M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

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Friday, May 18, 2007

Microsoft Finally Buys

aQuantive, the owner of RazorFish, today announced it had agreed to be acquired by Microsoft Corp. for $66.50 a share in cash, in a deal valued at approximately $6 billion.  aQuantive has already filed the merger agreement for the transaction.  Notably, the merger agreement contains a break-up fee of $175 million in cash payable to Microsoft if a higher bid is agreed to by aQuantive.  However, if the transaction does not proceed because of a failure to obtain "any required antitrust or competition consent or clearance" Microsoft will be required to pay aQuantive a reverse break-up fee of $500 million in cash.  I have no knowledge of the antitrust issues in this purchase, but based solely on the presence of this reverse break-up fee, it appears that aQuantive might have thought there could be an antitrust problem with this transaction.  Microsoft is currently challenging Google's $3.1 billion agreement to purchase DoubleClick on antitrust grounds (see the related Dealbreaker post here).  If there are antitrust issues with the aQuantive transaction, expect Google to try and turn the tables.

May 18, 2007 in Regulation, Takeovers | Permalink | Comments (0) | TrackBack (0)

More on Alcan and the Problem of a Pacman Defense

The Wall Street Journal Breakingviews column has a piece today on the problems Alcan would face under Pennsylvania law if it initiated a Pacman defense against Alcoa.  For those who want more of a legal analysis, I refer you to my Wednesday blog post on this subject.

May 18, 2007 in Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Acxiom and the Coming Convergence of Private Equity and Hedge Funds

Acxiom Corp., the database company, yesterday announced an agreement to be acquired by Silver Lake Partners and ValueAct Capital Partners in a transaction valued at $3 billion.  Acxiom stockholders will receive $27.10 in cash for each outstanding share of stock.  Acxiom shares closed yesterday at $27.95 which means that the Street is predicting another higher bid to emerge.

The merger agreement hasn't been filed yet, but Acxiom disclosed in a conference call that it contains a 60-day "go-shop", 1% equity value break-up fee during the go-shop period which rises to 3% thereafter, and no financing condition.  Interestingly, the transaction will require a 2/3rd majority vote of Acxiom's shareholders to win approval.  ValueAct owns 13% of Acxiom according to Bloomberg calculations, and has agreed to vote its shares in favor of the transaction if the Acxiom special committee agrees to a superior proposal. 

I'll save the speech that I have given before (see here and here) about the illusory nature of "go-shops" and simply note that Acxiom disclosed on its conference call that it permitted only one other bidder to conduct due diligence prior to agreeing to this transaction, and only then because Acxiom was approached.   

Finally, ValueAct, a hedge fund, waged a proxy fight against Acxiom last summer, winning a board seat and illustrating the growing influence of hedge funds as activist investors.  Its partnership now with Silver Lake to initiate a buy-out is a marker of another growing trend.  It is yet one more hedge fund entering the private equity business in search of extraordinary returns.  Hedge funds have been criticized for lacking the expertise to play the private equity game, so the Silver Lake partnership is likely to offer ValueAct some assistance on that front.  And so it goes . . . .

May 18, 2007 in Private Equity, Takeovers | Permalink | Comments (0) | TrackBack (0)

Yet More Insider Trading

Another week of record M&A transactions, another week of suspected insider trading.  This time it involves the announced $3 billion acquisition of Acxiom Corp. by Silver Lake Partners and ValueAct Capital Partners L.P.  The experts over at White Collar Crime Prof Blog have the full story.

May 18, 2007 in Regulation | Permalink | Comments (0) | TrackBack (0)

Friday Culture: Stealing Time

This week's Friday culture is Stealing Time: Steve Case, Jerry Levin, and the Collapse of AOL Time Warner by Alec Klein.  It tells in fast prose how the largest merger in U.S. history also became the most unsuccessful one.  A fitting subject this week in the wake of the agreement to sell Chrysler to Cerberus, yet another Deal From Hell.  Enjoy your weekend.   

May 18, 2007 | Permalink | Comments (0) | TrackBack (0)

Thursday, May 17, 2007

More on the Performance of Private Equity IPOs

Dan Primack over at PEHub has a nice post on the performance of private equity (LBO) exit initial public offerings.  You can read the full post yourself along with the back-up data, but apparently, while "buyout-backed IPOs have outperformed the non-LBO-backed IPO market" since 1980, "if you only look at buyout-backed IPOs since the beginning of 2006, they’ve underperformed the non-LBO-backed IPO market by a margin of 23.2% to 27.4 percent (through market close Tuesday)."   

