M & A Law Prof Blog

Fan and Yu on debt and the market for corporate control

Qiu and Yu's The Market for Corporate Control and the Cost of Debt is appearing in the current Journal of Financial Economics.  Here's the abstract:

Abstract: How do bondholders view the existence of an open market for corporate control? Between 1985 and 1991, 30 states in the U.S. enacted business combination (BC) laws, raising the cost of corporate takeovers. Relying on these exogenous events, we estimate the influence of the market for corporate control on the cost of debt. We identify different channels through which an open market for corporate control can benefit or harm bondholders: a reduction in managerial slack or the “quiet life,” resulting in higher profitability and firm value; a coinsurance effect, in which firms become less risky after being acquired; and an increasing leverage effect, in which bondholder wealth is expropriated through leverage-increasing takeovers. Consistent with the first two mechanisms, we find that the cost of debt rose after the passage of the BC laws; moreover, it rose sharply for firms in non-competitive industries, and for firms rated speculative-grade. In contrast, there is virtually no effect for firms in competitive industries, or firms rated investment-grade.

-bjmq

Perot Systems Employee Charged With Insider Trading

...well, that was quick.  From the SEC's litigation release this morning:

The SEC alleges that [Reza] Saleh made increasingly large purchases of Perot Systems call options contracts based on material, non-public information that he learned in the course of his employment with, or duties for, two Perot-related private companies and Perot Systems. Immediately following the tender offer announcement on Monday, September 21, Saleh sold all of the call option contracts in the accounts and reaped approximately $8.6 million in illicit profits.

Later that same morning, SEC staff with assistance from the Options Regulatory Surveillance Authority identified Saleh as a suspicious trader. Soon after being contacted by SEC staff, Saleh acknowledged to a Perot Systems director that he knew about the impending transaction when he traded.

-bjmq

Update:  Friday's WSJ has a sympathetic profile of Mr. Saleh.  Turns out he led a critical role in Ross Perot's rescue of EDS employees from Iran following the revolution in 1979.  That's too bad.  He'd have been better off if he wasn't so greedy.

Survey of Senior M&A Executives

Key findings of Nixon Peabody's senior executive M&A survey include:

• Mid-market deals under $250 million are expected to dominate over the next 12 months, with the industrial and financial services segments most likely to generate the highest volume of opportunities.
• While strategic buyers are expected to offer higher premiums than private equity buyers, 61 percent of respondents state that private equity firms’ ability to execute transactions quickly makes them more attractive to target companies.
• Financial sponsors are far more likely than their corporate counterparts to explore distressed deals. Accordingly, 56 percent of private equity respondents who have not traditionally focused on distressed opportunities say they plan to do so this year.
• Over the next 12 months, buyers will be focused on targets that complement existing businesses or operating units while sellers primary objectives will be to raise capital and divest non-core assets.
• 72 percent of respondents expect seller financing to be the most popular form of financing in the absence of regularly available debt.
• 58 percent of respondents expect sellers to negotiate higher termination fees over the next 12 months, and their use of MAC clauses and other deal terms reflects their concerns about transactions closing.  

Here's a link to the full 2009 M&A Executive Insight report. 

-bjmq

Adams Analyzes the Oracle/Sun Agreement

Ken Adams makes his case for better drafting of merger agreements, using last Spring's Oracle/Sun transaction as an example.  Here's the agreement so you can follow along.  

-bjmq

  

Travis Laster Confirmation Hearing

From yesterday's confirmation hearing as reported by the Sussex Countian:

   “For the past 13 years the vast majority of my practice has been before the Court of Chancery,” he said, adding that he understands not only the legal precepts that guide the court, but also the procedures and practices under which it operates.

    “What the Court of Chancery does is very different from other courts, the legal questions are of a particular nature,” he said. “There is not a lot of correspondence between other courts and the Court of Chancery.”

    The court, which has jurisdiction over cases involving businesses, contracts, trusts and other financial matters, is often cited as the leading authority on corporate law worldwide.

    In response to a question from Senate President Pro Tem Anthony J. DeLuca, D-Varlano, Laster said he would work to preserve the court’s status as a model, even when its decisions conflict with trends in the federal judiciary.

    Laster told the committee that, even in light of the bad feelings the public and politicians may have towards corporate America and its conduct before and during the recession, the Court of Chancery must hold its ground and remain fair and reasonable. 

    “A lot of people are hurting and are angry, they’ve lost a lot of money, it’s justifiable,” he said. “I think there’s a culture in Washington that says, whatever happens we have to change something.”

    While some are quick to accuse Delaware and the Court of Chancery of leaning on the side of corporate interests, Laster said the court must prove that it is and has always been fair.

    “We have to stick to what got us to a point of preeminence,” he said. “We have to make sure that we’re not labeled a pro-management state, we are a balanced state.”

