May 25, 2007
Nasdaq/OMX and the Global Listings Market
The NASDAQ Stock Market, Inc. and OMX AB, the Nordic stock exchange, today announced that they have agreed to combine. The new company will be called The NASDAQ OMX Group. The combination will be effected through a cash and stock tender offer by NASDAQ for all outstanding shares in OMX. The consideration offered will be equivalent to 0.502 new NASDAQ shares plus SEK94.3 in cash for each OMX share. The offer values OMX at $3.7 billion.
The combination comes on the heels of the New York Stock Exchange's combination with Euronext and alliance with the Tokyo Stock Exchange and Nasdaq's owned failed bid to acquire the London Stock Exchange. Nasdaq still holds a 29 percent stake in the LSE, and, according to this report, Nasdaq's CEO today refused to comment on Nasdaq's plans with respect to this holding.
For those who are interested in the economic and regulatory forces which are driving this global stock market consolidation, I refer you to my forthcoming article, Regulating Listings in a Global Market, 85 N.C. Law Rev. __ (Dec. 2007). In this Article, I discuss SEC regulation and how it has inhibited and limited the ability of non-U.S. issuers to cross-list in the United States thereby fueling a world-wide stock market consolidation:
The worlds’ major stock markets are now largely for-profit enterprises. The primary sources of their revenue are from listing and trading fees. Stock markets therefore have a strong interest in obtaining the highest number of listings and concomitant trading volume, and to advocate for a level of regulation which produces these. This goal will sometimes be hampered by regulators who set sub-optimal regulation (from a stock market perspective) in order to satisfy their own interests and the interests of other constituents. But, unlike issuers, stock markets can more easily migrate the globe, establishing or buying stock markets in other jurisdictions. Theoretically, stock markets should therefore respond to regulatory inefficiency by erecting multiple markets in separate jurisdictions in order to provide global issuers a menu of regulatory choice for their listing. This is simple consumer economics: the stock markets are only providing a product, a listing, and therefore, in order to maximize profit, will take the necessary steps to ensure that that product is optimal for their consumers, issuers.
The recent wave of consolidation engulfing the exchanges reflects these forces and interests. Stock markets are combining within regions (e.g., Euronext and OMX). They are also consolidating globally: the NYSE is on the verge of acquiring Euronext, and Nasdaq, as of February 10, 2007 had purchased 29.16% of the LSE and failed in a bid to purchase the remaining outstanding shares. Meanwhile, the Deutsche Börse, TSE and Milan Stock Exchange have all been rumored to be further participants in this global consolidation with either each other or other exchanges. This trend is likely to produce a smaller number of global stock markets and more regionally-based, rather than local, trading markets. Importantly, the global and regional reach of these markets should make them less sensitive to the vagaries of regulation in a particular jurisdiction. If a market is over-regulated, global and regional stock markets will maintain an equal regulatory footing among domestic competition while at the same time having the ability to direct global listings to their affiliated, less regulated exchanges. For example, the NYSE can now direct issuers who are dissatisfied with the level of regulation in the United States to the Euronext which may have a more attractive regulatory regime. These issuers would then gain many of the benefits of a NYSE listing without having to subject themselves to U.S. regulation. The market for global listings is thus likely to become even more fluid in the future providing greater flexibility for issuers to cross-list in different markets and engage in regulatory arbitrage, but still advantage themselves of the technology and expertise of a preferred exchange.
The OMX/Nasdaq combination is further evidence of this trend and should be added to the laundry-list in the last paragraph.
Trading Baseball Card Companies
The Topps Company, Inc. yesterday announced that it had received a $416 million offer from The Upper Deck Company, to acquire Topps for a price of $10.75 per share. Both Topps and Upper Deck are in the trading card business; Topps also makes Bazooka bubble gum. Topps currently has an agreement to be acquired by a group consisting of The Tornante Company LLC and Madison Dearborn Partners, LLC for $9.75 per share in cash. The Tornante Company is headed by former Disney CEO Michael Eisner.
