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Editor: Brian JM Quinn
Boston College Law School

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Friday, July 20, 2007

New Director General of U.K. Takeover Panel Announced

The U.K. Panel on Takeovers and Mergers, the U.K.'s takeover regulator, today announced the appointment of Robert Hingley as its new director general.  He will replace Mark Warham of Morgan Stanley and serve a two-year appointment beginning as of December 1, 2007.  According to the announcement, Robert Hingley is 47 and currently serves as Vice Chairman of Lexicon Partners, an independent corporate advisory firm based in London and Hong Kong.  Previously Hingley was an attorney with with Clifford Chance and the investment bank Citigroup.   

Hingley will actually serve on secondment from Lexicon partners for the two-year period.  This is a common practice in the United Kingdom with respect to not only the Takeover Panel, but also the Financial Services Authority, the U.K. equivalent of the SEC, and the Office of Fair Trading, the U.K.'s antitrust regulator.   

July 20, 2007 in Current Events | Permalink | Comments (0) | TrackBack (0)

Would the Whole Foods CEO Have Violated the Wild Oats Ethics Policy?

Jon Harmon over at the Force For Good blog has an interesting post on his email exchange with Sonja Tuitele, senior director - Corporate Communications & Investor Relations for Wild Oats.  Apparently, Wild Oats' ethics policy "prohibit[s] unauthorized statements about the company to external audiences, including the Internet."   John Mackey, the CEO of Whole Foods, and who was caught last week posting anonymously to the Wild Oats Yahoo! chat board, and is now under investigation by both the SEC and his own board should take note.  Mackey has also suspended posting on his own public blog as of this week.  Whole Foods is still continuing with its bid to acquire Wild Oats. 

July 20, 2007 in Current Events | Permalink | Comments (0) | TrackBack (0)

Friday Culture: Storming the Magic Kingdom

Today's Friday culture is Storming the Magic Kingdom by John Taylor.  Taylor's book tells the saga of the 1980's battle for control of the Walt Disney Company.   He ably details the family squabble which set off a chain of events that had such well-known corporate raiders as Saul Steinberg, the Bass Brothers, and even Ivan Boesky fighting to control Disney.  The battle for Disney aptly illustrates the perils of a corporate control contest for a company reliant on creative human talent and an able use by a board of a "Just Say No" defense.  Ultimately, Disney remained independent with Michael Eisner becoming CEO.  The rest is history.  Enjoy your weekend. 

July 20, 2007 | Permalink | Comments (0) | TrackBack (0)

Thursday, July 19, 2007

Dieter Von Holtzbrink Resigns in Protest from Dow Jones Board

Dieter Von Holtzbrink has just resigned from the Dow Jones board to protest their approval of the Dow Jone's decision to proceed with a News Corp. deal.  In his letter he stated:

Sorry, that I couldn’t support the recommendation which got Board approval. Although I’m convinced that News Corp. offer is very generous in financial terms, I’m very worried that Dow Jones unique journalistic values will long-term strongly suffer after the proposed sale.

Listening to our lawyers, one has to vote for a deal which is in the best (financial) interest for the shareholders, except if one can prove that such deal bears risks for the company that overcompensate the financial profits.

I cannot prove that my worries are right. I can only refer to News Corp. business practices in the past, can only refer to Jim Ottaway’s article in the Journal, etc. I do not believe that the “Special Committee” can finally prevent Murdoch from doing what he wants to do, from acting his way.

Herewith I resign from the Board of Dow Jones, hoping that you, my highly respected colleagues and friends, can understand my decision.

All the best to you and for the Company,

Dieter

By the way, the advice of Fried, Frank, Dow Jones lawyers von Holtzbrink refers to above is a good layman's encapsulation of the legal obligations the Dow Jones board faced when reviewing the News Corp. bid.

