Saturday, April 28, 2007
Here are the top-ten most downloaded takeover-related papers on the SSRN for the period February 16-April 16, 2007. I am happy to say that #5 is mine!
The Dutch shareholders' association VEB filed suit earlier this week against ABN Amro to enjoin the $21 billion sale of LaSalle Bank to Bank of America unless a shareholder vote is held. Details of the sale and bidding war between Barclays and a Royal Bank of Scotland-led consortium for ABN Amro are here. The Enterprise Chamber of the Amsterdam Court of Appeal held a hearing today, and according to media reports will issue a decision this Thursday. Details of the hearing as reported by the Financial Times are here. Given ABN Amro's egregious attempts to sway the bidding for ABN Amro towards Barclays, my bet is on the Dutch form of an injunction.
I live and teach in Michigan, and the news here is not surprisingly obsessively focused on the auto industry. The Detroit press does an amazing job of in-depth coverage of the industry, although it tends towards cheerleading and even self-delusion in its coverage (The Detroit Free Press front page headline yesterday was: "'IT'S A NEW FORD'': Strong results take pressure off workers worried about jobs"). Today's Detroit Free Press headline was "Magna Leads Chrysler Bids"; the paper reports that Magna International, the Canadian auto parts maker is now perceived to be the favored buyer for Chrysler by the United Auto Workers who still publicly want to keep Chrysler with Daimler and its deep pockets.
The so-called "auction" for Chrysler is being held under a media glare. Besides Magna there are three other reported bidders for Chrysler: two private-equity firms, Blackstone Group and Cerberus Capital Management, and billionaire Kirk Kerkorian who has offered $4.5 billion for Chrysler. According to the Detroit Free Press article, second-round bids in the auction are due next week. Although Daimler is refusing to let Kerkorian participate in the auction.
The constant media leaks and public comments by Chrysler and Daimler are a really bad way to run an auction. It is setting up expectations for a sale that has a significant chance of not succeeding. This is due to a number of self-evident and reported road-blocks, including the unions, lack of interested bidders (four is a small number), and the simple fact that the fire-sale price Daimler is seemingly willing to accept for Chrysler may not be low enough.
There's another big problem with any Chrysler sale, though, that hasn't been highlighted in the media. Daimler as a whole has disclosed underfunded pension plan obligations of $21.6 billion; it doesn't break out the amount attributable to Chrysler but it has been reported that Chrysler's has pension and health care liabilities are approximately $16.5 billion. Chrysler is a troubled company and therefore any sale is likely to require approval by the the PBGC (the U.S. agency responsible for insuring underfunded pension plans) under its Early Warning Program. The PBGC has a functional veto over acquisitions of plan sponsors (i.e., Chrysler) stemming from the PBGC's ability to terminate an underfunded pension plan when it believes a takeover transaction may increase its insurance risk on the pension benefits. The PBGC has often used its functional veto power over acquisition of companies with underfunded plans or plans controlled by troubled companies as a lever to force certain concessions designed to further protect the benefits accrued under the plans. For example, in 2002 the PBGC forced PricewaterhouseCoopers to contribute $264 million to its underfunded plans as the price of approving the sale of its consulting business to IBM.
Depending upon its assessment of Chrysler's financial situation, the PBGC may demand significant concessions from Daimler (and any buyer) for its approval of any sale: a contribution by Daimler or the buyer to the Chrysler pension plan in the billions of dollars to and possibly even an on-going commitment from Daimler to guarantee the plan. This is a commitment Daimler, looking for a clean break from Chrysler and a positive announcement to its hopeful shareholders, would likely be unwilling to make. Daimler's wishful talk of a Chrysler sale still has a long way to fruition.
Friday, April 27, 2007
The Dutch shareholders' association VEB has filed suit against ABN Amro to enjoin the $21 billion sale of LaSalle Bank to Bank of America unless a shareholder vote is held. The FT has a color report on the case here. If the sale goes through it is likely to thwart Royal Bank of Scotland's consortium bid for ABN Amro and pave the way for Barclays to acquire ABN Amro. It is being reported that the Enterprise Chamber of the Amsterdam Court of Appeal has scheduled a hearing for tomorrow, Saturday. VEB is also publicly demanding an investigation into the policy making process at the bank. Dutch law on these issues is murky at best. The only hard and fast rule applicable here is that a shareholder vote is required if a Dutch company sells more than 30% of its total assets. This isn't the case with the LaSalle Bank sale. Still, given ABN Amro's blatant favoritism towards Barclays at the expense of its shareholders, it is quite possible for the Dutch court to find a way to step in. I'll post over the weekend if anything happens.
