December 30, 2007
The Top Ten M&A Events of 2007
[Moving to the top for the new year]
My wholly subjective list of the top ten M&A events for 2007:
- The MAC Daddy. It began with Accredited Home Lenders/Lone Star. But the August turmoil subsequently brought material adverse change (MAC) claims in MGIC/Radian; Harman/KKR & GSCP; SLM/Flowers et al.; Genesco/Finish Line; Home Depot Supply/various; Fremont General Corporation/Gerald J. Ford; and H&R Block subsidiary Option One/Cerberus. You can speculate whether some of these MACs were asserted for bargaining leverage in a renegotiation or as reputational cover for exercise of a reverse termination fee. Nonetheless, it is clear that these MAC assertions and the subsequent deal terminations left their targets wounded and struggling to restore market credibility. We still have yet to see a court decision out of any these cases. However, the opinion in Genesco is due any day now and there is also pending Delaware litigation in the SLM deal, but given SLM's recent implosion I would suspect that dispute quietly settles before trial for a de minimis amount. So, we are likely to be left with one decision under Tenn. law -- a disappointment as an opinion providing further interpretation of a MAC clause under Delaware or New York law is sorely needed.
- The Great Private Equity and Bank Finance Blow-out. As the deal pipe-line sluggishly moved through Fall private equity firms increasingly became less worried about reputational issues and more willing to cut their losses by exercising reverse termination provisions -- this was ably illustrated in Acxiom/Silver Lake and ValueAct; URI/Cerberus and Myers Industries/GSCP. Banks got into the act too as, faced financing sure losers, they leveraged the terms of their own commitment letters to force renegotiations or deal terminations -- illustrated here by Genesco and Home Depot Supply. The tag-team worked on some deals such as Home Depot Supply but left everyone with a bad taste and distrustful of both private equity firms and financing banks. The Street generally has a short memory. But the private equity firms do not -- I doubt Cerberus will be able to contract with any of their brethren (from Drexel or otherwise) using their form of agreement for a very, very long time.
- The Return of the Cash Tender Offer. The '80s stalwart is back baby. Cash tender offers became increasingly frequent this year as SEC amendments to the best price rule made them more palatable, foreign investors provided cash to fund many deals and the market shifted from private equity deals (which need a longer lead time for finance marketing and therefore use a merger structure) to strategic transactions. But almost eight years after the SEC purportedly put stock-for-stock exchange offers and cash tender offers on parity the exchange offer remained notably absent as a utilized deal structure.
- CFIUS Reform & Sovereign Wealth Funds. On July 26, the President 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). The reforms were ultimately mild. But in the Fall sovereign wealth funds took minority positions in Citi, Merrill, Morgan Stanley, Bear Stearns, Carlyle, and Och-Ziff. The applicability of recently adopted CFIUS mandatory review in these circumstances was unclear and the effect of this investment uncertain. Foreign buyers are notorious for buying at the top of the market but here one was left to wonder who was taking advantage of the other and whether the current CFIUS review structure was adequate to review them. At the very least, the political element to some of these deals was a bit worrisome (e.g., a condition of Morgan Stanley's deal with CIC, the Chinese investment company was that Morgan operate in China).
- Cross-Border M&A. The largest completed deal of the year and announced deal, respectively were non-U.S. cross border deals (RBS et al./ABN Amro and BHP Billiton/Rio Tinto respectively). M&A activity outside the United States again exceeded domestic M&A. Expect these trends to continue -- U.S. M&A attorneys would accordingly do well to do a stint abroad preferably in a place with a good exchange rate if one still exists. Notably, the RBS/ABN Amro deal was U.S. registered under the Tier II exemption so U.S. lawyers got a cut however small (Shearman & Sterling ably represented RBS on the U.S. side here).
- The Rise and Fall of the Go-Shop. Go-shops were all the rage during the private equity boom and the subject of judicial scrutiny in In re Topps Shareholders Litigation, 2007 WL 1732586 (Del.Ch. June 14, 2007). However, in the Fall go-shops faded from the scene as private equity deals became few and go-shops themselves came under increasing scrutiny for being an ineffective cosmetic functioning to provide cover for management participation in deals.
- Mercier, et al. v. Inter-Tel. My pick as the most important M&A decision of 2007. In Inter-Tel, V.C. Strine held that a target's postponement of a shareholder meeting to permit the solicitation of more yes votes passed muster under the Blasius strict scrutiny test. This was despite the fact that the deal would have been voted down without the delay. Topps quickly adopted the tactic to gain approval of its own controversial private equity buy-out. In the future, expect more target companies in troubled deals to adopt this tactic providing them yet more leverage in the proxy process. The decision also has long term implications for the doctrinal integrity of Blasisus review generally.