July 19, 2007 | Permalink | Comments (0) | TrackBack (0)

Upper Deck Tries to Buy Time

On Tuesday, The Upper Deck Company announced that had withdrawn its Hart-Scott-Rodino Antitrust Improvements Act notification filing related to its proposed acquisition of The Topps Company, Inc.  Upper Deck stated at that time that it plans to re-file its notification today, July 19, 2007.  Upper Deck had originally filed its HSR notification on July 2, 2007.  By re- filing its notification with the FTC, Upper Deck now has another full 15 day period to discuss the transaction, and answer any questions raised by the FTC, the agency reviewing the HSR filing.  Assuming Upper Deck does file today, the waiting period under the HSR Act will expire at 11:59 pm ET on August 3, 2007, unless this period is earlier terminated or extended.

Upper Deck stated that "its decision to withdraw and re-file its notification was prompted in part by the July 4th holiday and by additional factors outside of its control."  Sometimes, companies withdraw and refile HSR notifications to correct or update information.  But refilings also sometimes occur when companies want to give the FTC or DOJ more time to review the transaction in the hopes of avoiding a second request which would delay Upper Deck's bid by several months.  This was likely the circumstances here.  Upper Deck is desperate to avoid a second request so as to make its $416 million bid more compelling than the current agreement Topps has to be acquired by a The Tornante Company LLC and Madison Dearborn Partners, LLC for $9.75 a share in cash, or about $385 million.  A refiling buys more time to convince the FTC that there is no antitrust problem with its transaction. And as I stated before in a prior post:

And the antitrust risk is clearly in both parties minds, as Topps 14D/9 filed today details that the substance of the parties' negotiations have concerned antitrust issues.  Topps is requesting that Upper Deck agree to a $56.5 million reverse termination fee and a modified hell or high water provision (a provision in which Upper Deck would agree to sell or hold separate assets to satisfy governmental antitrust concerns).  Upper Deck has resisted these provision, and the parties have agreed to suspend negotiations on the matter until the antitrust risk is clarified through the HSR process. 

Topps was scheduled to hold a shareholders meeting to vote on the Tornante acquisition on June 28.  But, the Delaware Court of Chancery enjoined the holding of the meeting to permit Upper Deck to commence its tender offer.  Topps has yet to announce the new date for the meeting but has set the record date for the close of business on July 3. 

For the time being, the deal is in the hands of the antitrust  authorities.  If and when they clear the transaction, expect the bidding for Topps to continue.  In the case of a second request, Topps may try and push forward with the Tornante bid, perhaps with a sweetener from that consortium to hasten the process.

With its HSR refiling Upper Deck is signalling that a second request is still a very real possibility.

July 19, 2007 in Hostiles, Takeovers | Permalink | Comments (0) | TrackBack (0)

Verizon/Vodafone and the CFIUS Card

The Financial Times yesterday had an interesting article reporting that "sources" assert that a rumored Vodafone takeover of Verizon would likely entail very close scrutiny by CFIUS.  CFIUS stands for the Committee on Foreign Investment in the United States, an inter-agency committee chaired by the Secretary of Treasury.  It is charged with administering the Exon-Florio Amendment.  This law grants the President authority to block or suspend a merger, acquisition or takeover by a foreign entity if there is “credible evidence” that a “foreign interest exercising control might take action that threatens to impair the national security” and existing provisions of law do not provide “adequate and appropriate authority for the President to protect the national security in the matter before the President."  The President has delegated this review process largely to CFIUS. 

I am not sure about the national security implications of a Verizon takeover by Vodafone.  But on July 11, Congress passed The National Security Foreign Investment Reform and Strengthened Transparency Act.  The bill is currently sitting on the President's desk for almost certain signature.  The bill would enhance the CFIUS review process, and add to the factors for review critical infrastructure and foreign government-controlled transactions.  A Verizon/Vodafone transaction would now likely fall under the former category.  And, of late, CFIUS has been much more attentive to foreign takeover transactions.  According to one news report, CFIUS considered 113 transactions in 2006, up 74 percent from the previous year.  And CFIUS conducted seven second-stage investigations in 2006, equaling the number of the previous five years combined. 