The Wall Street Journal today has an article about a recent study by Andrew Karolyi and René Stulz of Ohio State University and Craig Doidge of the University of Toronto. The authors conclude that there is no evidence the Sarbanes-Oxley Act disadvantaged the New York stock markets to the London Stock Exchange's benefit. More interestingly, the study found that investors are still willing to pay a substantially higher equity premium for U.S.-listed investments over and above London-listed ones. The new study also finds that the Sarbanes-Oxley Act did not effect this premium. From 1990 to 2001, non-U.S. companies listed on the main U.S. stock exchanges traded at 17.5% above their non cross-listed peers, or 15.4% when the high-tech bubble year of 1999 is excluded. From 2002 to 2005, it averaged 14.3%. This is strong evidence that the Sarbanes-Oxley Act has not had the corrosive effect on the U.S. competitive position in the global listings market that many have otherwise claimed. It also makes me happy as I made the same conclusions based on other data in my own recent article Regulating Listings in a Global Market.
The study is Craig Doidge, et al., Has New York Become Less Competitive in Global Markets? Evaluating Foreign Listing Choices Over Time(April 2007), Charles A. Dice Center Working Paper No. 2007-9; Fisher College of Business Working Paper No. 2007-03.
Some of you M&A-types may be looking for a good read this weekend. OK -- you'll likely be working, particularly if you are at Davis Polk with $105 billion in announced deals this week. But just in case, I recommend Mergers & Acquisitions by Dana Vachon, a Gawker favorite. It is not J.D. Salinger, but it has pathos and enough self-reference (including jokes about pitch-books) to keep you knowingly entertained. Reviews are here (N.Y. Times), and here (Marketwatch)
The N.Y. Times has a personality piece today on Joseph R. Perella, former Chairman of M&A at Morgan Stanley, and his new investment bank Perella Weinberg Partners. Perella is trying to repeat the success of Greenhill & Associates (Greenhill's market capitalization today is $1.85 billion) by starting his own independent investment bank. He has has raised $1.1 billion and hired more than 22 bankers as partners, but has only $34 billion in announced deals so far.
The piece quotes Warren Buffet to highlight a crying need for independent investment banking advice. I'm not so sure of this need; these are all sophisticated players and there is full disclosure so everyone knows the conflicts as they arise. Vice Chancellor Leo E. Strine, Jr. of Delaware’s Court of Chancery apparently agrees with me though on different grounds. He likes the big banks and believes that they know their client best and therefore can provide better quality advice than a smaller, freshly-hired independent bank. Elizabeth Nowicki has a really nice post at Truth on The Market about why Strine's reasoning is likely wrong.
However, there is no doubt that there are conflicts everywhere today in investment banking M&A. This is particularly true due to the rising prevalence of stapled-financing; banks represent the seller in a sale, then "switch sides" at a later stage to provide bidder-financing. To mitigate this conflict, these banks require the seller to obtain an independent fairness opinion from another bank. Boutique banks have profited immensely from this income stream. But, this is more optics than anything else, and although Greenhill and Lazard have succeeded on this model there does not appear to be a tremendous stampede towards these banks. This is mainly because these independent banks can't provide what transaction participants truly value these days -- yes, those inherently conflicted services, such as financing.
Citigroup, yesterday announced that they had completed the $13.4 billion takeover of Nikko Cordial, the Japanese brokerage group. Including the 4.9 per cent it already owned, Citigroup now owns in excess of 60 percent of the shares in Japan’s third biggest brokerage group.
Harman International, the audio company, announced yesterday an agreement to be acquired by Kohlberg, Kravis & Roberts and Goldman Sachs' private equity fund, GS Capital Partners, for approximately $7.8 billion. The agreement contains a "go-shop" and permits the current shareholders of Harman to elect to receive up to 27% of the equity in the newly private company. I blogged about these features yesterday.
