M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Saturday, November 7, 2009

IPOs versus Acquisitions: An Empirical Analysis

The IPO versus acquisition exit is a continuing area of interest:  Why go sell when you can go public at a higher valuation?   My first reaction is that if you sell, you can then head off to Hawaii the next day.  An IPO will require you to hang around a lot longer.  Leisure has some value.  Alas, there are others with a slightly more academic answer to this question. Bayer and Chemanur have just posted a paper,  Product Market Competition, IPOs versus Acquisitions, and The Valuation Premium Puzzle: An Empirical Analysis that provides some perspective on this question.

Abstract: Using a hand-collected data set of private firm acquisitions and IPOs, this paper presents an empirical analysis of a private firm's choice between IPOs and acquisitions, and develops the first empirical analysis in the literature of the “IPO valuation premium puzzle” (where many private firms seem to choose to be acquired rather than to go public at higher valuations). In the first part of the paper, we test several new hypotheses regarding a firm's choice between IPOs and acquisitions and develop several new empirical findings. First, firms operating in less concentrated industries characterized by the absence of a dominant market player (and therefore more viable against product market competition) are more likely to go public rather than be acquired. Second, firms facing a greater extent of information asymmetry in the equity market, more capital intensive firms, and those operating in industries characterized by greater private benefits of control, are more likely to go public rather than to be acquired. Third, the likelihood of an IPO over an acquisition is greater for venture backed firms and those characterized by higher pre-exit sales growth. Finally, we document that the passage of the Sarbanes-Oxley Act has motivated a larger proportion of firms to favor acquisitions over IPOs. Our comparison of private firm valuations in IPOs and acquisitions in the second part of the paper indicates that IPO valuation premia disappear for larger firms after controlling for various factors affecting a firm's choice between IPOs and acquisitions. Further, after controlling for the long run component of the expected payoff to firm insiders from an IPO exit, we find that the IPO valuation premium vanishes even for smaller venture backed firms and shrinks substantially for non-venture backed firms as well. Thus, we are able to resolve the IPO valuation premium puzzle for the first time in the literature.


November 7, 2009 in Deals | Permalink | Comments (0) | TrackBack (0)

Friday, November 6, 2009

"Artie" was right to be spooked

Don't trade options.  Yes, that's right, but it turns out these guys weren't as smart as they thought.  Best not to share confidential information about your client's transaction with anyone.  From the DOJ's criminal complaint:


At one point defendant Drimal allegedly tells a confidential informant that the source for his inside information was a lawyer and that he had no idea why he [Cutillo] "was risking his legal career and possibly 'jail' by providing [inside] information."  Indeed. 


November 6, 2009 in Insider Trading, Lawyers | Permalink | Comments (0) | TrackBack (0)

Thursday, November 5, 2009

More Bad Lawyers...

The Galleon case takes more scalps.   From the SEC's litigation release.

The Securities and Exchange Commission today announced insider trading charges against nine defendants in a case involving serial insider trading by a ring of Wall Street traders and hedge funds who made over $20 million trading ahead of corporate acquisition announcements using inside information tipped by an attorney at the international law firm of Ropes & Gray LLP, in exchange for kickbacks. The SEC alleges that Arthur J. Cutillo, an attorney in the New York office of Ropes & Gray, misappropriated from his law firm material, nonpublic information concerning at least four corporate acquisitions or bids involving Ropes & Gray clients — the 2007 acquisitions of Alliance Data Systems Corp. ("ADS"), Avaya Inc. ("Avaya"), 3Com Corp. ("3Com"), and Axcan Pharma Inc. ("Axcan").

The SEC's civil complaint describes the scheme in detail, including a nice paragraph describing their "trade-craft": 

Arthur Cutillo is an attorney at the international law firm of Ropes & Gray. He has worked in the firm's New York office since 2005. Throughout 2007, he had access to, and learned of material nonpublic information concerning corporate acquisitions in which Ropes & Gray represented acquirers or bidders in proposed acquisitions. Cutillo owed a fiduciary or other duty of trust and confidence to Ropes & Gray and its clients to keep this information confidential and not to disclose or personally use this information.