Whether a Vodafone/Verizon transaction actually occurs and is reviewed by CFIUS is uncertain.  But given the political atmosphere and the pending bill, an extended review of any such transaction is more likely than ever.  And Verizon is likely to make use of this fact in order to ward off any unwanted Vodafone bid (they may have even planted this FT story).  Expect more targets to try a similar strategy in the future, playing the CFIUS card to deter foreign acquisitions and use it as an anti-takeover device when the unsolicited acquirer is a non-U.S. entity.  Hopefully, CFIUS itself will be able to sort through these cases appropriately and prudently without undue scrutiny, but more likely this enhanced CFIUS scrutiny will deter some foreign bidders to our detriment.    

For a summary of the final legislative provisions of the CFIUS reform bill, see this client memo by Wiley Rein here.  For more on Exon Florio and the CFIUS process see my prior posts:  CFIUS Reform to Become Law; GE, The Saudis and Exon-Florio; and The Politics of National Security.

July 19, 2007 in Cross-Border | Permalink | Comments (0) | TrackBack (0)

Biomet's Tortuous Takeover Route

Yesterday, Biomet filed a preliminary proxy statement to effect a squeeze-out merger of its remaining minority shareholders.  The preliminary proxy comes a week after the successful completion on July 11 by a private equity consortium of a tender offer to acquire all of Biomet's shares.   According to the acquiring private equity consortium press release, 82.85% of Biomets outstanding shares were tendered and purchased in that offer. 

The filing is a bit of a surprise.  The Biomet amended merger agreement had a top-up option -- a provision which permitted the consortium to purchase, at a price per share equal to the offer price, a number of newly issued shares that would constitute 90.0005% of the total shares then outstanding.  Accordingly, the acquiring group could have exercised this option to bring their holdings up to 90% of the company and initiate a short-form merger under Indiana law.  This option could have been exercised the day after the closing of the tender offer; a short-form merger also effected immediately thereafter.  Instead, the private equity consortium has chosen to complete the acquisition through a long-form merger requiring a proxy and a shareholder vote.  The effect is to delay the closing of the deal by another four to six weeks for the shareholder vote.  The delay may even be longer because the merger agreement provides for a 20 consecutive day “marketing period” that the consortium may use to complete its financing for the merger and which only begins to run after they have obtained shareholder approval.

Biomet has not publicly explained the reasons for this choice by the private equity consortium.  Instead, the transaction participants' only action has been to file this preliminary proxy a week after the closing of the tender offer.  But the likely reason for the delayed route it to permit the private equity consortium additional time to arrange permanent financing for the squeeze-out transaction.  In the interim, the private equity consortium gets a free period of interest on the approximately $1.5 billion it will cost to squeeze-out the remaining Biomet shareholders.

Ultimately, the conditions in the merger agreement to closing the squeeze-out transaction are so few that it will almost certainly close and Biomet's shareholders will then receive their $46 per share without interest.  Still, the remaining Biomet shareholders would be better served by a more communicative policy by the company so they know this.  It also would have helped for Biomet's lawyers (Kirkland & Ellis and Simpson, Thacher & Bartlett) to have negotiated a requirement for the private equity consortium to exercise the top-up option if possible instead of leaving Biomet's minority shares outstanding for this period.  Practitioners take note.    

July 19, 2007 in Takeovers | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 18, 2007

Dow Jones Deal Still a Shaky Prospect

I'm quoted in today's TheStreet.com article Dow Jones Deal Still a Shaky Prospect on the legality under the federal securities laws of Dow Jones's refusal to disclose that three of its directors either abstained or refused to vote on the News Corp. deal.  Given that there is no final, agreed deal on the table at this time, disclosure of the exact composition of the Dow Jones board vote is likely immaterial and Dow Jones therefore not legally required to make it.  Nonetheless, good corporate governance practice would generally militate such disclosure. 