The Tornante led bid was opposed by three of the 10 members of Topps's board and hedge fund Crescendo Partners II, which says the offer undervalues the company. Topps initial agreement had a 40-day go-shop provision, and Topps disclosed in its press release that it had rejected an indication of interest previously made by Upper Deck during that time period. Topps had previously identified Upper Deck in its proxy statement for the transaction only as a competitor. The disclosure of Topps on this point is actually a bit funny:
On April 12, 2007, prior to the expiration of the go-shop period, one of the potential go-shop bidders, who is the principal competitor of our entertainment business, submitted a non-binding indication of interest to acquire Topps for $10.75 per share, in cash. Lehman Brothers called this interested party on the first day of the go-shop period, and numerous times during this period, for the purpose of soliciting and/or assisting them with the development of their bid for Topps. Lehman Brothers’ calls were infrequently returned . . . . .
One hopes it wasn't because of this that a deal was not reached. Topps response to yesterday's offer was similarly tepid:
[Topps's] Board of Directors noted that there are material outstanding issues associated with Upper Deck's latest indication of interest, including, but not limited to, the availability of committed financing for the transaction, the completion of a due diligence review of the Company by Upper Deck, Upper Deck's continued unwillingness to sufficiently assume the risk associated with a failure to obtain the requisite antitrust approval and Upper Deck's continued insistence on limiting its liability under any definitive agreement. Upper Deck's present indication of interest was accompanied by a highly conditional "highly confident" letter from a commercial bank.
I'm usually skeptical of private equity buy-outs and target attempts to put the fix in on a chosen acquirer. This is particularly true here where both board members and shareholders have complained of the offer price. Still, Topps may be justified in its own skepticism. A deal between Topps and Upper Deck apparently has substantial antitrust risk. Upper Deck's bid may therefore not be a "true" bid but rather an attempt for Upper Deck to gain access to its main rival's confidential information. In addition, a deal for Topps by Upper Deck would apparently require approval by Major League Baseball. Moreover, the financing for this deal does appear to be uncertain. In this day of cheap and easy credit the best Upper Deck could obtain from its lenders was a "highly" confident letter. This is a 1980's invention of Michael Milken; bankers issue these letters for deals that are riskier and financing uncertain. Instead of a firm commitment letter, they therefore state they are "highly" confident that financing can be arranged. So, if Topps has a firm deal on the table the extra money being offered here by Upper Deck might not be worth it given the deal completion risks and possible harm to Topps if it permits a competitor to review its confidential information. Still, Upper Deck's offer is a nice negotiating tool with the current buy-out group even if a deal is not possible. Topps shares rose 48 cents, and closed at $10.26 yesterday, so the market presumably agrees.
Coca Cola to Acquire Energy Brands for $4.1 billion
The deal is not a surprise: it had been reported earlier in the week that Coca Cola had previously filed a Hart-Scott-Rodino Act notification, a required antitrust filing for the transaction. It also appears that Coca-Cola, which makes the Dasani water brand and has rights to license and distribute Dannon and Evian water in the United States, does not expect a full antitrust review. Such a review would postpone completion of the transaction until the Fall or later, but Coca Cola announced in its press release that it expects the transaction to close this summer.
SEC Proxy Roundtable Series Continues (Rule 452 Highlighted Yesterday)
At yesterday's SEC roundtable on proxy voting mechanics, Catherine R. Kinney, president and chief executive officer of Euronext NYSE, announced that the New York Stock Exchange filed a proposal with the SEC the previous day to amend Rule 452 to eliminate broker discretionary voting for the election of directors. Kinney stated "the election of directors is not routine" and therefore should be left to individual shareholders. More controversialy, though, Kinney also announced that the rule would not apply to the election of mutual fund directors but would apply to the election of small company directors. The NYSE said that its decision was made even though its advisory group had "considerable concern and discussion about the potential problems facing smaller issuers as a result of the potential rule change, as well as discussion about the similarities and differences between smaller operating companies and investment companies." The newly proposed rule will now be reviewed by the SEC for publication.
The SEC's roundtable discussions regarding the proxy process concludes today with a panel on proposals of shareholders starting at 9:00 a.m. and ending at noon. I'll update this post with a link to the webcasts for this and yesterday's events once it is posted.
Free Food! OSI Restaurant Partners Shareholder Meeting Today.
OSI Restaurant Partners is holding its three times postponed shareholder meeting today. According to OSI's press release, the purpose of the meeting is only to adjourn it to June 5, 2007 in order to provide OSI shareholders more time to consider an increased offer from a consortium led by Bain Capital Partners, LLC and Catterton Management Company, LLC. The buy-out group on Tuesday announced that it will now pay $41.15 per share in cash up from $40.00 per share.
