August 1, 2007
The Return of the Tender Offer (Redux)
Three weeks ago I penned a post on the The Return of the Tender Offer. Yesterday, Theodore Mirvis a partner at Wachtell, Lipton, Rosen & Katz posted to the Harvard Corporate Governance Blog a memorandum issued by Wachtell last week on the same subject. It is worth a read for those wanting a highlight of the benefits tender offers provide over mergers. And nice to know we are in agreement on the return of the beloved '80s structure, particularly since I was a week or two ahead of those super-fast Wachtell lawyers.
Harvard's Hedge Fund Loss
The Wall Street Journal today is reporting that Harvard University's endowment fund lost about $350 million investing in Sowood Capital Management. The amount is about 1.2% of Harvard's $29 billion endowment. Last month Sowood suffered in the bond market a loss of about $1.5 billion, approximately half of its assets under management. Earlier this week the hedge fund Citadel Investment Group agreed to buy much of Sowood's investment portfolio. Citadel has made a bit of a business buying hedge fund distressed assets; last year it purchased the remainder of Amaranth's energy portfolio.
The Harvard loss belies the fact that hedge funds and private equity have been very good investments for university endowments. A recent paper, Smart Institutions, Foolish Choices?: The Limited Partner Performance Puzzle by Josh Lerner , Antoinette Schoar and Wan Wongsunwai found that, in particular, endowments' annual returns are nearly 14% greater than average investments in this investment class. And, according to the Wall Street Journal, the top 53 university endowments, with nearly $217 billion in assets, have invested about 18% of their money in hedge funds. The superior returns are a testament to the investing skill of these endowment fund managers mixed, perhaps, with the good luck to have started investing in this area early before it became saturated with a high number of funds searching for return. Still, the Harvard loss is a reminder that hedge fund investments carry risk, and some more than others. But hopefully it will not be cited for the oft-made argument that hedge funds are too risky for investment. Presumably, the very smart people at the Harvard endowment ran their risk analysis and considered the risks associated with this investment against the superior returns Harvard has made over the years. Against this backdrop and the extraordinary returns gained, the loss is insignificant and worthwhile. Good investment is often accompanied by total failure mitigated by diversification. Here, Harvard can take solace in the fact that it only lost half of one investment, something that investors in many equity stocks cannot (remember Pets.com?).
The Bancrofts Finally Sell: Wachtell Profits
Dow Jones & Company announced that it has agreed to be acquired in a merger transaction by Rupert Murdoch's News Corp. for approximately $5.6 billion (see also the Bancroft family statement here). News Corp. will pay $60 in cash for each share of Dow Jones common stock and Class B common stock. Members of the Bancroft family and their trusts collectively owning approximately 37% of Dow Jones' voting stock have agreed to vote in favor of the transaction. The agreement also permits up to 250 holders of record and not more than 10% of the shares of Dow Jones to elect to convert their Dow Jones shares into a number of exchangeable Class B units of Newco LLC, a newly formed subsidiary of News Corporation. This will permit these holders to defer taxable gains until the shares are exchanged for News Corp. stock. Once the merger agreement and the voting agreement are filed with the SEC I'll have more commentary on any other interesting terms of the transaction. In the interim and not surprisingly, both the Wall Street Journal and the New York Times are all over this story.
Congratulations must go to Rupert Murdoch and his counsel Skadden Arps for getting to an agreement in an incredibly complicated, political deal (Dealbook has a blow-by-blow here). There are a number of M&A lessons to learn from this transaction. But a major one is the fragility of dual-class stock as a controlling structure over future generations in the absence of a strong leader. The New York Times has it in the form of Arthur Ochs Schulzberger Jr, but the Wall Street Journal lacked a similarly strong presence. The Bancroft family therefore not only failed to manage Dow Jones over the past years but also failed to collectively and meaningfully respond to Murdoch's surprise bid (For more on this distinction, see my post Why The New York Times is Not Dow Jones).