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

IHOP/Applebees Merger Agreement Filed

IHOP has filed its merger agreement with respect to its $1.9 billion acquisition of Applebees.  The agreement is fairly standard:  A $60 million break fee which is just at 3% of equity value, a no-solicit, two-business day matching right for IHOP with respect to competing bids, and a fairly tight material adverse change clause.  In addition, for those contemplating a transaction with a franchising party, the agreement contains a fairly good franchising representation and warranty in paragraph 4.01(s) of the merger agreement.

In its 8-K filing, IHOP also disclosed that it intends to finance the acquisition with a combination of debt and equity financing.  The debt financing is expected to consist of two separate securitization transactions consisting of an additional issuance of asset-backed notes under the existing IHOP securitization program and the issuance of asset-backed notes under a securitization program to be established for Applebee’s assets.  IHOP has also secured a bridge facility commitment for 2.139 billion from Lehman Brothers to fund the transaction pending the completion of both securitizations. 

The equity financing consists of preferred stock to be sold to an affiliate of MSD Capital, L.P., and affiliates of Chilton Investment Company, LLC.  IHOP has entered into a stock purchase agreement with MSD, pursuant to which MSD has agreed to purchase, concurrently with the closing of the Applebees merger, between $50.0 million and $133.8 million of a newly created series of perpetual preferred stock of IHOP.  In addition, IHOP has entered into a stock purchase agreement with Chilton, pursuant to which Chilton has agreed to purchase, concurrently with the closing of the Applebees merger, $35.0 million of a newly created series of convertible preferred stock of IHOP. 

The merger is not conditioned upon the receipt of financing by IHOP.

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

The Whole Foods CEO Mea Culpa

Whole Foods issued three press releases yesterday:

SEC Contacts Whole Foods Market as it Begins Inquiry

Apology Statement

Whole Foods Market’s Board of Directors Begins Independent Internal Investigation Associated with Online Financial Message Board Postings

The titles of each say it all.  And the CEO apology was short and begging:

Whole Foods Market today released the following statement from Co-founder, Chairman and CEO, John Mackey: "I sincerely apologize to all Whole Foods Market stakeholders for my error in judgment in anonymously participating on online financial message boards. I am very sorry and I ask our stakeholders to please forgive me."

In light of the SEC investigation, the Whole Foods board had little choice but to launch an internal probe and retain counsel to investigate John Mackey's illicit postings on the Wild Oats yahoo chat board (see the postings here, the Wall Street Journal has compiled highlights here).   And there is potential liability exposure here for Mackey under both the anti-fraud provisions of the Exchange Act and Regulation FD for selective disclosure.  However, given the anonymous nature of the postings and the free-for-all that chat boards are these days, reliance and materiality will both be difficult to establish, and a Regulation FD action can only be brought by the SEC.  Still, as I stated last week:

In the end, the Whole Foods-Wild Oats saga highlights for attorneys the problems of head-strong clients/CEOs who likely do not take advice well, as well as the perils of second requests.  But just because you have a dumb CEO still doesn't justify the FTC actions here challenging Whole Foods' proposed acquisition of Wild Oats.  As far as I know, there is no stupidity provision in the antitrust laws though some may argue there should be one in the law generally. 

The hearing on the FTC's request for a preliminary injunction halting Whole Foods acquisition of Wild Oats is schedule to begin on July 31 in the U.S. District Court in Washington D.C.

July 18, 2007 | Permalink | Comments (1) | TrackBack (0)

News Corp Gets Closer to a Deal for Dow Jones

Yesterday, the Dow Jones & Company announced that its Board of Directors had determined that it would be prepared to approve and recommend an agreement to merge with News Corporation (See also the News Corp. statement here).  The agreement would provide that News Corp. pay $60 per share in cash per share of common stock and Class B common stock.  The draft merger agreement also contemplates that Dow Jones stockholders could elect on a limited basis to receive equity securities in the News Corporation subsidiary that will hold Dow Jones.  This provision is for tax reasons and in order to permit shareholders to defer capital gains taxes.  These equity securities would be exchangeable for shares of Class A common stock of News Corporation.  No details were provided concerning the post-transaction editorial arrangements for the Wall Street Journal (but see a draft of an agreement here).  According to the Wall Street Journal, Leslie Hill, a member of the Bancroft family, and Dieter von Holtzbrinck abstained from the vote, while Christopher Bancroft -- who has been actively seeking alternatives to the News Corp. bid -- left the meeting early.