- SPACs. According to the Wall Street Journal special purpose acquisition companies (SPACs) accounted for 23% of the total number of U.S. IPOs and 18% of the money raised. The $12 billion raised will sustain a significant amount of M&A activity in the coming years. But given the well-known problems with SPACs, I question whether their investors will similarly benefit. But for now it is boom times -- even former University of Notre Dame football coach Lou Holtz and Dan Quayle are directors on the SPAC Heckman Corp. Before it is too late, the SEC should consider updating Rule 419 which regulated blank check companies to apply to these companies (they currently escape application of the rule through an asset test loop-hole)
- Fairness Opinions. The SEC finally approved FINRA Rule 2290 regulating the procedures used by investment banks issuing fairness opinions. The Rule was a watered down version of the one originally proposed and imposed largely redundant procedural requirements on investment banks. Later in the year, Marc Wolinsky, a partner at Wachtell, Lipton, Rosen & Katz referred to fairness opinions as: “the Lucy sitting in the box: ‘Fairness Opinions, 5 cents.’”. He's right and Delaware, the SEC and FINRA should acknowledge it instead of promulgating rather useless fairness opinion requirements upon the deal process.
- Hedge Fund M&A. Hedge fund M&A made a fitful debut as hedge fund managers walked on deals (ValueAct in the Acxiom deal/Cerberus in the URI deal) and shareholder activism sometimes came up short (H&R Block and perhaps Applebee's). Ultimately, hedge fund growing assets under management and their unrelenting search for alpha will lead them to attempt more M&A deals, but clearly there is a learning process here.
- Contract Drafting (Tied for Tenth). Chandler's opinion in URI/Cerberus says it all.
THE M&A RAZZIE
Finally, its not in the top ten list but a big M&A razzie!? to all of those post-August companies and deal lawyers who agreed to reverse termination fees, particularly those with management involvement where such an option is unecessary and likely harmful (I'm talking about you Waste Industries -- see the merger agreement here -- a 29.9 million termination fee in a management involved leveraged buy-out is just an option that the special committee should not have agreed too -- Waste Industries lawyers' Robinson, Bradshaw & Hinson, P.A. and Wyrick Robbins Yates & Ponton LLP should have advised their client better).
Runner-up goes to the deal lawyers who let their clients put closing conditions in disclosure schedules which then go undisclosed (e.g., 3Com & Harrahs) so that we have no true idea what the conditions to closing the deal are. I wish the SEC would crack down on this.
THE M&A AWARDS:
- M&A deal of the year -- Tribune Co./Sam Zell -- Zell acquired the Tribune Co. with only $315-$500 million of his own money using an ESOP tax-efficient structure only an M&A lawyer could love. OK maybe also a tax lawyer. Credit to Zell for closing this highly-leveraged deal during a period of market turbulence and with only a $25 million reverse termination fee to hold him there. That is reputation for you.
- M&A deal team of the year -- I'm still thinking about this one -- comments or suggestions welcome.
- M&A litigation team of the year -- Willkie Farr & Gallagher for URI in the URI/Cerberus litigation-- dealt a bad hand they almost won it all on summary judgment.
- Hangover of the year -- The newly formed Arcelor Mittal was unable to break the the Netherlands Strategic Steel Stichting to which Arcelor gave ownership of Dofasco to try to thwart a takeover by Mittal Steel last year. Instead the trustees rejected a request to sell the Canadian steel unit in November of 2006. In January. Arcelor Mittal decided that it would not sue the trust as it would have no chance of winning -- an event which led to an unsuccessful lawsuit by ThyssenKrupp brought over Mittal's alleged promise to sell if Dofasco it bought Arcelor. Certainly a hangover for Arcelor Mittal, but a year late congratulations to Scott Simpson of Skadden, counsel for Arcelor, who devised this strategy bringing back to life a legal structure which initially came into widespread use to protect assets from the Nazis.
Have a good new year all. May your deals be plentiful and close with a success fee. And may you find the time to spend it with family and friends.
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Wonderful 2007 recap!
Regarding your "deal team of the year," are you taking into account account your December 10 posting "The Future of Private Equity M&A" where you recommended Shearman & Sterling or Wachtell?
Posted by: RStoy | Dec 28, 2007 9:35:42 AM