September 11, 2007
Genesco and the Fog of MACs
It has now been almost two weeks since Genesco reported its second quarter earnings and its agreed acquirer, Finish Line promptly issued a statement that it was "evaluating its options in accordance with the terms of the merger agreement." Finish Line's statement appeared to raise the issue that Genesco's second quarter earnings are a material adverse change under the merger agreement. As I posted at the time, the impetus for this statement may also be a case of buyer's remorse. According to one report, "the deal had come under heavy fire from analysts and investors, who said Finish Line had offered too high a price and was taking on too much debt." Someone probably needs to send their financial advisers a copy of Bernard Black's classic Bidder Overpayment in Takeovers.
Since that time Genesco has not made any public statement on Finish Line's press release. Nor has Finish Line made any subsequent statements. The special meeting of Genesco's shareholders to vote on the acquisition is to be held on September 17. In the meantime, there is a heavy discount on Genesco's shares which closed yesterday at $45.50 compared to the $54.50 Finish Line has agreed to pay. The market is predicting a lower price or a broken deal [NB. I'm a little surprised at the large discount given the apparently weak case of Finish Line based on publicly available information]. Meanwhile, the deal parties are on radio silence.
The silence here is typical of MAC negotiations in public deals which tend to go on behind closed doors without public signaling to shareholders. A recent example is the Radian/MGIC negotiations which led to an abrupt and unexpected termination of the deal. I can see the benefits of this approach -- it permits rational, closed door business negotiations without play-by-play announcements which could result in wild fluctuation of the target's price, not to mention potential liability exposure. Nonetheless, if you were a shareholder of Genesco right now you'd be more than a little uncomfortable. A brief statement by Genesco of the status of nay negotiations would likely go a long way to assuaging this concern and better price Genesco's stock in the market. There are benefits to a continuous disclosure regime.
Addendum: The Genesco merger agreement contains the following clause which contractually limits public communication:
Section 6.9 Public Disclosure. The initial press release concerning the Merger shall be a joint press release and, thereafter, so long as this Agreement is in effect, neither Parent, Merger Sub nor the Company will disseminate any press release or other public announcement concerning the Merger or this Agreement or the other transactions contemplated by this Agreement to any third party, except as may be required by Law or by any listing agreement with the Nasdaq National Market, NYSE or CHX, without the prior consent of each of the other parties hereto, which consent shall not be unreasonably withheld; provided, however, that Parent’s consent will not be required, and the Company need not consult with Parent, in connection with any press release or public statement to be issued or made with respect to any Acquisition Proposal or with respect to any Change in Recommendation. Notwithstanding the foregoing, without prior consent of the other parties, the Company and Parent (a) may communicate with customers, vendors, suppliers, financial analysts, investors and media representatives in the ordinary course of business in a manner consistent with its past practice and in compliance with applicable Law and (b) may disseminate the information included in a press release or other document previously approved for external distribution by the other parties hereto.
It is not as restrictive as you think because it exempts out statements required by law or by the party's exchange listing agreement or with the consent of the other party (not to be unreasonably withheld). To circumvent this provision lawyers typically advise their clients that, in their reasonable belief, federal securities disclosure rules require the statement. The party opposing the communication cannot really do anything -- no court is likely to penalize a party for complying with the federal securities laws based on the reasonable advice of their lawyers. Here, Genesco can take the position that it must make a statement to correct prior disclosure -- a position which has the virtue of likely being correct.
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