This pre-step of board approval without an immediate signed agreement is almost certainly due to disorder and uncertainty among the Bancrofts, the family currently controlling Dow Jones.  Typically, the board of a potential acquiree will agree to and approve the agreement and immediately thereafter, it will be signed.  At this time any controlling or significant shareholders will sign voting or tender agreements.  The usual procedure failing to occur means that the Dow Jones board has taken control of this takeover process.  In the absence of a coordinated response among the Bancrofts, the board has instead decided to makes its own decision, put a deal to the Bancrofts and see if enough family members can agree. 

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

Tuesday, July 17, 2007

Apollo to list on GSTrUE

It is being reported that Apollo Management, L.P., the private equity fund adviser, will offer shares and list itself on Goldman Sachs' new, private exchange GS Tradable Unregistered Equity OTC Market, known by the more catchy acronym "GSTrUE".  Similar to Blackstone's ipo sale of a significant stake to the Chinese government, Apollo is also reportedly selling an approximate 10% non-voting stake in itself to the Abu Dhabi Investment Authority, the investment arm of the Abu Dhabi government, and possibly another significant stake to the California Public Employees' Retirement System. 

This is GSTrUE's second listing.  In May Oaktree Capital Management LLC, an alternative investment firm with over $40 billion in assets under management, sold approximately 14% of itself for more than $800 million to less than 50 investors listing its shares on GSTrUE.  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, so as to permit Rule 144A offerings, the market will be limited to qualifying investment funds with over $100 million in investable assets.  As I posted at the time of the Oaktree offering:

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. 

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

Stuck on You (High Yield Debt)

Bloomberg is reporting today that Goldman Sachs Group Inc., JPMorgan Chase & Co. and the rest of Wall Street are stuck with at least $11 billion of loans and bonds they can't readily sell.  The debt is largely related to leveraged buy-out high yield notes which failed to garner buyers.  At least six leveraged buyouts over the past month have failed to fully sell, including the debt to finance the acquisitions of U.S. Foods, Dollar General and ServiceMaster Co. (as well as Maxeda announced today).  And, there may be more on the way.  Bloomberg reports that only three of the 40 biggest pending LBOs are contingent on financing (i.e., an escape clause that permits the acquirer to terminate the acquisition if funding can't be arranged).  If this financing is not bought the banks will be required to provide bridge loan financing or otherwise acquire this debt themselves. 

For those looking for a halt to the private equity boom, this is one sign.  A seizure in the high yield market is a certain way to stop private equity acquisitions.   And the market is beginning to crack a bit.  According to Merrill Lynch, high yield bonds fell 1.61 percent last month and regular debt fell 2.73 percent.  Still, the high volume of successful acquisitions shows that there is still momentum in the market.  But banks are likely to respond to this uncertainty by cutting back on offered terms in the future.  They will likely no longer freely offer covenant-lite loans and toggles which provide buyers more flexibility in down times.  Financing contingencies may also begin to appear more frequently in transactions.  The end result is likely a bit of a slow-down in the private equity train, but unless something momentous happens there is not likely to be a full brake.  Nonetheless, given the situation banks would also be advised to proceed with caution on committed financing and bridge loans lest they get stuck with a large amount of debt that they can't sell as First Boston Corp. famously did in 1989 with a bridge loan for a buyout of Ohio Mattress Co., the predecessor to Sealy Corp.  The deal is known as  the "burning bed", and First Boston only avoided bankruptcy by receiving a bail-out from Credit Suisse.