May 17, 2007 in Private Equity | Permalink | Comments (0) | TrackBack (0)

DaimlerChrysler's Information Gap

DaimlerChrysler AG, is a German company, and though it is listed on the New York Stock Exchange it is governed by more-relaxed SEC rules governing "foreign private issuers".  We are seeing the difference these rules make with respect to Daimler's disclosures concerning the Chrysler sale to Cerberus announced earlier this week.  Had Daimler been a domestic U.S. company, Daimler would have been required to file the Chrysler sale agreement, and any material related agreements, within two business days of its execution.  Instead, since Daimler is a foreign private issuer it only needs to disclose this agreement to the SEC if it is required to provide the agreement to its home country regulator.  This doesn't appear to be the case here, so we have been left in the dark as to the exact closing conditions and risk for the Chrysler sale.  This has been compounded by Daimler's refusal to fully disclose information concerning the sale and the drip-out approach to information it has produced.  Here are a few examples:

1. Union Condition.  It would not be until a conference call on Monday that Dieter Zetsche, CEO of DaimlerChrysler would state that “[t]his deal is not conditional on any aspects of collective bargaining.”

2. Financing.  It would not be until Tuesday that a few details of Cerberus's financing package would be leaked.  A group of five banks has committed more than $60 billion in financing; approximately $50 billion will be used for refinancing and $12 billion will be available as an undrawn credit line to operate Chrysler's business. 

3. Pension.  It would not be until Wednesday that the head of the United Auto Workers, Ron Gettelfinger, would disclose that "Cerberus has committed to contributing an additional $200 million to the pension fund and Daimler is providing a conditional guarantee of $1 billion for up to five years".  Daimler had previously refused to comment on this matter but reports have stated that the pension is overfunded.   

This information gap and the haphazard way information is coming out concerning the sale leaves open a number of important questions including:  What exactly are closing conditions to the deal?  Where is Cerberus getting the five billion in new Chrysler equity and how much of it is in committed financing?  What exactly are any other continuing obligations of Daimler with respect to the transaction?  Why are Daimler and Cerberus shoring up Chrysler's pension plan?  On what basis is Chrysler's pension over-funded (is it on a PBO or ABO accounting basis)?  And does Daimler expect the scrutiny of the Pension Benefits Guaranty Board of the transaction, and if so, is there a likelihood it could require additional contributions to Chrysler's pension fund (see my post on this here)?  Inquiring minds want to know.   

Update:  The PBGC issued a statement today on its talks with Chrysler and Cerberus.  The Interim PBGC director stated:

Daimler has agreed to provide a guarantee of $1 billion to be paid into the Chrysler plans if the plans terminate within five years. Under its new ownership capitalized by Cerberus, Chrysler will make $200 million in pension contributions over the next five years above and beyond the legally required minimum.

From the statement, it appears that on this basis the PBGC will not raise any further issues with the transaction. 

May 17, 2007 in Cross-Border, Europe, Private Equity, Takeovers | Permalink | Comments (0) | TrackBack (0)

More on the House Hearings on Private Equity's Effects on Workers and Firms

For those who want more on the House Committee on Financial Services Hearing on Private Equity's Effects on Workers and Firms, you can view round-ups at Marketwatch, the N.Y. Times Deal Book, and Wall Street Journal as well as watch the archived webcast through this link.  The hearings were pretty much a non-event, noteworthy mostly for its political posturing with the Democrats, led by Committee Chairman Rep. Barney Frank, D-Mass., taking the con side and the Republicans trumpeting private equity's virtues.  It doesn't appear that any action is imminent at this time, but at least there were some good quotes that came out of it.  My two favorite (the first as told by Deal Book):

1. Andy Stern, the president of the Service Employees International Union, testified that “the concentration of wealth in the hands of the top one percent of Americans” is a problem for which the private equity industry is partly responsible.  At one point, Texas Republican House member Jeb Hensarling asked Mr. Stern: “Does the janitor who cleans your office make the same income as you do?”  “No sir,” Mr. Stern responded, looking bemused by the question.

NB.  Stern has issued a press release extolling his testimony. 