Zvi [Goffer, former Galleon employee] traded on-this inside information and had numerous downstream tippees who also traded. As part of this illegal trading scheme, Cutillo, [Jason] Goldfarb, and Zvi at times used disposable cell phones in an attempt to conceal the scheme. For example, prior to the announcement of the 3Com acquisition, Zvi gave one of his tippees a disposable cell phone that had two numbers programmed in it labeled "you" and "me." After the announcement of the 3Com acquisition, Zvi destroyed the disposable cell phone he had provided the tippee by removing the 8IM card, biting it, breaking the phone in half) throwing away half of the phone, and instructing his tippee to get rid of the other half of the phone. 

I like the bit about the cell phones.  Clearly, these guys have been watching TV. One thing they didn't do was pay attention in law school when they should have learned about their obligations to clients and the insider trading rules.  Cutillo is a 2005 law school grad - four years.  That's a very short legal career.  I wonder what he'll do with the rest of his life.  


November 5, 2009 in Insider Trading, Lawyers | Permalink | Comments (0) | TrackBack (0)

Schapiro on Shareholder Access

SEC Chair Mary Schapiro's address (yesterday) to the PLI on shareholder voting and proxy access is here.  Her thoughts on shareholder access (in part):

Corporate governance, after all, is about maintaining an appropriate level of accountability — accountability to shareholders by directors whom shareholders elect, and by managers whom directors select. But accountability requires both transparency and an effective means to take action for poor performance or bad decisions.

I believe that the most effective means of promoting accountability in corporations is to make the shareholders' vote both meaningful and freely exercised. One of the most important matters presented for a shareholder vote is the election of the board of directors. However, in most cases today, shareholders have no choice in who to vote for.

They get a ballot in the mail or electronically. And they are presented with a slate of nominees. Most of the time, it's as many nominees as there are positions to fill. And, the nominees are the individuals whom the board itself has chosen.

Looks like the SEC is also taking on the question of empty voting and over-voting as well.  That's quite a full plate.

The review, which is well underway, is being conducted by staff throughout the agency — and involves outreach to market participants to ensure that a broad range of views is considered. As a result, the concept release to be voted on by the Commission is expected to probe a variety of areas:

We'll be asking about ways to ensure accuracy in vote tabulation, given that voting results on many items are becoming increasingly close and many companies have adopted majority voting for directors.

We'll be asking about whether our rules adequately address whether votes are cast by those with an economic interest in the securities. In some cases, for instance, a broker's customers may cast more votes than the broker is actually entitled to vote on their behalf — something called "overvoting". And in other cases, individuals are able to vote shares even though they lack the full economic interest that goes along with share ownership — known as "empty voting."


November 5, 2009 in Proxy Rules, SEC | Permalink | Comments (0) | TrackBack (0)

Takeover Panel and Arsenal

I think I've said before that I love takeovers of sports teams - mostly because it let's me read the sports pages on company time.  Well, there's a bit of a to-do brewing in the Uk over Denver-based businessman Stan Kroenke's potential takeover of the Arsenal football club (that's soccer).  Of course, Kroenke is no stranger to the sports business.  In fact, he's a "sports mogul".  He reportedly has ownership stakes in the Colorado Rapids (MLS), the Denver Nuggets (NBA), the Colorado Avalanche (NHL) as well as a 40% stake in the St. Louis Rams (NFL).  Okay, so that's not the most impressive list of professional sports teams, but any one of them is certainly better than any team I own.  (If you don't count amateur youth league, I don't presently own any.) 

Well, if you had $3 billion to your name and you were looking to improve on that line-up, what better way to do that than acquiring a large stake in a venerable UK football club?  Over the past summer, Kroenke reportedly purchased 25% of the club's shares.  In recent weeks, he has been buying shares in small blocks, 427 shares here, 10 shares there and another 200 shares here.  He now controls 29.6% of the shares of Arsenal.  The Times of London provides a nice Q&A on what would happen should Kroenke acquire 30% of the shares of Arsenal:

What could happen next?
As soon as Stan Kroenke hits 30 per cent of Arsenal’s shares, he will have to launch a takeover bid for the whole company.
What would the Takeover Panel make of this?
The City regulator that monitors dealings in UK companies would expect Kroenke to have enough cash to launch a fully funded bid immediately if he hit 30 per cent. He would have to bid for the rest of the shares at the highest price he had paid in the preceding 12 months. On May 1, he paid £10,500 each in a 4 per cent block. That has to be his bid price.
Suppose Kroenke did not have the available funds?
The panel has been keeping an eye on the situation and would be angry with Kroenke if he hit 30 per cent without having the cash to buy the club. Kroenke’s only option would be to apologise to the panel, which would make him sell the shares to get back below 30 per cent.
How closely is the American being watched?
The panel has looked at Kroenke’s stake-building to see if he is “acting in concert” with other Arsenal shareholders, which includes Danny Fiszman, from whom he bought shares for which he still owes £50 million. “Acting in concert” means you have teamed up with other shareholders to gain control without telling the panel, which is against City rules. However, the panel decided this year that Kroenke had not teamed up with other shareholders, despite arguments to the contrary from Alisher Usmanov, the Russian, who owns 25 per cent of the club. 

The rules of the Takeover Panel govern Kroenke's next steps.  So far, he has remained silent on his intentions.  That's likely because he doesn't want to trip a put-up or shut-up offer order from the Takeover Panel pursuant to Rule 2.5.  Fans in the UK aren't taking any of this lightly.  Apparently, a group have already traveled to the US to see Kroenke and assure themselves of his intentions.


Arsenal coach providing sports reporters with a summary of the takeover rules:

November 5, 2009 in Europe, Transactions | Permalink | Comments (0) | TrackBack (0)

Wednesday, November 4, 2009

Grundfest on Shareholder Access

Joe Grundfest fo Stanford has a new paper on the SEC's shareholder access proposal, The SEC's Proposed Proxy Access Proposal: Politics, Economics, and the Law.

Abstract: The Securities and Exchange Commission has proposed proxy rules mandating shareholder access under conditions that can be modified by a shareholder majority to make proxy access easier, but not more difficult. From a legal perspective, this Mandatory Minimum Access Regime is so riddled with internal contradictions that it is unlikely to withstand review under the arbitrary and capricious standard of the Administrative Procedures Act A fully-enabling opt-in proxy access rule is, in contrast, entirely consistent with the administrative record developed to date by the agency and is easily implemented without delay. 

From a political perspective, and consistent with the agency capture literature, the Proposed Rules are easily explained as an effort to generate megaphone externalities and electoral leverage to benefit constituencies allied with currently dominant political forces, even against the will of the shareholder majority. Viewed from this perspective, the Proposed Rules have nothing to do with shareholder wealth maximization or optimal governance, and reflect a traditional contest for economic rent common to political brawls in Washington D.C. 

From an economic perspective, if the Commission nonetheless determines to implement an opt-out approach to proxy access, it will then confront the difficult problem of defining the optimal proxy access default rule that should be subject to a symmetric opt-out by shareholder majority (not the asymmetric opt out imposed by the Mandatory Minimum Access Regime, for which there is no support in the academic literature). The administrative record currently contains no information that would allow the Commission objectively to assess the preferences of the shareholder majority regarding proxy access at any publicly traded corporation. To address this gap in the record, the Commission should, if it determines to follow an opt-out strategy, conduct a properly designed stratified random sample of the shareholder base, and rely on the results of that survey to set appropriate default proxy access rules. The Commission’s powers of introspection are insufficient to divine the value-maximizing will of the different shareholder majorities at each corporation subject to the agency’s authority.


November 4, 2009 in Proxy Rules | Permalink | Comments (0) | TrackBack (0)

Tuesday, November 3, 2009

13(d) and 13(g) Staff Interpretations

The new SEC staff interpretations (September 19, 2009 update) on 13(d) and 13(g) and a not so random selection of one of the Q&A's have been posted.  They're worth reviewing if these questions have kept you up at night.

Question: A husband and wife share the same household. One spouse beneficially owns more than five percent of a voting class of equity securities registered under Section 12 of the Exchange Act. Is the other spouse deemed the beneficial owner of the same securities under Rule 13d-3(a) by virtue of their marital relationship alone?

Answer: No. For purposes of Regulation 13D-G, an analysis of the facts and circumstances is necessary in determining whether a husband, wife or child beneficially owns shares held by another family member sharing the same household. The relationship between family members should be analyzed to determine whether a family member directly or indirectly either has or shares voting and/or dispositive power over the shares held by any other family member living in the same household. 