July 17, 2007 in Leveraged Buy-Outs | Permalink | Comments (0) | TrackBack (0)

Monday, July 16, 2007

Icahn Loses With Lear -- Shareholders Win?

Lear Corporation, yesterday announced that at its Annual Meeting of Stockholders its shareholders failed to approve a merger proposal with Carl Icahn's American Real Estate Partners L.P.  As a result of this vote, Lear's merger agreement with AREP will terminate in accordance with its terms.  The vote is a victory for Lear shareholders who had actively opposed the Icahn bid claiming it significantly undervalued the company.  The leader of this charge had been Pzena investment management which had repeatedly asserted its opposition to the bid. The California State Teachers Retirement System and Institutional Shareholder Services had also actively opposed the transaction.

In a last ditch bid to push the transaction through, Lear on July 10 had agreed to amend its merger agreement with AREP to increase AREP's offer price for shares of Lear common stock from $36 to $37.25 per share.  The $100 million increase in aggregate consideration paid had valued Lear at approximately $2.9 billion.  However, in connection with this increase, Lear had agreed to pay AREP $12.5 million in cash as well as 335,570 shares of Lear common stock (valued at about $12.35 million) if Lear's stockholders did not approve the merger.  The provision was unusual; bidders are usually lucky to get their expenses in a deal that is not approved by shareholders.  The provision, though likely legal, is even more suspect now that Lear shareholders have voted against the transaction. Icahn's AREP will now pocket this sum.

Lear will continue to operate as a stand-alone, publicly-traded company, though its future is now uncertain.  But the Lear shareholder vote is a milestone; it is the first real rejection of a private equity/management initiated leveraged buy-out.  Though activist investors have in other similar transactions such as Clear Channel and OSI Restaurant Partners succeeded in obtaining an increase in the consideration offered, none had resulted in a rejected bid. And according to MergerMetrics, only eight deals have been rejected by shareholders since 2003, out of more than 1,000 deals which required shareholder approval.

The reasons are fairly obvious.  An outright rejection of a management initiated or participating buy-out leaves the company in uncertain hands, and the continued retention of management as well as the direction of the company unclear.  Lear is the first big deal in recent memory where this has occurred. But, if Lear succeeds in its independent direction, it may chart a course for shareholders in similar situations involving management/private equity buy-outs.  Apparently, the market is also optimistic about Lear's future.  Lear's shares yesterday rose 60 cents, or 1.6%, to $37.50, showing that Wall Street, at least, for now agrees with the Lear shareholder decision.  Lucky for the arbs.      

July 16, 2007 in Private Equity | Permalink | Comments (0) | TrackBack (0)

Playtex's Change of Control Agreements

Footnoted.org has a nice post today on Playtex's change in control agreements for its executives.  Last Thursday, Energizer announced that it will acquire Playtex for $18.30 per share in cash plus the assumption of Playtex debt. The total enterprise value of the transaction is approximately $1.9 billion.

Playtex only updated its change of control agreements on the date of announcement.  And, as footnoted.org details:

“Tier One” employees, defined by the contract as anyone reporting to the CEO or anyone designated Tier One by the CEO, get some pretty generous benefits.  According to the agreement the top tier executives get two years worth of base salary and bonus. They also get medical and dental coverage for themselves and their family for two years, or until they find another job. Then there are those other perks. Like use of the company car, the value of financial planning services and the value of a health club membership. And of course the company will foot the bill for gross up payments.  Tier Two and Tier Three employees don’t fare quite as well. They only get a portion of their salary, bonuses, profit sharing contributions and outplacement services. And unlike the big bunnies, they have to pay their own taxes.

Energizer presumably signed off on the revisions, but Playtex shareholders will ultimately foot the bill for these payouts.  Having retained a good investment bank, Energizer merely adjusted the consideration it was willing to pay for Playtex downward to account for these expenses.  Disputes over change-of-control payments date from the 1980s and for those who want more on the theoretical justifications for these arrangements, I'll refer you to the following excellent comment from those days, Kenneth Johnson, Golden Parachutes and the Business Judgment Rule: Toward a Proper Standard of Review, 94 Yale L.J. 909 (1985) (there hasn't been much legal scholarship on this issue since then).  But, I'll also close by linking to a recent study which found that target shareholders tend to receive lower acquisition premia in transactions that involve extraordinary change of control payments for the CEO.       