2. Dunkin' Brands Inc. CEO Jon Luther used phraseology worthy of Ayn Rand to assert that the acquisition of the company by Bain Capital LLC, Carlyle Group L.P. and Thomas H. Lee Co. had "liberated" it to focus on long-term goals and gain access to low-cost financing.  Of course, he stated, this has now permitted them to expand and boost employment helping all workers.

May 17, 2007 in Private Equity | Permalink | Comments (0) | TrackBack (0)

Blackstone Agrees to Acquire Alliance Data

Alliance Data, the marketing services company, today announced an agreement to be acquired by Blackstone.  The transaction is valued at approximately $7.8 billion, and Blackstone will pay $81.75 per share in cash, an approximate 30 percent premium over Alliance Data's closing share price yesterday.  Blackstone's deal comes only one-day after the AFL-CIO sent a letter to the SEC attempting to halt Blackstone's initial public offering; looks like they are continuing on full speed ahead.   

Alliance Data also filed the merger agreement today, an admirable two business days ahead of schedule.  A quick scan finds it to be a pretty clean deal.  No financing provision, a relatively reasonable $170 million termination fee, and no apparent management involvement.  The only question appears to be why, given that this is a cash deal, the parties structured it as a merger rather than a tender offer.  A merger takes two-three months to complete whereas a tender offer takes 20 business days from commencement complete.  In cash deals parties typically prefer the quicker route of a tender offer when they do not have regulatory or other conditions which may require more time to fulfill.  This is particularly true since the deal does not include a "go-shop", a provision which permits the target to undertake market solicitations for a higher offer for a limited period of time after the deal.  I am not  sure of the answer, but I would speculate that the extended provisions in the agreement concerning the marketing of the deal financing likely required more time than the 20 business days a tender offer would take, and so they defaulted into a merger.  Alterntaively, the extended period allowed by a merger here is intended to function as a limited "go-shop" permitting offers to be made without the solicitation aspect.  Please let me know if you have another explanation.

   

May 17, 2007 in Private Equity, Takeovers, Tender Offer | Permalink | Comments (0) | TrackBack (0)

3i's New Private Equity Fund

3i, the private equity fund adviser listed on the London Stock Exchange, yesterday announced that it would publicly list a new £400 million private equity fund on the LSE (see The Deal report here).  The fund is to be called 3i Quoted Private Equity, or 3IQPE.  Its investment strategy will be to acquire substantial or controlling stakes in eight to 12 small or medium-sized companies in the United States and Europe.  The companies would still retain a public shareholder base.  In adopting this strategy, the fund will attempt to fill a gap between activist investors who take smaller stakes and private equity firms who acquire 100% of a company. 

3i's fund follows Carlyle's announcement last Friday of a mortgage-backed securities investing fund listed on Euronext Amsterdam. Private equity and hedge funds are currently prohibited from public offerings of this nature in the United States under Investment Company Act restrictions dating to 1940.  Due to this prohibition Europe has become a haven for these investments.  And the largest so far is the $5 billion KKR Private Equity Investors listed on Euronext Amsterdam.  Given the investor interest in these funds, the benefits they offer in terms of risk-adjusted extraordinary returns and diversification and the reality that they are likely to become increasingly prevalent and popular, it might be time to examine their propriety in the United States.  Otherwise, Europe may gain an insurmountable lead in this important capital market product.

May 17, 2007 in Private Equity | Permalink | Comments (0) | TrackBack (0)

M&A Boom Times

Bloomberg reports that on May 15 global announced M&A activity reached $2 trillion.  M&A activity this year is at a record pace, and 60% ahead of last year.  There are also some interesting statistics in the report.  European M&A activity is higher this year than U.S. activity:  $1.2 trillion versus $961 billion (both are announced transaction figures).  Moreover, there has been $366 billion of announced leveraged buy-out activity, a little less than one-third of which is attributable to Kohlberg, Kravis and Roberts.  The report also quotes a number of market participants who say that the pipeline is strong and that M&A activity is on track to surpass last year's all-time high of $3.49 trillion.  It looks like another good (and busy) year. 

May 17, 2007 in Current Events | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 16, 2007

Bausch & Lomb Blinks

Bausch & Lomb today announced that it had agreed to be acquired by Warburg Pincus, the private equity firm, in a transaction valued at approximately $4.5 billion, including approximately $830 million of debt. Warburg Pincus will pay $65.00 per share in cash in the transaction.  There is no financing condition on the deal. 

