M & A Law Prof Blog

Are PE IPOs Shareholder Friendly?

Yesterday, the Deal Book had a story about a study commissioned by the Investor Responsibility Research Center Institute.  The story reports the major conclusion of the study is that

 

buyout firms generally do not establish more shareholder-friendly corporate governance policies at the companies they take over, restructure and then take public. Instead, [these companies] tend to exhibit features that potentially benefit executives at the expense of shareholders, including takeover defenses and boards whose independence may be compromised.

 

The study is apparently based on a sample of 90 companies that went public from 2004 to 2006. Of these, 48 were backed by private equity funds, and 42 were not.

 

In addition to being a sample that must be too small to be of any statistical significance (can we really draw any conclusion from the fact that 5 of 48 PE backed companies had poison pills compared to 1 of 42 companies without PE sponsorship?), the study seems to have stolen a base that the DealBook implicitly recognizes. 

 

Since “private equity firms generally keep a large ownership stake in their portfolio companies for years after they take them public” isn’t it at least as likely that the policies in the PE backed companies are ones the PE funds believe are MORE shareholder friendly?  After all, why would these funds do anything other than maximize the value of their ultimate exit?

 

MAW

On the road this week

First, thanks to Steven Davidoff for the mention on his Deal Professor Blog today.  Hopefully, Michael and I will be able to add to the discussion.   

Second, I'll be traveling for the rest of the week and won't be posting very much.  But I'll be back online Monday, June 15.

-bjmq

CSL-Talecris Agreement Terminated

CSL Limited announced this morning that it was pulling its HSR filing and is terminating its merger agreement with Talecris following a challenge by US antitrust authorities. The CSL-Talecris deal was one of the very first transactions to be challenged by a more assertive, post-Bush Administration, FTC.  

CSL will pay Talecris a $75 million break fee.  The prospect of a lengthy delay and an indeterminate outcome led the parties to decide to walk away.  The FTC was to hear arguments in October 2009, well past the July 2009 drop-dead date in the merger agreement.   Simultaneously, CSL announced a share buyback.  Earlier, CSL's CEO hinted they might make a move like that -- essentially returning to shareholders the money they raised to do the Talecris transaction. 

CSL disucssed their decision to terminate the agreement on an analyst call, which you can listen to here. 

-bjmq

Supreme Court Stalls Chrysler Sale

Supreme Court of the United States

No. 08A1096  

INDIANA STATE POLICE PENSION TRUST, ET AL.,  

Applicants, 

v.  

CHRYSLER LLC, ET AL.

ORDER

   UPON CONSIDERATION of the application of counsel for the applicants, and the responses filed thereto,

   IT IS ORDERED that the orders of the Bankruptcy Court for the Southern District of New York, case No. 09-50002, dated May 31 and June 1, 2009, are stayed pending further order of the undersigned or of the Court.

/s/ Ruth Bader Ginsburg

Associate Justice of the Supreme

Court of the United States

Dated this 8th

day of June 2009.

****

Update: The WSJ has a copy of the Indiana Pension Fund's application for a stay here. 

Slow-Motion Trainwreck

 OK, I have to admit that I am fascinated at the slow-motion train wreck that is the proposed sale of Hummer to a Chinese company in the foothills of the Himalayas.  I understand that GM and its advisors are just looking to off-load this division, but I wonder what the buyer is thinking.  Do they really think they can operate a 3,000 person, money-losing manufacturing operation in the US from Chengdu?  Of course, it’s not impossible, given that the actual manufacturing of the civilian Hummer (H2) is done by AM General (here) under contract in a plant just adjacent to their factory that produces the military version of the vehicle.  But, the H3 might be more difficult as it is manufactured at the GM truck plant in Shreveport, LA (here).  

The Tengzhong transaction will require that Tengzhong takeover the contract with AM General for the production of the H2 and also enter into some sort of transition services agreement with GM for production of the H3 unless it wants to carveout the line from the existing Shreveport plant that currently builds the H3 along with the Chevy Colorado and the GMC Canyon and run that themselves somehow.  What happens when GM decides to ditch the Colorado and the Canyon?  Who runs the factory then?  Or is Tengzhong going to buy those lines as well?

Though it was easy to announce, I suspect this transaction will be much more difficult for the Chinese buyer to successfully accomplish.  I’m not alone.  Here’s a sampling of Chinese English-language press reaction:

"I had never heard of the company and was surprised at the news"

"(Tengzhong) has no experience producing passenger vehicles, which adds to the difficulties it faces in managing the brand."

“While China has made clear its determination to pursue energy-saving, environment-friendly and sustainable growth, the purchase of a US auto brand famous for being a gas-guzzler obviously does not make sense.”

 “Tengzhong plans to maintain the current management team for Hummer and develop more energy-efficient models, but this is just a fantasy. If the current team could prevent the brand from slumping in any way, they would have done so before.”

 “The vehicle is too big, uses too much gas, and is viewed as a toy for the rich. These are rather significant brand negatives for the Chinese company Tengzhong to consider."

On the other hand there was this from the People’s Daily, the party organ:

“The acquisition of General Motors Corporation (GM) "Hummer" brand name by the Chinese private enterprise Sichuan Tengzhong Heavy Industrial Machinery is an example that should be encouraged.”

-bjmq

Gilson and Kraakman - The Directors Guild

Ronald Gilson (Stanford/Columbia) and Reinier Kraakman (Harvard) make the case for stronger boards in today's New York Times.  In particular, they argue that the Treasury should set up (or at least rely on) a clearinghouse to help identify idependent director candidates to take positions onboards of companies that the government has taken stakes in.  The op-ed is here.

-bjmq