Thursday, December 27, 2007
I think we now have a confident view of how the negotiation occurred. Throughout the contract negotiation process the Cerberus side made it clear at all times that its contracting policy did not permit it to allow the Seller a specific performance remedy and the URI side pushed at all times to get them on the hook if the financing was available. URI tried to do that that in many ways on all three agreements (merger agreement, limited guarantee, equity commitment letter) without making all the progress they wanted.
The Cerberus legal team was under strict orders to keep the out clear to their side; Simpson via Swedenburg ultimately was under pressure to get Cerberus signed up as best he could. I believe he was lucky that the other side allowed 9.10 to stay in subject to 8.2(e) even if 8.2(e)'s final sentence added by Ehrenberg reduced URI's optionality to force it to accept the payment of the reverse termination fee in a Cerberus breach. And, think about it, one can reasonably conclude from the evidence that URI and Simpson adopted this strategy deliberately -- if so, they did a fantastic job given their hand even if Swedenburg was found not to be a forthright negotiator (there are other explanations here but for now let's take this one). According to Chandler, he almost succeeded and no doubt Chandler realized the higher probabilities of being reversed on summary judgment versus a trial and that must have factored into his thinking to deny summary judgment to URI. Sloppy drafting helped URI much more than Cerberus. At the time the deal was executed, it may be that URI took a calculated risk that Cerberus wouldn't take the reputational hit of walking and (unfortunately) was wrong.
Auctions are funny. Throughout the process the seller is always pushing its bankers to make predictions about the intent of the bidding parties and the investment bankers are always worried about looking dumb or being wrong or misinformed about that. So they call the bidders or their agents (which is worse but necessary sometimes) to gauge their intent--they do that frequently, too frequently. However the communication is always a two way street and often the bidders can detect anxiety on the part of the seller or more likely the banker who has already put his credibility on the line about how the auction should go. There is evidence in the case that UBS did that in spades. Mayer told UBS he needed an option contract clear and simple. I believe Cerberus felt it had the strong hand in the negotiations: they lowered their price at least once in the end game; UBS made that an "issue of looking bad to the URI Board" not an issue that Cerberus was "out of the auction or on the back burner." Later on, when UBS told Cerberus, the URI board won't sign an option, all negotiations should have been on the back burner. Mayer giving his word that he would close (AND THAT IS EXACTLY WHAT HE DID --See pp. 28-29 of the opinion) should not have worked.
But the negotiations weren't ended, most likely because the lower bidder also was balking at specific performance and If I were Mayer I would note that. Neither the Street nor the general corporate client pool have very long memories and the win makes them look like smart money when they are troubled on other fronts, but the more I think about it the more I move Cerberus from a winner on this deal to a loser. I increasingly believe Cerberus' reputation, particularly Mayer's and Feinberg's, have been damaged by this event. And the reason isn't contractual--it's the "nice nice" words they used. (of course, UBS should have been very suspicious given that their point person at Cerberus was removed from the deal team for being "empathetic" with the Seller's advisors who had already been subject to Cerberus reneging behavior.) UBS and the URI board played the "mark" and the mark must always bear some blame for "wanting to believe". Again we can read the evidence in a favorable light towards URI and Simpson and conclude that Swedenburg ultimately contracted with this party on a non-forthright basis as their counter-move; it was certainly the best move they had at that point to the extent a deal was being pushed through. Short term, I doubt Cerberus can play effectively in non-distressed auctions. Longer term, when the Street and the corporate client pool forgets this incident, there will be one type of entity that won't forget. Other private equity sponsors. I doubt if Cerberus will be able to contract effectively using their forms of agreement with them for a very long time.
Ultimately, the moral of the story for transactional lawyers is that sloppy drafting is bad and not being forthright in your bargaining can be troublesome. But here I now add a caveat -- if you discuss this with your client and they are willing to take the informed risks, then so be it. But remember you might also be on the stand too and that has its own reputational effect.
Final Question: Under the above, one would have thought URI and its counsel realized the weak hand they had at trial after Chandler denied summary judgment. So why not settle? I would suspect Cerberus put a low number on the table -- say $25 a share. And URI made the decision that they would rather have the $100 million and build back up as a public company than that lower figure.
[Addendum: I have been rereading this and my other posts and I realize I may appear schizophrenic (and perhaps a bit too hard) on my thoughts on what exactly Swedenburg knew, thought and negotiated. We will likely never know, but at the end of the day I think we have to put a rational spin on things. So, I am going to leave it to the reader to decide and put forth above what is a highly plausible and positive, rational interpretation]