Bausch & Lomb has been a rumored takeover candidate for the past month, and as I blogged before, has been cleaning itself up for a sale as it recovers from the recall and subsequent discontinuation of its ReNu and MoistureLoc contact lens solution, after the product was connected with a rare fungal eye infection that can cause blindness.

Two notable aspects of the transaction.  First the transaction is yet another one where Wachtell negotiated a 50-day "go-shop".  Baush & lomb will have a fifty day period to solicit superior proposals.  Second, the deal has an abnormally low break-fee of $40 million or approximately 1% of the transaction value. 

I have previously blogged before here and here about the illusory nature of "go-shops"; they tend to cover for an undue head start for the initial acquirer and management involvement in the initial acquisition agreement.  According to one recent study, only one "go-shop" provision has solicited a higher bid since 2004.  The lower break-up fee here will help ameliorate these issues, but still, given the head start of Warburg and possible management involvement (the extent of their involvement here is still unclear), you have to wonder whether this yet another "go-shop" provision that will find no one willing to buy.    

May 16, 2007 in Private Equity, Takeovers, Transaction Defenses | Permalink | Comments (0) | TrackBack (0)

Fast is Relative for ABN AMRO

The Financial Times is reporting that the Dutch Supreme Court is expediting its consideration of ABN Amro's appeal of a lower court decision halting the $21 billion sale of its subsidiary LaSalle Bank to Bank of America until an ABN Amro shareholder vote is held on the matter.  According to the FT:

The court could complete its deliberations "by the end of June or early July", far quicker than expected, said a person familiar with the matter. The most optimistic estimates had suggested the process would take three or four months.

It is at these times that one must extol the virtues of the Delaware and other U.S. courts for their efficiency and responsiveness.  If the matter arose in this country, any appeal would likely have been heard in weeks and certainly not months.  In the interim, the competing bids for both ABN Amro and LaSalle are in limbo and the operations of ABN Amro, including LaSalle Bank will be run under the handicap of an uncertain future. 

May 16, 2007 in Hostiles | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 15, 2007

Alcan, Alcoa and the Pacman Defense

On Monday, an analyst at Prudential Equity Group, John Tumazos, sketched out the benefits of a reverse takeover by Alcan of Alcoa.  Alcoa has commenced an unsolicited offer to acquire Alcan in a transaction valued at $33 billion.  A reverse takeover, known as the pacman defense, whereby a target turns the tables on an acquirer and offers to acquire it instead, has not been used in the United States since the 1980s (most notably in the Bendix/Martin Marietta wars) [correction: a reader pointed out that in 2000 Chesapeake Corp. employed a successful pacman defense against Shorewood Corp.; details of that transaction are here).  As reported by DealBook, the analyst highlighted the political benefits of a reverse-takeover; it will increase business by relocating the combined company outside the United States thereby stemming anti-American sentiment against Alcoa in other countries and be more politically palatable to the Quebec authorities where Alcan is headquartered and based.  And so it goes . . . .

The analyst may have been a bit too hasty in his calculus as to the balance of local politics.  Aloca is organized under the laws of the state of Pennsylvania.  Pennsylvania has the strictest anti-takeover laws in the country, including a constituency statute, business combination statute, control share acquisition statute, fair price statute, and employee severance statute.  For a good description of the Pennsylvania law and each of these provisions, see the article by William G. Lawlor, Peter D. Cripps and Ian A. Hartmann of Dechert LLP, Doing Public Deals in Pennsylvania:  Minesweeper Required.  Alcoa had the option to opt-out of these anti-takeover provisions when they were first enacted in 1990, but chose not to.  The company also has in its Certificate of Incorporation an anti-greenmail provision.  Although Alcoa doesn't currently have a poison pill, it could adopt one if Alcan made an offer.  Pennsylvania courts, unlike courts in Delaware and New York, have allowed targets to utilize no-hand provision in these pills.  The Pennsylvania courts also haven't yet considered the validity of a dead hand provision.  Any pill adopted by Alcoa to fend off an Alcan bid would therefore also likely contain these powerful anti-takeover devices.  Moreover, the Pennsylvania state legislature has been more than willing to change its laws to help a Pennsylvania organized company fight off an unwanted suitor when its current laws appeared insufficiently protective (most recently it acted to protect Sovereign Bancorp). 