I've blogged before about this deal and management's inordinate and inappropriate involvement in the process. OSI's founders, CEO, CFO, COO and Chief Legal Officer are all participating in the deal. I believe that their undue influence on the process and participation has given shareholders a Hobson's choice: no deal at all or a less than full premium in the private equity/management buy-out being offered. Nonetheless, analysts believe that the latest increase offered by the buy-out group should be enough to gain shareholder approval. A substantial number of OSI's shares are now held by arbitrageurs, and Tuesday's 3% raise is a nice return on an annualized basis for them.
For aggrieved OSI shareholders, I note that dissenters' rights are available if the transaction goes through and you don't vote for it. Additionally, another way to earn some extra return, would be to attend the next two meetings. These meetings typically have a spread of food and refreshments, and since OSI is a restaurant company it might be tastier and more copious than normal. I make no promises about this, but if there is food it would be free for shareholders, so the more you eat the more money you can put into your pocket (actually stomach). Not to mention you can exercise your shareholder rights. Today's meeting time and place for those OSI shareholders hungry and/or interested is:
Friday, May 25, 2007, at 11:00 a.m., Eastern Daylight Time, at A La Carte Event Pavilion, 4050-B Dana Shores Drive, Tampa, Florida 33634.
Let me know if it was worth the trip and I'll make another post on June 5 as a reminder, perhaps including the menu from this meeting.
Update: The meeting today voted to adjourn to June 5.
Friday Culture: Famous First Bubbles
This Friday's Culture Pick is Famous First Bubbles: The Fundamentals of Early Mania by Peter M. Garber, an economist at Brown University. This week we have seen reports that we are in the midst of a private equity/takeover bubble, hedge fund bubble, Chinese economic bubble and/or credit bubble. Given this, I thought it would be a nice time to review and learn about market bubbles long past such as Dutch tulipmania, the Mississippi Bubble and the South Sea Bubble. Garber does this and more debunking many myths about all three events in his excellent, short tour of early mania. Enjoy your weekend!
May 24, 2007
M&A Nirvana: Alcan, BHP Billiton and a Tri Listed Company Structure
The rumors yesterday that BHP Billition was to be a white night for Alcan with respect to Alcoa's pending $28 billion offer to acquire Alcan, had me thinking about M&A nirvana: the Tri Listed Company. BHP Billion is a dual listed company. A DLC 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. In the case of BHP Billiton, this structure involves Billiton, an English company, and BHP, and Australian company.
If BHP Billiton were to acquire Alcan, it could do so by adding a third leg with Alcan and forming the world's first tri listed company. The agreements to do this would reach new levels of complexity (hence my thoughts of M&A nirvana), and the operation of the company could become a bit complex to say the least. For example, the shareholder meeting for the company would have to last almost 24 hours in order to encompass meetings on three continents for three companies. But the structure is feasible. Thomson, a Canadian company, and Reuters, an English company, showed its viability by recently agreeing to combine using this structure in the first English/Canadian DLC (see my blog post on this here). The Australian element should be able to fit within this framework.
And a BHP Billiton acquisition through a TLC would actually make good sense. It would assuage issues of Canadian nationalism by maintaining the presence of Alcan in Canada. It would preserve beneficial dividend tax treatment for Canadian shareholders and establish a strong Canadian shareholder base for the TLC. It would also avoid triggering any existent change of control provisions in any joint venture agreements that Alcan might have. Finally, an acquisition in this form would ensure that certain valuable hydroelectric, power and other rights and agreements that the Quebec government has granted to Alcan would not be terminated, an event Alcan asserts would happen with a true acquisition.
The above calculus would also apply if Rio Tinto decides to bid for Alcan. Rio Tinto like BHP Billiton is also a DLC involving an English company and an Australian one.
If BHP Billiton and Alcan (or Rio Tinto and Alcan) agreed to such a structure it would permit Alcoa to counter with its own DLC proposal thereby raising further complexity to this takeover battle. And if Alcoa succeeded this would also be a milestone as there has yet to be a true U.S. DLC. BP came close in 1998 with Amoco, but the SEC refused to allow pooling accounting and so it was at the last minute converted into a true acquisition. The closest is Carnival, a Panamanian and English DLC. Carnival's Panamanian company has equivalent U.S. corporate governance provisions and is treated as a U.S. tax-domiciled entity.