And regardless of whether the Bancrofts won or lost here, their advisers Wachtell, Lipton and Merill Lynch have been reported to be about to profit handsomely on this deal. In a last minute attempt to obtain the consent of the Bancroft family, Dow Jones agreed to pay their fees associated with the transaction up to the amount of $30 million. According to the Wall Street Journal, Wachtell is now in line to receive $10 million and Merrill $18.5 million. Not bad for what appears to be a limited amount of work which ultimately left the Bancrofts criticized for a lack of strategy and a failure to obtain a higher price.
For more on Dow Jones, see my prior posts:
Topps Postpones Shareholder Meeting
The Topps Company, Inc. announced yesterday that it had postponed the special meeting of Topps' stockholders to vote on the proposed merger agreement with Michael Eisner's The Tornante Company LLC and Madison Dearborn Partners, LLC to August 30, 2007. The record date is now August 10, 2007.
Upper Deck's competing, higher bid is still in the HSR Act waiting period being reviewed by the FTC or DOJ. The waiting period under the HSR Act for the Upper Deck bid will expire at 11:59 pm ET on August 3, 2007, unless this period is earlier terminated or extended. Given this, Topps had no choice but to postpone its own shareholder meeting. By the time the Topps shareholder meeting is held, the FTC or DOJ will have decided whether to initiate a second request concerning the Upper Deck acquisition proposal; if a second request is made it would postpone the Upper Deck bid by several months at best. In a few days Topps board and its shareholders will thus be in a better position to assess the Upper Deck bid and choose. But the choice will become much harder if a second request is made forcing Topps shareholders to decide between a lower, certain bid and Upper Deck's less sure and delayed higher one. For more see Upper Deck Tries to Buy Time, Topps and Upper Deck: The Antitrust Risk.
July 31, 2007
Midwest Air Group Blinks
Midwest Air Group, Inc., parent of Midwest Airlines, announced today that it has formed a special committee to explore strategic and financial alternatives for the company. According to the announcement:
While the board of directors has not changed its recommendation regarding the unsolicited exchange offer by AirTran Holdings, Inc., the committee intends to commence discussions with AirTran regarding its proposal to acquire all outstanding shares of Midwest. Additionally, the committee intends to hold discussions with other strategic and financial parties that have recently expressed interest in pursuing a transaction with Midwest.
Airtran's battle for Midwest has been one of the most vigorously fought takeover battles of this decade. The formation of a special committee by Midwest is likely driven by increasing shareholder protest at their board's scorched earth resistance to Airtran's "hostile" bid. Last week, hedge fund Octavian Management LLC, Midwest's largest shareholder with a 7.5% stake, called the Airtran bid "extremely compelling" and stated that it was "irresponsible and wrong for the company not to abide by its fiduciary responsibility to engage with AirTran" in negotiation. The Midwest committee will therefore serve to cover the board's liability exposure, but it is also likely to lead to a serious exploration of the AirTrans offer. If Airtran succeeds in acquiring Midwest it will be a powerful statement about the ability of any public company to "just say no" and resist a transaction, but it will also serve as a reminder of the immense transaction costs our current takeover system imposes by permitting the use of anti-takeover devices.
Wendy's, Triarc and Stapled Financing
Nelson Peltz, Chairman of the Triarc Companies, Inc. yesterday wrote a letter to the Chairman of the board of directors of Wendy's International concerning the inability of the two companies to reach agreement on several significant provisions of a confidentiality agreement governing Triarc's participation in the auction of Wendy's. In the letter, Peltz also stated that Triarc presently anticipates that it would be prepared to offer consideration in the range of $37 to $41 per share to Wendy's shareholders. Triarc currently owns the Arby's restaurant chain as well as 9.8% of Wendys itself.
Triarc filed the letter on a Schedule 13D amendment, showing that the letter is more for public negotiating position more than anything else. In the letter, Triarc alluded to concern over a provision requiring any bidder to use seller stapled financing. Wendy's here appears to be following the fairly common practice of requiring any bidder participating in its auction to use pre-packaged financing offered by Wendy's financial adviser, termed stapled financing. Since the financing is on the same terms for all of the bidders it permits the seller, in this case Wendy's, to better assess the competing bids. Triarc is objecting to this provision since, as an industry buyer, it thinks it can obtain better terms in the market.