The effect of all of this would be to permit Alcoa to effectively undertake a "Just Say No" defense to any Alcan pacman bid.  And while shareholder pressure may, if Alcan's bid goes high enough, force the Alcoa board to accept an offer this will likely take time and more consideration than Alcan, which is slightly smaller than Alcoa, can offer.  And Alcoa, also has a staggered board making a proxy contest a multi-year affair (and still facing the problem of Pennsylvania's antitakeover laws making any proxy contest win moot).  Compare this with Quebec law which permits Alcan to keep its poison pill for only a short period of time and has similar time limitations on other explicit anti-takeover maneuvers (see my previous blog post on this here).  In light of the comparative advantage of Alcoa, a pacman would have a small chance of succeeding against any protracted resistance by Alcoa and before Alcoa could complete its offer for Alcan.

Addendum:  Shares of Pennsylvania companies which have not opted out of the Pennsylvania anti-takeover statutes have been found to trade at a discount to their market comparables.  For more on this point, see P.R. Chandy et al., The Shareholder Wealth Effects of the Pennsylvania Fourth Generation Anti-takeover Law, 32 Am. Bus. L. J. 399 (1995).

May 15, 2007 in Hostiles, Takeover Defenses, Tender Offer | Permalink | Comments (2) | TrackBack (0)

Lampert's Citi Investment

ESL Investments disclosed to the SEC yesterday that it had acquired 15.2 million shares, or approximately 0.3 per cent of Citi’s stock, at March 31, 2007 (Citi is the new name for Citigroup; it was changed a few weeks ago).  The value of ESL's stake is approximately $800 million.  Edward Lampert manages ESL Investments which also controls Sears Holdings.  According to Bloomberg, the "[the Citigroup investment follows an approach that has led ESL to take stakes in Kmart, AutoZone Inc. and AutoNation Inc.  Like Buffett, Lampert invests in 'stable businesses with predictable income streams that have very strong brands . . . .''"

For those interested in reading further about the nature of, and issues associated with, hedge fund investment in public companies, I recommend Marcel Kahan & Edward B. Rock, Hedge Funds in Corporate Governance and Corporate Control.  For an examination of the benefits of such investment see Alon Brav et al. Hedge Fund Activism, Corporate Governance, and Firm Performance.   The authors in the latter paper find that "activist hedge funds resemble value investors and that the announcement of hedge fund activism generates statistically significant abnormal returns, in the range of 5-7% for a 20-day window, with results that are robust for different buy-and-hold periods."  If they are correct, expect Citi's share price to head up today.   

May 15, 2007 | Permalink | Comments (0) | TrackBack (0)

Victoria's Sale

Limited Brands yesterday announced that it agreed to sell a 67% ownership interest in its Express brand to Golden Gate Capital for $548 million in cash.  The Company also announced that it is exploring strategic options for its Limited Stores business.  Limited Stores' 2006 net sales were $493 million and it currently has 253 store locations.  Limited, based in Columbus, Ohio, also owns and derives a majority of its revenue from its Victoria's Secret and Bath & Body Works.

The company chose to take a common tactic with this "good" news" M&A announcement -- disclose other bad news and hope no one notices.  So, with the sale announcement the company also yesterday substantially lowered its 2007 first quarter earnings guidance to $0.12 to $0.14, versus its initial guidance of $0.25 to $0.28, and $0.25 last year.  Despite Limited's efforts, the market chose to follow the bad news and Limited's shares closed at $26.18 down 4.5% on the day.

Blogging Buy-outs also writes that Limited's sale may have more nefarious motives.  They blog

Interestingly, although sales are lower in the Express and Limited brands, they units are on an upward trend, and operating profit is growing much faster at these stores than at the Victoria's Secret/Bath & Body Works segment -- both of which reported profit down from the year-earlier period for the quarter ending February 3, 2007. With Q1 2007 EPS outlook being revised downward today, it seems that the company is taking advantage of the enhanced value of its two recent success stories before they're tainted by the poor results in the rest of the company's stores. . . . You have to wonder: is this a case of management battening down the hatches to focus on the profitability of its flagship brands, or opportunism?

May 15, 2007 in Private Equity, Takeovers | Permalink | Comments (0) | TrackBack (0)

House Hearing on Private Equity’s Effects on Workers and Firms

The House Committee on Financial Services is holding a hearing today at 10 a.m. on Private Equity's Effects on Workers and Firms.  You can watch a live webcast of the broadcast here.  According to the House website: 

The hearing will focus on the impacts on workers and firms of the increased role played by private equity funds in American financial markets.  Specifically, the hearing will aim to address the following questions:

1.         Given the typically high degrees of leverage in many of these transactions are the restructured firms able to make the investments in technology, capital equipment, and research essential to long run productivity growth?