Inter-Tel, a full-service provider of business communications solutions, announced an agreement to be acquired by Mitel Networks Corporation for US$25.60 per Inter-Tel share or approximately $723 million in total.
North American Oil Sands Corp., a Canadian, oil-sands developer, announced an agreement to be acquired by Statoil ASA, Norway's biggest oil company, for U.S.$2 billion.
The Royal Bank of Scotland consortium (RBS, Fortis NV & Santander Central Hispano SA) announced that they intend to proceed with an unsolicited public offer for ABN Amro despite ABN Amro's endorsement of a pending offer from Barclays.
Sobeys, Canada’s second-biggest grocery chain, announced an agreement for its founding family to take the company private by purchasing the 28 percent stake it doesn’t already own for U.S.$950 million.
Thursday, April 26, 2007
Lots of stuff today on the takeover battle for ABN Amro -- as I blogged earlier check out the dealbreaker website for the best summary. But I couldn't help posting about this one.
Reuters reports that ABN Amro sent over a confidentiality agreement today to the RBS consortium (RBS, Fortis, Santander) to permit due diligence by the group. NB. RBS has a due diligence-out in its current offer. The agreement, which ABN Amro claims is the same one executed by Barclays, included a standstill provision which would require ABN Amro's consent for any offer by the group to be made in the next 12 months. I'll refer you to the Financial Times website if you want to get indignant about it. But suffice it to say that while this provision may be standard in uncontested deals, it is simply not in a competitive bidding situation (and no doubt Davis Polk and Allen & Overy, ABN Amro's counsel, know this)
The RBS group bid is 13% higher than Barclays. And for those who are counting, the LaSalle Bank out (whereby ABN Amro can break its agreement with Bank of America to sell LaSalle Bank if a higher bid emerges) expires May 6 according to the agreement filed by ABN Amro. RBS is likely to drop out of its consortium if it cannot get LaSalle Bank in the deal. It is times like these, when ABN Amro is doing everything it can to throw this takeover contest to Barclays and with a $100 billion company at stake, that the mediating virtues of the Delaware courts come to mind.
Update: The Financial Times reports that last night ABN Amro and the RBS group agreed on a confidentiality agreement and ABN Amro opened its books to the RBS group for due diligence.
Harman International Industries, Inc., the audio equipment maker, this morning announced an agreement to be acquired for $7.8 billion by Kohlberg, Kravis Roberts & Co. and Goldman Sachs Group Inc.'s private equity arm, GS Capital Partners. The price offered, $120 a share, is a 17% premium to Wednesday's closing price on the New York Stock Exchange. Not surprisingly these days, management is participating in the buy-out and Dr. Harman, who owns approximately 5% of the outstanding common stock of Harman, will own at least 2.5% of the newly private company.
The transaction is interesting for two reasons:
First, Harman’s stockholders will be offered the opportunity to elect, on a purely voluntary basis, to exchange some or all of their shares of Harman stock for shares in the newly private corporation. The total amount of Harman shares that that they may elect to receive in the post-transaction corporation is approximately 27% of the post-transaction equity in Harman. The stock will not be publicly traded.
Second, the agreement contains an increasingly common provision known as a "go-shop". Under the provision, Harman may solicit proposals for alternative acquisitions for a 50-day period.
I've blogged before about the perils of management participation in private equity buy-outs. Their participation is likely to give an undue and trumping head start to their chosen private equity firm(s) due to management's head-start, superior information and ability to (unduly) influence the acquisition process even when a special committee is present. To ameliorate this problem, special committees have been negotiating "go-shops" like the one here. And two of the biggest private equity deals of last year Columbia HCA and Freescale included the provision (for the details see the announcement press releases here and here). But in neither case did competitors emerge, likely due to the involvement of management in the initial deal. Accordingly, investors have increasingly come to see "go-shop" provisions as cover for unduly large break-up fees and the significant advantage and head-start provided by management participation. We'll find out Harman's negotiated break-up fee in the next few days. But, the shareholder participation feature is encouraging. It gives shareholders a real option to participate in what may be seen as a management cash-out. It may be a good solution to some of the problems with management/private equity partnered buy-outs. It also fortuitously alleviates KKR & GS's financing burden for the purchase. Harman's stock price closed at $122.50 which is above the offering price, so it may be that Harman's stockholders are highly valuing this opportunity (that leads to a whole host of other concerns as to why it can't just do the same thing as a public company). Or, of course, they are expecting a higher bid to emerge as Harman goes shopping . . .