July 16, 2007 in Takeovers | Permalink | Comments (0) | TrackBack (0)

The Promise of Private Equity Executive Lending

The Financial Times has a brief article today on lending to private equity executives.  Private banks lend to private equity executives who need required cash to invest in their own funds.  In Europe, the market is estimated to be about €1 billion ($1.37 billion), and the U.S. market is thought to be even bigger.  The need for this money arises from investor requirements that the prinicpals of a private equity fund put their own money into any fund they raise.  This usually amounts to 1-5 per cent of the total.  With the rise of the mega-private equity funds, these sums are substantial even for these people thereby providing the impetus for this market. 

The borrowing raises issues of risk for the executives themselves.  They are borrowing money to invest in transactions which themselves are levered.  But it is also a meaningful way to align the interests of private equity fund advisers and the investors themselves.  The private equity advisers stand to earn fortunes if they can return an appropriate amount to their investors, but can also lose substantially if they fail.   The success of this model is apparent in private equity fund returns.  The studies are mixed but most find that, when fees are included, private equity returns are greater than comparable levered investments in the S&P 500.  The returns have also been found to have statistically significant alpha (See, e.g., Steven N. Kaplan and Antoinette Schoar, Private Equity Performance: Returns, Persistence and Capital Flows (November 2003).  So, I am still surprised that this private equity model has not had wider adoption in the public company forum.  It appears to be a promising way to greater align the interests of public shareholders and executive officers than other types of incentive-based compensation such as stock options or stock plans, reducing agency costs and producing mutually beneficial results.   

July 16, 2007 | Permalink | Comments (0) | TrackBack (0)

Apple, Risk and "Appropriate" Investments

Here is a true story:

In 1980 Apple Computer famously went public.  At the time, blue sky laws in each of the fifty states had yet to be preempted by Congress.  Thus, any nation-wide initial public offering was required to qualify under the rules of each state in order to sell shares to the residents of that state.  This typically encompassed the filing of an offering document with the state regulator and hoping for a timely approval by them.  However, the Apple Computer offering was not only considered to be a "hot" one, but because the computer was such a new technology, it was also considered to be a very "risky" offering.  Accordingly, the securities regulators in Massachusetts banned the offering, and Apple avoided Illinois, Michigan, Missouri, and Wisconsin due to almost certain denial.  The reasons cited by the regulators for their position was the undue risk of making an investment in Apple Computer.

I thought of this story and the SEC last week as I read the Dealbook entry:  In Hedge Fund I.P.O.’s, Shades of Pets.com? Not Really.   According to Dealbook, the phenomenon of fund advisers going public is no Pets.com redux since fund advisers are more mature and less risk-taking these days:

The latest hedge fund to go public is one of a breed of large, institutional firms that seem to be more focused on gathering assets and delivering stable but unremarkable returns with low volatility — fewer dramatic moves one way or another — than swinging from the chandeliers like George Soros taking on the Bank of England.

Hedge fund advisers may or may not end up like Pets.com though they certainly (and unfortunately) will not have a sock-puppet mascot.  But the truth is that these advisers, like Pets.com or Apple, all bear risk that is probably much higher than an initial public offering of a manufacturer or other traditional industry company.  Ultimately, the underlying theme embodied in Dealbook's post is the appropriateness of all of these investment for retail investors.  Here, the question is who will make that choice -- securities regulators or the individual investors.  The securities regulatory regime we have today largely leaves this up to investors  -- I believe this is the right call provided investors are given the proper tools to assess such risk.  The alternative is to end up with a slippery slope and a political process which leads to prohibitions like that of Apple.  But despite this, the SEC still irrationally clings to the idea that some investments are still too risky for investors.  Thus, hedge and private equity funds are off-limits.  This is no different than banning Apple in the 1980s (and irrational too -- if the adviser can go public why not the fund itself?).  And that I believe, is the moral of this story.