Final Note: Legal geeks should note that the SEC recently revised its position on the requirement to register the shares of newly-formed DLCs (or presumably TLCs). Historically, the SEC did not require a new registration statement to be filed as the shares of both companies remained outstanding and there was no triggering offering. But, with the Carnival DLC the SEC took the position that the changes in the character of the securities of the company were so fundamental that a registration statement is now required with respect to both sets of shares of the DLC. So, a BHP Billiton/Alcan tie-up would require reregistration of the shares of each of the three companies with the SEC unless U.S. holders constituted 10% or less of the company's shareholder base.
More on In re: Appriasal of Transkaryotic Therapies, Inc.
Latham & Watkins has issued a thoughtful client note on the recent opinion of the Delaware Chancery Court in In re: Appraisal of Transkaryotic Therapies, Inc. In Transkaryotic, the court held that beneficial holders seeking appraisal do not have to establish how the specific shares they acquired after the record date were voted. Lathams concludes that "[t]he case will heighten the attractiveness of an investment strategy premised on assertion of appraisal rights and lead to more frequent and larger appraisal claims than previously." Professor Larry Hammersmesh disagrees.
Kohl Opposes XM-Sirius Tie-up on Antitrust Grounds
Senator Herbert Kohl (D-Wis.) yesterday sent a letter to the Justice Department and Federal Communications Commission urging regulators to block the proposed merger of Sirius Satellite Radio's and XM Satellite Radio Holdings. He argues that the deal would cause "substantial harm to competition and consumers."
Kohl has become increasingly vocal on M&A antitrust issues of late most prominently in his opposition to AirTrans' unsolicited bid for Midwest Airlines, a Milwaukee based airline. For those who are interested, I'll once again refer you to Thom Lambert over at Truth on the Market who has a very nice commentary on Kohl's views in the context of the AirTrans bid. To quote Lambert: Kohl "demonstrate[s] almost no understanding of antitrust’s role and purpose . . . ."
May 23, 2007
Oaktree and GSTrUE
The Los Angeles Times is reporting that Oaktree Capital Management LLC, an alternative investment firm with over $40 billion in assets under management, has sold approximately 14% of itself for more than $800 million to less than 50 investors. It was previously reported in the Wall Street Journal that Oaktree was circulating an offering memorandum to sell a 13% interest in itself for $700 million. Oaktree is the latest firm to cash in on the private equity/hedge fund boom and follows in the heels of Fortress Investment Group's successful public offering and Blackstone's pending one.
The Oaktree offering is private and its shares will trade on a new private market developed by Goldman, "GS Tradable Unregistered Equity OTC Market" with the catchy acronym GSTrUE. Information about the market is limited as Goldman has done nothing to publicize it and Oaktree is apparently its first listing. But, according to reports, Goldman is hoping that GSTrUE will become a viable alternative listing market for hedge funds, private equity and operating companies who wish to avoid SEC regulation. Accordingly, the market will be limited to qualifying investment funds with over $100 million in investable assets.
GSTrUE, however, will live under the shadow of U.S. regulation. In order to avoid triggering Exchange Act reporting requirements for any listed company, Goldman and any such listed U.S. entity will need to make sure that the company does not exceed more than 500 shareholders. This will likely place Goldman in the position of forced market maker when the cap is reached. It will also even further reduce liquidity by limiting the number of trading shareholders and shares traded. Moreover, Goldman has not disclosed whether there will be any other market makers for this market, but given the likely low liquidity and shareholder trading limitations, Goldman is likely to set fat spreads on trades. Pricing is also likely to be opaque due to information and analysts' coverage gaps. While Goldman has incentives to maintain lower spreads in order to attract listings, these problems may be why Oaktree's offering values it at only $5.7 billion, a much lower valuation than Fortress and the one mooted for Blackstone. Time will tell if GSTrUE is a success, and it is certainly a worthwhile economic experiment on the validity of private markets, but I believe that GSTrUE's handicaps will likely make it more of a stepping stone for companies on their way to a full public market listing more than anything else.
NB. The L.A. Times is reporting that Oaktree shares are now trading on GSTrUE at $50 a share after being offered at $44. It would be more interesting to know the bid/ask spread.