Also, for those who keep track of such things, Simpson Thacher & Bartlett was legal adviser to the private equity group, Wachtell, Lipton, Rosen & Katz was legal adviser to the special committee of the Harman board of directors, and Jones Day was legal adviser to Harman.
Alcoa, Inc. announced yesterday that it is exploring a disposition of its packaging and consumer businesses which include the iconic and useful product aluminum foil. The business currently constitutes 10% of Alcoa's revenue. Alcoa is also exploring strategic alternatives for their AFL wire harness and aluminum casting operations
Applebee's International Inc. announced that it had received several proposals to be acquired. They also announced a settlement of the proxy contest launched against it by investor Richard Breeden giving him and one of his nominees board seats.
Computer Sciences Corporation agreed to acquire competitor Covansys Corporation for $1.3 billion cash.
Harman International, the audio company, announced an agreement to be acquired by Kohlberg, Kravis & Roberts and Goldman Sachs' private equity fund for approximately $8 billion.
Hilton Hotels Corp. announced today that it had agreed to sell up to 10 European Hilton-brand hotels to a fund managed by Morgan Stanley Real Estate for $770 million. They also today closed the sale of the 132 hotel Scandic chain to EQT for approximately US$1.1 billion.
TheStreet.com, Inc. yesterday announced the acquisition of the remaining 50.1% stake in Stockpickr.com that it did not already own. According to the press release, "Stockpickr.com boasts a unique Web 2.0 offering in a forum where people who want to learn how the rich get richer meet to compare and exchange investment strategies and techniques." [Insert Cramer joke here]
Wendy's International Inc., announced yesterday that its board had formed a special committee of independent directors to investigate all strategic options for Wendy's (read, a sale/leveraged buy-out).
Do What Tastes Right . . .
The takeover story of the week is the $100 billion contest for ABN Amro being fought between Barclays and a Royal Bank of Scotland-led consortium comprising RBS, Fortis and Santander. There is also the related sale of LaSalle Bank by ABN Amro to Bank of America for $21 billion. Dealbreaker has a nice summary of today's action on the deal here
But, while the battle swirls, let's look at the real winners here: the attorneys representing the parties as reported in part by Legal Week:
Royal Bank of Scotland: Linklaters (Dutch, U.K. and U.S. law)
Fortis: De Brauw Blackstone Westbroek (Dutch law), Wilkie, Farr & Gallagher (U.S. law)
Santander: De Brauw Blackstone Westbroek (Dutch law), Slaughter & May (U.K. law)
ABN/Amro: NautaDutilh (Dutch law), Allen & Overy (U.K. law), Stibbe (advising the bank’s supervisory board), and Davis Polk & Wardwell (U.S. law). Davis Polk is also advising ABN Amro on the sale of LaSalle Bank to Bank of America.
Barclays: Clifford Chance (Dutch and U.K. law) and Sullivan & Cromwell (U.S. law).
Bank of America: Wachtell, Lipton, Rosen & Katz.
It was a good week for Davis Polk in particular. They, along with Freshfields, also advised AstraZeneca on its announced agreement to purchase MedImmune for $15.6 billion. MedImmune was represented by Dewey Ballantine.
The list emphasizes the continued dominance of U.K. and U.S. law firms in the cross-border takeover market. And, of course, the list is wishful thinking, as the WSJ blogs today the actual real winners are the 16 investment banks involved who stand to earn approximately $275 million in fees.
Wednesday, April 25, 2007
Bausch & Lomb finally filed its 2006 10-K today. It is still working on its 10-Qs for the first, second and third quarters of 2006 and the third quarter of 2005 and has made the usual boiler-plate disclosure about there being no assurances of timely completion and filing of these documents.