Stapled-financing has always been a bit problematical. The reason is that it puts the seller's financial adviser on both sides of the transaction. The adviser wants to simultaneously obtain the highest price for the seller, but also wants a price that is not too high so as to cause trouble for the buyer in making its future debt payments. The banks have papered over this conflict by having third party investment banks retained to provide the seller an independent fairness opinion. But, as I have said before, fairness opinions, though they have been a great source of income for the independent investment banks such as Greenhill, are manipulable and in today's market rather unreliable. Consequently, there is still reason to be concerned with the issues raised by stapled financing even if a fairness opinion is obtained. But here, the issue is different. Triarc is objecting because it believes it can obtain better terms for its own financing. The appeal of this argument is convincing and likely why Triarc highlighted this dispute in its letter rather than covering any of the other disputed provisions. What these are, Triarc did not disclose.
Bausch & Lomb's Wary Eye
The Board of Directors of Bausch & Lomb Inc. yesterday responded in a letter to Advanced Medical Optics' proposal to acquire B&L for $75 per share in cash and AMO stock. B&L currently has an agreement to be acquired by affiliates of Warburg Pincus for $65 per share in cash.
In their letter, the B&L board and special committee expressed uncertainty as to the ability of AMO to complete an acquisition of B&L. ValueAct Capital, the owner of 8.8 million shares of AMO common stock, representing 14.7% of the outstanding AMO shares, has publicly stated it will vote against the acquisition. AMO is required to have its own shareholder vote on the proposal in order to approve the share component of the offered consideration. Given this completion risk, the B&L board stated that the $50 million reverse termination fee proposed by AMO was too low.
AMO had previously been designated by B&L as a party who B&L could continue to negotiate with despite the end of the "go shop" period in the Warburg Pincus merger agreement. However, in yesterday's letter the B&L board threatened to withdraw this status if AMO was not more cooperative. The effect of such a redesignation would be to require B&L, if it ultimately accepts the AMO bid, to pay Warburg a $120 million termination fee rather than the lower $40 million required if a bid was received during the "go shop" period.
B&L's actions appear to be appropriate considering the uncertainty surrounding the AMO proposal. However, the threat of a redesignation of AMO seems a bit odd -- such a move would only hurt B&L shareholders and make it harder for AMO to pay the consideration offered. It therefore seems motivated to assuage likely complaints of Warburg more than anything else. B&L is currently in discussions with AMO's shareholders concerning their intentions with respect to any AMO vote, and apparently is in a dispute with AMO concerning the provision of information to these shareholders. the actions of AMO's large shareholder have clearly thrown a monkey-wrench into AMO's bid and put them in the role of "decider" for this acquisition contest. Another victory for institutional shareholder activists.
Updated Financial Regulators Gateway
The University of Toledo College of Law has updated and redesigned its Financial Regulators Gateway website. According to Professor Howard M. Friedman the site "is the most complete online directory in existence of securities, banking and insurance regulators in every state and in every country throughout the world. Names, addresses, phone numbers, e-mail and website information [are] provided and links are furnished to each agency and in to the laws and regulations they administer."
July 30, 2007
ABN AMRO Withdraws Barclays Recommendation
The Managing and Supervisory Boards of ABN AMRO today announced that they would no longer recommend the Barclays offer to combine with ABN AMRO. Instead, the boards announced that they were not "currently in a position to recommend either" the Barclays offer or the Royal Bank of Scotland consortium "[o]ffers for acceptance to ABN AMRO shareholders". As at the market close on 27 July 2007, the Barclays offer was at a 1.0% discount to the ABN AMRO share price and the RBS consortium offer was at a premium of 8.5% to the ABN AMRO share price; 9.6% higher than the Barclays offer.