2.         Do workers – either through layoffs and/or pay and benefit cuts – find themselves disadvantaged through financial – or other – restructuring?

3.         What are the implications of the very high degrees of profitability in many of these transactions on the growth of income inequality?

Among the speakers will be: Andy Stern, President of the newly-formed and increasingly influential Service Employees International Union; Douglas Lowenstein, President of the newly-formed industry group Private Equity Council; and Jon L. Luther, Chairman and CEO, Dunkin’ Brands Inc.  Dunkin' Brands, owner of Dunkin' Donuts, was purchased last year for $2.4 billion by Bain Capital Partners, Thomas H. Lee Partners and The Carlyle Group.  Luther can therefore be placed on the pro-private equity side of the testimony along with Lowenstein.  Stern, not surprisingly, is in the anti-private equity column.   

May 15, 2007 in Current Events, Private Equity | Permalink | Comments (0) | TrackBack (0)

AFL-CIO Opposes Blackstone IPO

The FT is reporting that the AFL-CIO has written the SEC arguing that private equity group Blackstone's planned initial public offering should be halted.  According to the Financial Times, "the union says that the unique structure chosen by Blackstone’s senior executives to raise funds from stock markets while keeping a tight grip on the running of its business is an attempt to evade the coverage of the Investment Company Act of 1940."  (Update:  a copy of the letter can be downloaded here).  In brief, the AFL-CIO is arguing that a majority of Blackstone's assets are in the form of carried interest that has been “marked to market” . Carried interest is the term for the 20% Blackstone takes on deal profits over and above its 2% administration fee.  The AFL-CIO is arguing that because the carry is only paid when a deal reaches certain profit milestones, it is a form of call option.  Call options are securities, and given that more than 40% of Blackstone's assets are in carry, if the union is right Blackstone would fall under the regulatory schematic of the Investment Company Act of 1940 as an investment company unless another exemption applied.

The argument is a clever and convoluted one, but is almost certainly an incorrect interpretation of the definition of a call option under the Act.  The alternative view would arguably pick up a number of regular operating companies and investment banks who have profit participation contracts and mark those profits to market.  Not to mention the argument would cause serious doctrinal problems for the SEC which recently let the similarly-structured Fortress ipo go forward without claiming the Investment Company Act applied (the AFL-CIO attempts to get around this problem by claiming that Blackstone's practice of marking-to-market makes it distinct from Fortress and is the key to qualifying the carry as a security). 

But the  AFL-CIO is absolutely correct that the Blackstone offering is an attempt to evade application of the Investment Company Act.  Under the Act, it is very clear that the Blackstone funds themselves as currently structured cannot currently be offered to the public.  But, Blackstone is getting around this prohibition by selling shares in itself, the fund advisor.  Blackstone's evasion is permissible under the current structure of the U.S. securities laws.  Despite almost certainly being wrong, the AFL-CIO argument does highlight the out datedness of the Investment Company Act and the increasingly bizarre results it engenders.  Investing in a private equity fund adviser is essentially equivalent to investing in the funds themselves.  There should be no regulatory difference in their regulation by the SEC, and no ability for private equity funds to game this regulation as Blackstone is doing here.  In fact, if anything investing in the adviser is more risky.  The subject is for a more extended post, but it is far past the time that the SEC updated the Investment Company Act, which was passed in 1940, to regulate mutual funds for the modern age of hedge funds and private equity. 

May 15, 2007 in Hedge Funds, Private Equity, Regulation | Permalink | Comments (0) | TrackBack (0)

Thomson/Reuters Combine Using Novel Structure

Thomson Corporation and Reuters Group plc today announced an agreement to combine the two groups in a transaction that will create a new company, Thomson-Reuters Corporation, with a market capitalization in excess of $35 billion.  The transaction will be effected using a dual-listed company structure. 

I've blogged on this structure before:

[a] dual listed company structure is a virtual merger structure utilized in cross-border transactions.  The companies do not actually effect an acquisition of one another, but instead enter into an unbelievably complex set of agreements in which they agree to equalize their shares, run their operations collectively and share equally in profits, losses, dividends and any liquidation.  Examples of these arrangements are BHP/Billiton (BHP an Australian company and Billiton an English Company), Carnival (an English and Panamanian company), and Rio Tinto Group (an Australian and English company).