Alcan's Inadequacy Opinion
Alcan, Inc. yesterday filed with the SEC its response to Alcoa's $27 billion unsolicited offer to acquire the company. Alcan disclosed in the response that its board unanimously recommended its shareholders reject the Alcoa offer calling it "inadequate in multiple respects." The response document (called a Directors' Circular) is a fine piece of work and the financial sections a model for these things; these were presumably prepared by Alcan's investment bankers JPMorgan Securities Inc., Morgan Stanley, RBC Capital Markets Inc., and UBS Securities LLC. Two things caught my eye in this response:
1. Poison Pill. Alcan is taking the position that Alcoa's offer does not meet the definition of “Permitted Bid” under its shareholder rights plan (also known as a poison pill). To qualify as a “Permitted Bid” under the rights plan and avoiding triggering it, the Alcoa offer must contain an irrevocable and unqualified provision to the effect that no Alcan common shares may be taken up or paid for prior to the close of business on a day which is not less than 60 days following the date of the offer. Alcan is asserting that, "[t]he Alcoa Offer, while open for more than 60 days, does not contain an irrevocable and unqualified no take-up provision in respect of the first 60-day period. The Alcoa Offer is therefore not a 'Permitted Bid' under the Rights Plan." Alcoa's response is likely to amend its offer to respond to Alcan's assertion, so Alcan's position will only buy it a few weeks of time. [NB. The Alcan rights plan is different than U.S. ones in that it permits a bid to proceed without triggering the rights plan on the above basis; this is a requirement of Canadian securities regulators who permit a Canadian public company to employ a rights plan only to gain enough time for their shareholders to consider an offer, and after a period of 40-60 days force the company to redeem the rights or terminate the plan].
2. Inadequacy Opinion. Morgan Stanley has delivered an opinion to the Alcan board that the "the consideration to be received by holders of Alcan Common Shares pursuant to the Alcoa Offer is inadequate from a financial point of view to such holders." An inadequacy opinion is the opposite of a fairness opinion. It is often used outside the United States by targets fending off unsolicited bids. But you don't often see them here. One reason offered by practitioners for this is that by stating the price is inadequate, a board legally undermines a "Just Say No Defense." By rejecting an an offer based on price, a board implies that this was determinate in its decision and there is consequently a higher price at which it will agree to an acquisition. I'm not sure about the concerns, the Delaware courts last invalidated a "Just Say No Defense" in 1988 in Interco and that case has dubious validity at best in light of subsequent Delaware decisions (see City Capital Associates v. Interco Inc., 551 A.2d 787 (Del.Ch.1988)). Nonetheless, in Canada a "Just Say No" defense is not permitted, takeover defenses can only be used to provide a limited amount of additional time for shareholders to consider a bid. The Alcan board therefore did not face the same calculus a Delaware company does.
By the way, inadequacy opinions have the same problems as fairness opinions. Since financal valuation is a subjective exercise and there are no set agreed guidelines or practices for it, there is substantial leeway for investment banks to arrive at their clients desired conclusion. This is particularly true in light of the typical investment bank contingency-based fee arrangement. Here, the contingency component may not have been an issue as Morgan is aiding the defense of the company and not advising on its acquisition, but still Morgan did not disclose its fee structure in the Directors' Circular. (The SEC will oftentimes force a target to correct this omission).
OECD Report on the Private Equity Bubble
The Organization for Economic Co-operation and Development has released a report asserting that the current private equity buy-out boom is the result of excess liquidity and low yields caused by distortions in the global financial system - mainly in China and Japan. The OECD stated in its report that:
Low yields result from excess global saving and liquidity. They risk pushing leverage and equity prices in parts of the corporate sector to excessive levels . . . . [adding that] Two major prices in the world economy worth noting in this respect are the near zero interest rates in Japan and the fixed exchange rate for the reminbi.
The OECD proceeded to recommend that:
The policy focus from a global perspective should be on raising interest and exchange rates that are too low at present. But domestic considerations in the countries concerned may delay this process . . . .
With the Federal Reserve likely to lower interest rates and the U.S. heading into a period of lower economic growth it remains to be seen whether China and Japan will have the political and economic strength to also lower their interest rates and, in the case of China, further permit the Reminbi to float. Food for thought as Secretary of Treasury Paulson and Chinese Vice Premier Wu Yi meet for talks this week on these and related issues.
