Wall Street Journal, Shari is asking to be bought out for $1.6 billion, valuing National Amusements at $8 billion. Sumner apparently responded to her request in a public letter to Forbes on Friday:
I am perfectly satisfied to leave the matter as it is. There is no practical difference between me controlling 80% of the stock of National and 100% of the stock of National . . . . If Shari wishes to be bought out I will consider this so long as the price is acceptable.
For Shari, the corporate situs of National Amusements in Delaware is unfortunate for her bargaining position. For partnerships, Delaware follows the strict majority rule and allows no remedy for oppression. National Amusements is a corporation, though, but Delaware also has a strict rule that in a close corporation context as here, there are no specialized fiduciary duties of majority shareholders to minority shareholders (Nixon v. Blackwell, 626 A.2d 1366 (Del. 1993)). Thus, Shari's rights vis-a-vis a buy-out and as a minority shareholder will be determined solely by any shareholder agreement among the parties. It has previously been reported that such an agreement exists and it restricts her from selling her stake except for back to National Amusements at book value, which would be a fraction of its market value. This puts Shari in a tenuous negotiating position; Sumner is absolutely correct that he can just leave her there and run National Amusement and its controlled subsidiaries at his discretion.
If Sumner indeed does follow this route, Shari will likely be left with the only remedy typically available of shareholders in this minority position: be a pest and hope that this will create an incentive for Sumner to buy her out. If she follows this route, expect her to be regularly trooping to Delaware Chancery to challenge the decisions made by National Amusements on any plausible fiduciary grounds available to her, with a focus on any arguably self-dealing transactions between these entities and Sumner as these are subject to heightened scrutiny.
Ultimately and in order to prevent these problems, minority shareholders in any private enterprise and their attorneys should before-the-fact bargain for exit and governance rights in the case of a dispute. Unfortunately for Shari, since these shares were reportedly a gift from her father she likely did not have this option.
The rift between Sumner Redstone and his daughter Shari very publicly broke on Friday. The Wall Street Journal started it with an article reporting that octogenarian Sumner no longer wished his 53-year-old to succeed him as controlling shareholder and chairman of CBS and Viacom when he dies, and was is in negotiations with her to end her involvement with the companies. Sumner responded by issuing his own letter to the editor of Forbes magazine chastising Sheri. In the letter Sumner stated that while his daughter "talks of good governance, she apparently ignores the cardinal rule that the board of the two public companies, Viacom and CBS, should elect my successor." Sumner had previously fallen out with his son Brent who had sued him -- the suit was settled less than six months ago for about $240 million. Hopefully, this makes us all feel better about the relativity of our own family disputes.
One could also question Sumner's bona-fides in invoking principles of good-governance with respect to Viacom and CBS. He controls each through a dual-class voting stock which over-represents his economic interest in the companies (which is about 12% in each). Moreover, he has not been afraid to exercise this control. According to the Wall Street Journal:
In 1996, he forced Frank Biondi out as CEO and took the reins himself. In 2004, Mel Karmazin quit as president after four years of friction with Mr. Redstone. Last September Mr. Redstone, by then executive chairman of Viacom, ousted CEO Tom Freston and appointed Philippe Dauman, who himself had been forced to leave as deputy chairman in 2000 when Viacom acquired CBS.
Sumner´s inability to cede control of these companies has led to jokes that for each their succession policy is for "Redstone to not die". Hardly the best governance policy. Moreover, according to the Viacom proxy statement and the CBS proxy statement in 2006 Sumner was paid over $16 million by Viacom and $12 million by CBS, respectively. Notably, CBS was up about 30% last year while Viacom's stock went down. Part of good corporate governance is pay for performance. And whether a controlling shareholder should compensate him or herself at all is even questionable -- their reward is embedded in their gain from an increased stock price. If Sumner is indeed adhering to principles of good governance he might want to consider this course.
P.S. M&A lawyers should know that this now puts former Shearman & Sterling M&A partner and current Viacom CEO Philippe Dauman in a more likely position to succeed Sumner. He met Sumner when he was assiged as an associate to prepare a Schedule 13D for one of Sumner's investments.
On Friday, Orbitz Worldwide Inc., the online travel company, had its first day of post-IPO trading opening at $14.90 but falling 50 cents to close at $14.50. This came a day after its IPO had priced at $15 a share below expectations of between $16 and $18. The Orbitz IPO also occurred in a bad week as four of the ten companies making initial offerings (including Orbitz) priced below their offering range and three fell below that range in their first day of trading.
The IPO of Orbitz was unique, though. It had been criticized for impenetrable financial statement disclosure in its prospectus and nominated by one blogger as "The Worst IPO of 2007". Not a great harbinger. Moreover, Orbitz was a "quick-flip". According to the final prospectus, Orbity is owned by Travelport which itself is wholly-owned by a Blackstone-controlled fund. Orbitz sold stock worth $510 million in the offering but remitted all of the proceeds to Travelport which retains a controlling interest in Orbitz. And the quick-flip here was due to the fact that its IPO occured less than a year after Blackstone acquired Orbitz. Blackstone, in particular, has made some spectacular sums with quick-flips. For example, Blackstone scored a tremendous return with Celanese, taking the company public only eleven months after acquiring it; Blackstone has made over 2 billion dollars thus far on its $650 million equity investment.
But quick-flip offerings are not as sweet for investors. In their article, The Performance of Reverse Leveraged Buy-Outs, professors Josh Lerner and Jerry Cao found that quick flips - defined for their purposes as when private equity firms sell off an investment within a year after acquisition - under perform. This compared with private equity-sponsored IPOs generally which the authors found consistently outperformed other IPOs and the stock market as a whole. Investors take note.
Friday, July 20, 2007
The U.K. Panel on Takeovers and Mergers, the U.K.'s takeover regulator, today announced the appointment of Robert Hingley as its new director general. He will replace Mark Warham of Morgan Stanley and serve a two-year appointment beginning as of December 1, 2007. According to the announcement, Robert Hingley is 47 and currently serves as Vice Chairman of Lexicon Partners, an independent corporate advisory firm based in London and Hong Kong. Previously Hingley was an attorney with with Clifford Chance and the investment bank Citigroup.
Hingley will actually serve on secondment from Lexicon partners for the two-year period. This is a common practice in the United Kingdom with respect to not only the Takeover Panel, but also the Financial Services Authority, the U.K. equivalent of the SEC, and the Office of Fair Trading, the U.K.'s antitrust regulator.
Jon Harmon over at the Force For Good blog has an interesting post on his email exchange with Sonja Tuitele, senior director - Corporate Communications & Investor Relations for Wild Oats. Apparently, Wild Oats' ethics policy "prohibit[s] unauthorized statements about the company to external audiences, including the Internet." John Mackey, the CEO of Whole Foods, and who was caught last week posting anonymously to the Wild Oats Yahoo! chat board, and is now under investigation by both the SEC and his own board should take note. Mackey has also suspended posting on his own public blog as of this week. Whole Foods is still continuing with its bid to acquire Wild Oats.
Today's Friday culture is Storming the Magic Kingdom by John Taylor. Taylor's book tells the saga of the 1980's battle for control of the Walt Disney Company. He ably details the family squabble which set off a chain of events that had such well-known corporate raiders as Saul Steinberg, the Bass Brothers, and even Ivan Boesky fighting to control Disney. The battle for Disney aptly illustrates the perils of a corporate control contest for a company reliant on creative human talent and an able use by a board of a "Just Say No" defense. Ultimately, Disney remained independent with Michael Eisner becoming CEO. The rest is history. Enjoy your weekend.