It is a way for companies in different jurisdictions to preserve beneficial dividend treatment (e.g., the franking credit in Australia) and inclusion in their home country indexes.  It is also a mechanism to stem flow-back into one country or another as the shares in one company are not exchangeable for the other.  Finally, because no company actually takes over the other and each remains domiciled in their home country, it is one way to salve issues of nationality or national security.  Often, the arrangements are viewed a stepping stone to a full merger (as was the case of Brambles which unwound in 2005).  But these arrangements are unwieldy and governance of multiple boards and nationalities sometimes a problem.  This was why Unilever (the Anglo-Dutch DLC) unwound its structure in 2005.  After Unilever, these structures fell out of favor -- viewed by practitioners as too unwieldy.  And finally, there can be some bizarre results -- it is rumored that BHP/Billiton will make a bid for Rio Tinto Group; if it does so, the BHP English company would likely make a bid for RT's English pair; the BHP Australian company for RT's Australian pair.  How the mechanics of each jurisdiction would work to accommodate this bid is uncertain."   

The Reuters/Thomson transaction marks a resurrection for the DLC structure; it is likely being used in order to stop flow-back of shares to Canada and preserve the inclusion of the combined company in the FTSE 100 and other FTSE indexes.  This will provide Thomson, a Canadian company ineligible for the S&P 500, with a much-needed index listing.

Thomson and Reuters have substantial overlap in publishing and there is significant antitrust risk on the deal (see the Seeking Alpha blog post here).  The deal is preconditioned on obtaining all antitrust clearances, and Thomson in its press release stated it has agreed to take whatever steps are required to procure such clearances.  Bloomberg reports that ABN Amro and Societe Generale lowered their recommendations on Reuters shares to ``hold'' , citing the potential for the deal to fall through due to antitrust risk.

One other point of note.  The Reuters Family Share will be retained in Reuters and implemented in Thomson.  The share will provide that no shareholder may hold more than 15% of the combined company and that if any person acquires, or seeks to acquire, more than 30% of the combined company, the share may exercise whatever votes are necessary to defeat a shareholder resolution.  The Thomson family will be exempted from this provision so long as they uphold the Reuter Trust Principles.  Separately, the combined board will be given the power to force a divestiture by any shareholder to an ownership below 15% of the combined company.  The legality of all of these shareholder capping provisions under English and Canadian law and their takeover codes is uncertain, though yet to be tested.    

For those interested, The Lawyer has a list of the law firms on the transaction.  It is a good week for Shearman & Sterling who is advising on the U.S. antitrust aspects of the deal for Thomson and is also advising DaimlerChrysler on the sale of Chrysler. 

May 15, 2007 | Permalink | Comments (0) | TrackBack (0)

Monday, May 14, 2007

ABN AMRO and the Sausage Factory

ABN Amro yesterday released a copy of the RBS consortium's inter-conditional offer to acquire ABN Amro for approximately $98 billion and ABN Amro's subsidiary, LaSalle Bank, for $24.5 billion.   The disclosure was made at the prompting of the Autoriteit Financiële Markten, the Dutch regulator, and its inquiries into the propriety of ABN Amro's rejection of the RBS consortium's offer. 

I link to a copy of the full RBS consortium offer as disclosed by ABN Amro here (RBS also released similar documents in response to a virtually identical request by the AMF).  The first link also includes the subsequent correspondence between ABN Amro and the consortium, as well as the correspondence between their lawyers and bankers.  It is fascinating reading.  Notably, it includes ABN Amro's response to the RBS offer:  a memo of 31 issues, questions and requests for additional information by ABN Amro which it requested be answered satisfactorily before it would even consider the bid.  Reading the ABN Amro response, it is hard to make any other conclusion than that ABN Amro was framing the correspondence to justify rejection of the RBS offer.  Although to be fair, RBS wasn't terribly cooperative in its subsequent response either stating that it had already supplied all needed information.  Also notable is the clear lack of a financing condition in the RBS-group offers, a blow to ABN Amro's repeated attempts to justify its rejection on the lack of a clear financing commitment by the consortium.  In other related news, the CEO of ABN Amro, Rijkman Groenink also yesterday withdrew his nomination for a board seat at Royal Dutch Shell in order to devote his full attentions to ABN Amro.  Given what has occurred thus far, this may not be best news for ABN Amro shareholders. 

May 14, 2007 in Hostiles | Permalink | Comments (0) | TrackBack (0)