The Google Way to Get Your Start-up Funded
I was doing some research yesterday on Google's new private trading market for its employee stock options -- it has gone fully live -- when I stumbled across this Google 8-K filed yesterday:
In May 2007, Google Inc. invested approximately $3.9 million in the Series A preferred stock financing of 23andMe, Inc., an early stage biotech company focused on helping consumers understand and browse their genome. . . . Anne Wojcicki, who is a co-founder of 23andMe and who is also a shareholder and member of the board of directors, is married to Sergey Brin, Google’s President, Technology and one of its founders. . . . .Prior to Google’s investment in 23andMe, Sergey provided approximately $2.6 million in interim debt financing to 23andMe, which was repaid as part of this financing transaction.
The disclosure continues with a description of the process by which Google's audit committee approved the transaction and received an arms' length valuation in connection with this approval. Google's audit committee is headed by former Pixar CFO Ann Mather who herself has been caught-up in the options back-dating scandal. 23andMe also issued a statement with respect to the investment stating "[w]e are thrilled and honored to have attracted the backing of such a diverse, proven and innovative group of investors.” No doubt.
Google could have waited to disclose this information in its year-end filings, so they do receive some credit here for transparency.
May 22, 2007
Business Agreements and the Right to Lie
Jeffrey M. Lipshaw, a professor at Suffolk University School of Law and a visitor this year at Tulane Law School, has recently published an Article in the Delaware Journal of Corporate Law entitled: Of Fine Lines, Blunt Instruments, and Half-Truths: Business Acquisition Agreements and the Right to Lie. Here is the abstract:
In this article, I expand upon a happy coincidence (for scholars) in reconciling the overlap between contract and fraud. Both the recent book by Ian Ayres and Gregory Klass and the Delaware Court of Chancery in Abry Partners Acquisition V, L.P. v. F&W Acquisition, LLC addressed the matter of lies within contractual promises, whether as to the promisor's intention to perform or as to the state of the business being sold. Each treatment, however, in focusing on fraudulent affirmative representations, falls short of (a) recognizing the fundamental aspect of deceptive promising in a complex deal, namely the half-truth, (b) articulating an appropriate doctrinal principle to address it, or (c) capturing the social and linguistic context that makes the deceptive half-truth so insidious.
The archetypal facts in Abry frame the issue. When the parties to a business acquisition agreement purport to limit the buyer's reliance to those representations and warranties set forth in the agreement, just what obligations of truth-telling have the parties contractually released? We need to grapple with the inter-relationship of law, language, mutual understanding, and trust. The language of the law (and the contract) is a blunt instrument by which to map to track the subtle fine lines of a complex agreement. I will contend that there is a kind of special arrogance in the illusion onto which lawyers hold – that the uncertainties and contingencies of the world are in their power to be controlled, and to the winner of the battle of words go the spoils. The correct doctrinal result is to presume in the transactional speech acts (including the contract), as we do in everyday life, a default of truth-telling, to permit the parties freely to contract around the rule, but to require narrow construction of the exceptions and disclaimers.
I finished it last night and highly recommend it. [NB. Jeff is also a co-editor of the Legal Profession Blog, a fellow member of the Law Professors Blog Network.]
Acxiom's Hedge Fund Problem
Today, MMI Investments L.P., the hedge fund and Acxiom’s second largest stockholder owning 8.2% of the company, disclosed a letter delivered to the Acxiom board of directors in opposition to Acxiom's agreement last week to be acquired by Silver Lake Partners and ValueAct Capital Partners in a transaction valued at $3 billion (the letter is annexed to MMI's 13D amendment filed today). ValueAct Capital Partners is also a hedge fund and so the news and blogs are highlighting this as a clash of two hedge fund trends: hedge funds taking on private equity roles and hedge funds as activist shareholder investors. It is also yet another real example this week of shareholder resistance to private equity/hedge fund buy-outs -- the other two being Clear Channel and OSI Restaurant Partners. More interesting to me was the following language in MMI's letter to the Acxiom board:
Our concerns about valuation are only amplified by our frustration with both the timing and structure of this transaction. Given the strategic initiatives currently underway (and recent earnings pain that your existing stockholders have had to bear) we struggle to understand why this is the right time to sell our company. Moreover it is our belief that the “go-shop” mechanism is a poor substitute for a full auction for a comprehensively marketed property. We can only hope that the “go-shop” for our company is a genuine one, with clear, concise, and thoughtful distribution of information, and thorough outreach to potential buyers from Acxiom’s industry, as well as those in comparable or tangential industries, and financial buyers (many of whom have significant experience and resources in the marketing data and informatics industry).