For M&A purposes, the timing is remarkably coincidental as rumors of a private equity buy-out of the company swirl. Its stock gained almost 13% on Monday on this speculation. On that day, Bausch & Lomb followed standard practice and declined to comment on any takeover speculation. Bausch & Lomb has been buffeted in recent years by the recall and subsequent discontinuation of its ReNu contact lens solution.
It is just beginning to make a come back though the number of ReNu-related lawsuits have been growing. And perhaps management is sensing an opportune time to cash-in/out. If it did so, this would be yet another example of management partnering with flush private equity firms to opportunistically time management buy-outs. The prevalence of this practice in the 1980s led to calls by some to completely ban MBOs. I don't think they should be banned, but more scrutiny by shareholders and independent directors could clearly help. Implementation of a corporate code of conduct for management which, among other things, requires them to inform the board when they do commence active planing for such a buy-out would be a good start. I previously blogged about this need here.
ABN Amro yesterday filed with the SEC the agreement with respect to Bank of America's $21 billion dollar purchase of ABN Amro's U.S. subsidiary, LaSalle Bank.
Per the terms of the agreement (and Bank of America counsel Wachtell's fine negotiating skills), the LaSalle Bank contract contains a "calendar" 14 day "go shop" clause which continues until 11:59 PM New York time on May 6th, 2007. Under that clause an alternative bidder has 14 days to execute a definitive sales agreement on superior terms for cash and not subject to a financing condition. This is followed by a 5 business day right for Bank of America to match the new bidder's superior proposal. There is a $200 million termination fee to be paid by ABN Amro if Bank of America does not match.
This short time fuse almost certainly forestalls other bids for LaSalle Bank. And, as I speculated it would do on Monday, through an almost certain sale of LaSalle Bank ABN Amro has implemented a big roadblock to the $103.75 billion cash and RBS shares bid for ABN Amro announced today by the RBS consortium (Fortis, RBS and Santander). This competing bid is conditioned on ABN Amro having taken such steps as may be required to ensure that LaSalle Bank remains within the ABN Amro group. This is all just wrong. Nonetheless, under Netherlands law no ABN Amro shareholder vote here is required for the LaSalle Bank sale because it consitutes less than 30% of ABN Amro's assets, and Netherlands law does not otherwise prohibit a "crown-jewel" lock-up of this nature. For those who are wondering, it is questionable whether Delaware in a similar situation would permit these machinations.
Tuesday, April 24, 2007
Alliance Boots Plc, a U.K.-based pharmacy chain and pharmaceutical wholesaler, yesterday endorsed an offer to be acquired by Kohlberg Kravis Roberts & Co. KKR's bid group included Italian billionaire Stefano Pessina, who owns 15 percent of Alliance Boots. The KKR-led bid beat out a rival consortium headed by Guy Hand's Terra Firma Investments which included Wellcome Trust and HBOS Plc. KKR's final offer is an aggregate amount of £11.02 billion in cash or $22.07 billion dollars at yesterday's lofty exchange rate of £1=$2.002.
The offer is yet another "mega" private equity buy-out. It is also yet another bid where private equity firms leaped into a competitive bidding situation. In this day and age, neither is terribly new or particularly interesting, at least in this instance.
But this is interesting. The KKR group won the bid because of Pessina's initial toehold in Alliance Boots. A toehold is a pre-offer stake in the target. Here, the toehold was Pessani's shareholding. And last Friday and Monday, the KKR consortium bought two large blocks of Alliance Boots shares giving them, together with Pessina's interest, total ownership or options to purchase 25.6% of the share capital of Alliance Boots. This won the day for the KKR group. The reason lies in the intricacies of the U.K. Companies Act which require that an acquirer who wants to use the target's assets as security for a leveraged purchase must own at least 75% of a target to squeeze-out the minority and initiate a "whitewash" procedure. KKR's sizable shareholding made it impossible for the Terra Firma group to achieve this 75% threshold and consequently use a leveraged takeover structure. This killed the Terra Firma group's bid.
A very nice strategy and kudos to Merrill Lynch and JP Morgan Casanove who advised KKR on the bid and, based on a report in the Financial Times, presumably came up with and executed it. Other bidders in the United Kingdom would do well to follow this strategy by pairing up with current shareholders or making significant open market purchases (though in the interests of full disclosure the strategy has yet to succeed for NASDAQ in its pursuit of the London Stock Exchange). I emphasize the U.K. aspect here. We don't often see toeholds through open market purchases in the United States because of SEC regulations which discourage them (not to mention the HSR antitrust waiting period).