By the way, the split-adjusted ipo price of Apple is $2.75.  It now trades at about $138. 

July 16, 2007 | Permalink | Comments (0) | TrackBack (0)

RBS Et Al. Stays The Course

Fortis, RBS and Santander announced today that they intend to proceed with their proposed offer for ABN AMRO. The consortium left the consideration per ABN AMRO share being offered unchanged at €38.40 but raised the cash component to approximately 93% (€35.60 in cash plus 0.296 New RBS Shares for each ABN AMRO share).  The offer values the equity of ABN AMRO at €71.1 billion or $98.03 billion.

The prior bid has been 79% cash. It was also conditioned upon a shareholder vote with respect to the LaSalle Bank sale and withheld €1 a share to cover costs for litigation over ABN's LaSalle bank unit.  This condition and the withholding have been dropped in this bid in the wake of the Dutch court ruling upholding the sale of LaSalle Bank to Bank of America.  Instead, RBS issued a press release today stating that the net cash received from the LaSalle sale will go to RBS.  The new RBS consortium offer puts significant pressure on Barclays to raise its competing all-share bid which currently values ABN AMRO at about €65 billion.

ABN AMRO's securities are registered with the SEC and it has greater than 10% of its shareholders resident in the United States disqualifying the RBS-led group from using the SEC's cross-border exemptions.  Accordingly, there will be two offers made by the RBS consortium:  one to U.S. shareholders and ADS holders wherever located governed by U.S. rules and one to all other shareholders governed by Dutch rules.  In connection with the U.S. bid, RBS will need to prepare and file with the SEC a registration statement on Form F-4.  However, unless ABN AMRO cooperates, the RBS consortium will not need to include in the F-4 the usually required U.S. GAAP pro forma financial information for the combination.  This omission is permitted by Rule 409 of the Securities Act since the information is reasonably unavailable (usually required ABN AMRO auditor consents can also be omitted under Rule 437).  And it is a way for hostile bidders in cross-border transactions to gain timing parity by having to avoiding the time-consuming process of preparing this financial information.   

July 16, 2007 in Europe, Hostiles, Tender Offer | Permalink | Comments (0) | TrackBack (0)

The Great Pancake

IHOP Corp. today announced an agreement to acquire Applebees International, Inc.   IHOP will pay  $25.50 per share in cash, representing a total transaction value of approximately $2.1 billion.  The press release was a bit scarce on transaction terms, though the deal is all-cash and will be consummated through a merger.  Break fees were not disclosed nor future arrangements with Applebee's management.  IHOP will finance the transaction through a securitization of the entire Applebee's business underwritten solely by Lehman Brothers.  For those who want more details, the conference call will be at 8:30 a.m. Eastern Time. To participate, dial 800-798-2801 and reference pass code 67127217. 

The transaction premium was a low 4.6% premium over Friday's closing price on the Nasdaq and below the company's 52-week high of $29.10.  But Applebee's has been on the block since February after investor Richard C. Breeden conducted a successful proxy solicitation to obtain board representation for his firm.   Breeden who is now on the Board also apparently voted to approve a sale.   So, it remains to be seen if another bidder will emerge or even shareholder protest at the low premium.  Still, I'm surprised at the use of cash rather than stock consideration by IHOP; one would have thought that Applebee's shareholders would have liked to participate in the future upside of any deal. 

And I'll close with a quote from a prior post on this possible combination:

A combination of IHOP and Applebees would be an unstoppable force in the American suburb. People wouldn't leave, and the branches would develop into self-sufficient communities like the Arcologies in SimCity 2000 or the Bio-Dome invented by Pauly Shore or your average Wal Mart Super Center.

July 16, 2007 in Takeovers | Permalink | Comments (0) | TrackBack (0)