Acxiom has yet to file the acquisition agreement. But according to a conference call last week, Acxiom's "go-shop" is a relatively robust form of the provision. Pursuant to its provisions, Acxiom will have 60 days to solicit other superior proposals, and if it agrees to one, is required to pay only a reduced break-up fee of 1% of the equity value of the company. Nonetheless, on that same conference call Acxiom management disclosed it permitted only one other bidder to conduct due diligence prior to agreeing to the ValueAct transaction, and only then because Acxiom was approached. According to Acxiom, the transaction will require a 2/3rd majority vote of Acxiom's shareholders to win approval. Given this requirement, shareholder resistance and the fact that Acxiom stock is trading above the offer price, the current offer appears to be only an opening gambit, yet again highlighting the perils of "go-shops" and the head-start and cover they provide to a chosen acquirer.
Update: Acxiom filed its merger agreement later today; it contains the above provisions.
The Bloomin' Onion (Part III)
OSI Restaurant Partners, Inc., owner of the Outback Steakhouse and Cheeseburger in Paradise restaurant chains, today announced that it agreed to an increased offer from a consortium led by Bain Capital Partners, LLC and Catterton Management Company, LLC. The buy-out group will now pay $41.15 per share in cash up from $40.00 per share. OSI's founders who are part of the acquiring group have agreed to receive only $40 per share for their stakes. Bloomberg reports that many shareholders are likely to still view the consideration as insufficient, but that analysts believe the raise should be enough to obtain necessary shareholder approval.
In connection with the new agreement, OSI today also postponed for the third time to May 25, 2007 its shareholder meeting to consider the proposal. It was supposed to be held today. I've blogged before about the perils of management-led buy-outs and the OSI one in particular (see here and here). OSI's CEO, CFO, COO and Chief Legal Counsel as well as its founders are all participating in the buy-out and have exercised what appears to be inappropriate influence and activity in this transaction. The postponement of the meeting for three times in order to make sure that the proposal has sufficient votes speaks to these issues.
NB. If the transaction were structured as a tender offer, the payment of differential consideration here to the OSI founders would not be permitted due to the requirements of the all-holders/best price rule. This rule does not apply to mergers. Hopefully, if the SEC ever decides to update its tender offer and merger rules for the modern age, it will end this no longer justified disparity by applying the rule to both structures or neither. For more on this and other no longer jusitifed SEC merger/tender offer distinctions, see my soon to be published article, The SEC and the Failure of Federal Takeover Regulation.
Kerkorian and MGM Mirage
Tracinda Corp., the investment vehicle for Kirk Kerkorian, today filed its 17th amendment to its Schedule 13D with respect to its 56% stake in MGM Mirage. The Amendment contains the following language:
Tracinda Corporation announced today that it intends to enter into negotiations with MGM MIRAGE (NYSE: MGM) to purchase the Bellagio Hotel and Casino and City Center properties. Tracinda also wishes to pursue strategic alternatives with respect to its investment in MGM MIRAGE which may include financial restructuring transactions involving all or a substantial portion of the remainder of the Company. Tracinda has made no decision with respect to any such restructuring transactions and reserves the right not to engage in or approve any transaction.
This is catch-all disclosure that is far from clear. It does nothing to tell you what Kerkorian really intends. But according to the Wall Street Journal:
Analysts said the properties Mr. Kerkorian wants to acquire from MGM Mirage are the company jewels: the luxurious Bellagio and the nearby CityCenter, an ambitious $7.4 billion megaproject set to open in late 2009 that combines private residences, boutique hotels, a resort casino and a retail-and-entertainment district.
MGM shares are up 27% in trading today.
A special committee of MGM Mirage directors will now be formed to negotiate with Kerkorian with respect to his preferred transaction (whatever it might be). If Kerkorian does agree to acquire MGM's most productive assets or the entire company, expect shareholders to rightfully complain if the price is not perceived as sufficiently high or if Kerkorian attempts to skew the process by rejecting or foreclosing alternative transactions. Also, I would suspect that we will once again see the hedge funds leading the activist shareholder charge here, asserting themselves even before an agreement is reached in order to shape an ultimate transaction. Tracinda is a Delaware corporation, and so the plaintiff's lawyers have already also likely sped into Delaware Chancery and filed suits asserting that any transaction with Kerkorian is not "entirely fair". Hopefully, they will zealously defend their clients and do not use any suit for its settlement value to support their attorneys' fees as they have done before.