The Deal's Private Capital Symposium is continuing through today. Their sibling blog site is real-time blogging the panels and speakers. These include Scott Sperling, co-president of Thomas H. Lee Partners, and Doug Lowenstein, President of the newly-formed Private Equity Council. For those who are not in attendance, I highly recommend the blog which is posting nugget upon nugget of information and opinion gleaned from the symposium.
There has been some blog traffic here and here on the new North Dakota Publicly Traded Corporations Act (see North Dakota's press release trumpeting the Act here). Professor Ribstein has the latest and most extensive post today. Professor Ribstein aptly notes that the Act "looks like a shareholder rights advocate’s wish list."
With respect to takeovers, the Act permits shareholders of North Dakota public companies to ban poison pills, prohibits poison pills from being in effect for longer than the shorter of one year or 90 days after a majority of the shareholders indicate they wish to accept an offer, bans the ignominious dead-hand poison pill, and sets a minimum threshold for a poison pill trigger at 20%. In addition, all anti-takeover provisions in the articles or by-laws of a North Dakota publicly traded company must be approved by a 2/3rd vote of shareholders.
However, North Dakota companies need to affirmatively opt-in to the Act's provisions. There are currently two, count them, two, publicly traded companies organized under the laws of North Dakota. We'll see whether they decide to take the plunge. Furthermore, despite the Act's proclaimed intent to attract incorporations away from Delaware, for a host of reasons no-one thinks that this going to happen anytime soon. So, the Act is noteworthy more for attempting to set out in the market a referential shareholders bill of rights than anything else. With respect to the takeover provisions at least, it is a worthy goal.
The FT has a very nice special section today on private equity accessible here. The special opens with the results of a poll carried out on the FT’s behalf, which found that the industry is poorly understood by the majority of people in Europe’s five biggest economies. For example, 62 per cent of people are “not at all familiar” with private equity. In another good, short article, Josh Lerner of the Harvard Business School reviews the results of recent studies which have found that when you adjust private equity returns for their high leverage, these investments actually underperform the market on average.
For those who are interested, the two main papers Lerner cites to are:
Steven N.Kaplan & Antoinette Schoar, Private Equity Performance: Returns, Persistence and Capital Flows, Journal of Finance (Aug. 2005) a draft of which is available here.
Phalippou, Ludovic & Gottschalg, Oliver, Performance of Private Equity Funds (March 2007).
The real question, of course, is why is there such a flight to private equity today in light of these sub-standard returns? My guess is a species of the winner-take-all effect. A few of the better organized and larger funds are significantly out-performing the market (witness Blackstone's now disclosed superior returns). These leaders incentivize investors chasing outsize returns in a global capital glut to stay with private equity. I hope they choose well.
Monday, April 23, 2007
The N.Y. Times today has an article on SPACs -- the acronym stands for special purpose acquisition companies. These are blank check companies making initial public offerings specifically for the purpose of a to-be-determined and unknown acquisition There are all sorts of special SEC regulations which apply to them, mainly because the SEC has never favored the vehicle.
With good reason. The rise of SPACs has been a discussion point and concern among M&A practitioners for almost three years now and many white shoe firms still refuse to be involved with them, so it is surprising that the N.Y. Times is only now picking up on it. SPACs were big in the 1970s but fell into disfavor due to a number of high-profile implosions and complaints over the quality of their acquisitions. But like Frankenstein arisen from the dead, the Times reports that SPACs represented 26 percent of the 73 initial public offerings this year, and 15 percent of the money raised.
The rise of SPACs is a derivative effect of the private equity bubble. The Investment Company Act of 1940 effectively makes impossible the public listing of a private equity fund. And Investors shut off from private equity are turning to SPACs as a substitute. Given the past troubles with SPACs this is a dubious effect at best. There is also no real reason to permit SPACs yet shut-off private equity funds from the public markets. It is yet another reason why the SEC should take steps to fully revise the Investment Company Act to bring it into the modern era.