This essentially leaves the battle for ABN AMRO in the hands of its shareholders. Nonetheless, there are structural differences which may influence the contest. The RBS consortium is proceeding through an exchange offer structure (see the Form F-4 here, it is a nice precedent for a U.S./Dutch cross-border exchange offer). The Barclays offer is pursuant to a Dutch merger protocol. RBS has launched its offer and Barclays today stated that it intended to make its offer documentation available on August 6. Given the need for all of the parties to obtain regulatory and other approvals, it is likely that they will remain on the same timing track. Thus, ultimately, the contest now largely depends on the share price of Barclays increasing during this time period sufficiently to justify its acquisition proposal: an uncertain prospect in today's volatile markets.
New Article on Private Equity M&A Litigation
Joseph S. Allerhand and Bradley R. Aronstam at Weil, Gotshal & Manges have recently published an article in the New York Law Journal, entitled New Wave of M&A Litigation Attacks Private Equity Deals. According to an author posting on the Harvard Corporate Governance Blog, the article "addresses several recent decisions from the Delaware Court of Chancery involving private equity firms and management buyouts. The article concludes that, while the players in the M&A market may have changed, the rules of the game remain the same where the board of directors decides that it’s time to sell the company."
Doosan to Purchase Bobcat from Ingersoll Rand for $4.9 billion
Ingersoll-Rand Company Limited today announced that it has agreed to sell its Bobcat, Utility Equipment and Attachments business units to South Korean Doosan Infracore for approximately $4.9 billion. The Ingersoll-Rand press release was sparse on details, but more will come out once the sale agreement is filed with the SEC later this week. Of particular interest will be if there is an Exon-Florio condition in the agreement and its parameters in light of the new CFIUS review legislation which came into effect last week. I'll post more on this once the agreement is filed.
Also, for those who decry the sale of this American infrastructure to foreigners note that Ingersoll-Rand reincorporated from the United States to Bermuda on December 31, 2004 (for details see their 2006 Form 10-K here). This was before Stanley Works attempted the same tax dodge, and, in the wake of the controversy, the American Jobs Creation Act of 2004 made such reincorporation tax prohibitive.
Law and Finance Revisited
Perhaps one of the more interesting papers presented at last week's Law and Society Annual Meeting in Berlin was Holger Spamann's, On the Insignificance and/or Endogeneity of La Porta et al.'s 'Anti-Director Rights Index' under Consistent Coding. Here is the abstract:
I re-code the "Antidirector Rights Index" (ADRI) of shareholder protection rules from La Porta et al. 1998 for 46 countries in 1997 and 2005 with the help of local lawyers. My emphasis is on consistent coding; I do not change the original variable definitions. Consistently coded ADRI values are neither distributed with significant differences between Common and Civil Law countries, nor predictive of stock market outcomes. The revision of the variable definitions in Djankov et al. 2005 salvages some of the original results, but reinforces severe endogeneity concerns regarding the index components that drive the remaining significant results. I review the other index components and conclude that the ADRI is unlikely to be a valid measure of shareholder protection. Results derived with the ADRI in the literature may have to be revisited. Along the way, I develop some general guidelines for consistent coding.
Translating, Spamann looks at the famous article Law and Finance by Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, & Robert W. Vishny (The Journal of Political Economy, Vol. 106, No. 6 (Dec., 1998), pp. 1113-1155). That paper examines the legal rules covering protection of corporate shareholders in 49 countries. It found that common law countries have the strongest protection for investors and civil law countries the weakest protections. And its findings set off a host of scholarship on inter alia the jurisdictional path dependency and origins of corporate and securities regulation, the role of law in economic growth and building share equity premiums, and the relative strengths of various legal systems for investors. By casting doubt on La Porta et al.'s findings, Spamann also throws into question all of this further scholarship. Nonetheless, there has been an observable difference in equity premiums among all of these systems with common law countries generally having higher ones and the U.S. the highest. The paper of La Porta et al. may have dubious groundings and others are bringing forward some good research to also dispute it and its progeny, but on some level all agree that the law and its protection of investors matters for finance, the question is really how and how much?