Update: MGM Mirage has announced the formation of a special committee of independent directors to consider Kerkorian's statement and strategic alternatives available.
Lessons from the Motorola/Carl Icahn Proxy Contest
Theodore Mirvis of Wachtell, Lipton, Rosen & Katz has posted to the Harvard Law School Corporate Governance Blog Wachtell's memo on lessons from the Motorola/Carl Icahn proxy contest. Icahn, who owns 2.9% of Motorola, recently lost a short-slate proxy contest for one seat on the Motorola board despite obtaining the endorsement of Institutional Shareholder Services. Since this is Wachtell, the lessons are for targeted corporations, not insurgent shareholders.
May 21, 2007
Blackstone, Simpson and Signs of the Apocalypse
Blackstone Group filed their amended S-1 today. Lots of interesting stuff in it; the papers are mostly focusing on the S-1's disclosure of a $3 billion purchase by the Chinese government of the non-voting common units being offered. The price paid per common unit will be equal to 95.5% of the initial public offering price, and the money will go directly to Blackstone's current owners.
I'm not too worried about the investment itself. If the Chinese government wants to invest in non-voting common stock in a high-flyer that is its prerogative. Breakingviews put it better than me noting that we are amidst a private equity bubble and stating "[i]n this case, there may be no greater fools than the Chinese bureaucrats who are taking this buyout bet on the private-equity firm’s non-voting stock. . . . ”
More interesting and with much greater ramification, would have been such an investment in Blackstone's funds itself rather than in Blackstone. Here the S-1 stated that:
The State Investment Company has agreed to explore in good faith potential arrangements pursuant to which it or its affiliates would invest in or commit to fund amounts to current and future investment funds managed by us and to evaluate in good faith and consider investing in any comparable funds or vehicles offered by us in connection with any investment they make in alternative asset funds or vehicles.
So, the investment is probably most significant for future tie-ups between Blackstone and the Chinese government. There is probably only so far the Chinese government can go with these U.S. investments before it becomes a U.S. national security issue. This is particularly true in light of the pending congressional bill to heighten review of takeover transactions for national securities issues and the increased scrutiny of foreign investments it will bring (for more see my blog about the politics of national security here). But, how far is too far is still to be determined. Stay tuned.
All this is prelude to the disclosure which really caught my eye:
An investment vehicle composed of certain partners of Simpson Thacher & Bartlett LLP, members of their families, related parties and others owns interests representing less than 1% of the capital commitments of certain investment funds managed by Blackstone. Certain partners of Simpson Thacher & Bartlett LLP may purchase common units in this offering pursuant to the directed sale program in an aggregate amount equal to less than 1% of the common units.
We last saw the issue of lawyers investing in their IPO clients back in the technology bubble (back then Wilson Sonsini was the leader in these investments). This practice is yet another sign of private equity boom times. It is a practice that has been barely tolerated because of the conflicts it creates and its impingement upon the role of lawyers as gate-keepers. But I'll leave it to the experts for a more detailed analysis of whether this is truly bad practice.
Update: Jeff Lipshaw, a fellow member of the Law Professor Blog Network and editor of the Legal Profession Blog, has some further thoughts on this issue.
Alltel Dials PE
Alltel Corp., the cell-phone network operator, today announced that it had agreed to be acquired by TPG Capital and GS Capital Partners, in a transaction valued at approximately $27.5 billion. TPG Capital and GSCP will acquire Alltel in a merger transaction paying $71.50 per share in cash.
The deal has already been criticized for its small premium, and the press release offers few details of the transaction. But it appears that there is no "go-shop", break fees have yet to be disclosed and it is uncertain if there is any financing condition on the deal. The absence of a "go-shop" is a bit puzzling, it could have at least provided the buyers some aesthetic cover particularly since it has been reported that Alltel has been throughly shopped over the past few months and no buyers have emerged. I'll have more once the merger agreement is filed: it looks like Alltel is going to wait out the two business days they have to file. In particular, Alltel CEO Scott Ford has already agreed to continue as CEO with the private company and so it will be interesting to see his arrangements.