November 3, 2009 in SEC | Permalink | Comments (0) | TrackBack (0)

VC Laster's First Days

Vice Chancellor Laster's first days on the job and an informative backgrounder of the Chancery's newest vice chancellor:

Vice Chancellor J. Travis Laster strode down the hallway used by judges in Delaware's Court of Chancery like an old hand on the bench.

But when it came time to enter the courtroom, he couldn't get the door open. Turns out, Laster was pushing the door instead of pulling it.

"That shows how new I am," Laster, 39, said on his third day on the job last month.


November 3, 2009 in Delaware | Permalink | Comments (0) | TrackBack (0)

Derivatives, Complexity, and Asymmetric Information

Arora, et al have a paper, Computational Complexity and Information Asymmetry in Financial Products, which concludes that the complexity of financial derivatives due in part to the complicated structure of many derivatives, the sheer volume of financial transactions, the need for highly precise economic modeling, the lack of transparency in the markets increases information asymmetries rather than decreases them.  I made a similar argument in a paper, The Failure of Private Ordering and the Financial Crisis of 2008, last Spring, but minus all of the horsepower these guys bring to the table.

Abstract: Traditional economics argues that financial derivatives, like CDOs and CDSs, ameliorate the negative costs imposed by asymmetric information. This is because securitization via derivatives allows the informed party to and buyers for less information-sensitive part of the cash flow stream of an asset (e.g., a mortgage) and retain the remainder. In this paper we show that this viewpoint may need to be revised once computational complexity is brought into the picture. Using methods from theoretical computer science this paper shows that derivatives can actually amplify the costs of asymmetric information instead of reducing them. Note that computational complexity is only a small departure from full rationality since even highly sophisticated investors are boundedly rational due to a lack of requisite computational resources.



November 3, 2009 in Deals | Permalink | Comments (0) | TrackBack (0)

Monday, November 2, 2009

Bad Lawyers

This is a story with sad endings all around.  Last week, the SEC charged Canadian lawyer, Stanko Grmovsek with insider trading.  Here's the SEC's complaint.  The complaint alleges that Grmovsek was involved in a 14 year long conspiracy with his friend, Gil Cornblum, another Canadian lawyer, netting over $10 million in illicit profits.  Cornblum passed along confidential information regarding pending transactions to Grmovsek.  Cornblum was an associate at Sullivan & Cromwell and then a partner at Dorsey & Whitney (of O'Hagan fame!).   According to the complaint, while at Sullivan:

Comblum was not in Sullivan's mergers and acquisitions group. He worked in the general corporate practice area. He obtained information about M&A transactions involving Sullivan clients in one of three ways: (1) through discussions with other Sullivan attorneys at lunch or in the hallways; (2) by viewing memoranda or deal documents left outside offices, in fax rooms, or in copy centers; and (3) by accessing electronic documents' in files on Sullivan's document management system, often using passwords intended for use by the word processing department. 

At times during this period, Grmovsek would make wake-up calls from Toronto to Cornblum in New York at 4:00 or 5:00 a.m. to ensure that Cornblum arrived at Sullivan's offices to search for information prior to the arrival of other employees. For about four or five months during 1997, Grmovsek also lived with Cornblum in New York while attending film school. Cornblum provided material, non-public information to Grmovsek during phone calls or during discussions at night while Grmovsek was living with him.

While Cornblum was a partner at Dorsey & Whitney:

Comblum worked on the transactions involving three [...] U.S. issuers and obtained information about the other transactions in one of three ways: (1) through searches of files contained in NetDocuments, Dorsey's electronic database system; (:2) from conversations with other attorneys about their matters; and (3) through conflict checks.

From 2005 through 2006, Comblum provided information to Grmovsek during calls made from Gnnovsek's cell phone to Comblum's office phone. Beginning in 2006, Comblum began using pay phones to communicate with Gnnovsek in an effort to conceal their contacts. In addition, during 2006 and 2007 Gnnovsek was a frequent visitor to Comblum's office prior to weekly lunch dates. Comblum provided informnnation to Gnnovsek during these phone calls and lunch meetings.

Last week, Grmovsek pled guilty to insider trading and Cornblum committed suicide.



November 2, 2009 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Sunday, November 1, 2009

Mergers and Acquisitions in the Cosmos

I wonder if there is a statutory shareholder vote for any of these transactions?  Do I get appraisal rights if I vote no?


November 1, 2009 | Permalink | Comments (0) | TrackBack (0)