-bjmq

Travis Laster Confirmed to Chancery Court

Congratulations to Vice Chancellor J. Travis Laster on his confirmation this afternoon. 

-bjmq

Update:  Here are the reports from Bloomberg and the Delaware News Journal.

Perot Systems Option Trading Raises Questions

By way of warning, I tell students in my Acquisitions Workshop that it's always a bad to start your legal career by engaging in insider trading.  Then we launch into a discussion of the David Li (News Corp/WSJ case) and the too-good-for-Hollywood Pacjin case and the Edelman case.  

The key lesson of the discussion is, obviously, that M&A lawyers need to learn discretion when it comes to their clients' confidences and pending transactions. If you have inside information about a pending transaction, of course, you don't trade on it.  Moreover, a discrete lawyer doesn't blab all about the transaction to their seat-mates on flights across the Pacific and certainly doesn't tell their good-for-nothing boyfriend about it.  

The second, less obvious, lesson is that if you are going to trade on inside information, well then, for heaven's sake don't trade options!  

Someone with inside information about the just announced Perot Systems/Dell transaction is going to learn that second lesson the hard way.  Bloomberg is reporting a spike in options trading just prior to announcement of the deal:

Calls volume climbed to 2,539 contracts, or 242 times the four-week average, according to data compiled by Bloomberg. Only 10 puts traded that day, the data show. The shares, which rose 0.1 percent to $17.91 on Sept. 18, surged 65% to $29.62 at 11:03 a.m. New York time today.

Options are usually so thinly traded that anyone greedy enough to try to make money on inside information by trading options ahead of an M&A announcement is just asking for trouble.  I suppose since one can make much more money on an equivalent investment using options rather than stock it's just too much to resist.  Better yet, if you've got inside information, sit on it.  

-bjmq

Massa and Zhang on Cosmetic Mergers

Massa and Zhang's Cosmetic Mergers: The Effect of Style Investing on the Market for Corporate Control is appearing in the current Journal of Financial Economics. Here's the abstract.

Abstract:  We study the impact of “style investing” on the market for corporate control. We argue that the choice of the bidder is influenced by the fact that the merge with a firm that belongs to an investment style more popular with the market may boost the bidder's value. By using data on the flows in mutual funds, we construct a measure of popularity, which relies directly on the identification of sentiment-induced investor demand, rather than being a direct transformation of stock market data. We show that differences in popularity between bidder and target help to explain their pairing. The merger with a more popular target generates a halo effect from the target to the bidder that induces the market to evaluate the assets of the less popular bidder at the (inflated) market value of the more popular target. Both bidder and target premiums are positively related to the difference in popularity between the target and the bidder. However, the target's ability to appropriate the gain is reduced by the fact that its bargaining position is weaker when the bidder's potential for asset appreciation is higher. We document a better short- and medium-term performance of less popular firms taking over more popular firms. The bidder managers engaging in these cosmetic mergers take advantage of the window of opportunity induced by the deal to reduce their stake in the firm under convenient conditions.

-bjmq

Air Coming Out of Marvel Acquisition?

I hope no one over at Disney was really surprised when Marvel received 45 copyright termination notices from the family of Jack Kirby last Wednesday.  I mean, even I, if prodded, remember that there was bad blood between Marvel and DC Comics and that it stemmed from some sort of dispute between the legendary Stan Lee and his erst-while partner Jack Kirby.  Me? I was always clearly in the Marvel camp growing up.

Anyway, it's just another reason why law school students who might want an M&A practice should take advantage of their time in law school to take a broad array of classes - even in areas where they think they'll never venture, like for example, copyright law.  One shouldn't be surprised by this kind of post-signing issue.  It should have come up in diligence (remember Michael's post on J&J/Elan?) and parties should be prepared to respond quickly and pro-actively. From the IP reps of the merger agreement, it's clear that people were looking backward and thinking of this issue, but it's less clear that they anticipated getting the notices.  

On the other hand, a Disney spokesperson told the LA Times, "The notices involved are an attempt to terminate rights seven to 10 years from now and involve claims that were fully considered in the acquisition."

Of course they were.  But we'll see won't we?  One suspects that Marvel will attempt to negotiate some sort of settlement with the Kirby estate, suggesting that parties anticipated this issue before signing.   On the other hand, if Disney attempts to walk or renegotiate its $4 billion price, they might be showing their hand that they were in fact surprised.

-bjmq

Legal Scholarship and Contractual Complexity

Over at the Conglomerate, guest blogger Afra Afsharipour has a couple of posts (here and here) dealing with the sparseness of legal scholarship on contractual complexity. Prof. Afsharipour, who practiced as a corporate lawyer for seven years before she began teaching in 2007, is "surprised that there is not more scholarship studying in detail complex agreements."  She contends that there is a need for greater scholarly study of existing contractual terms, deals and deal structures, at least in part to help practioners do a better job.

 

I agree with her views. In 2005, Jono Rosen and I published a pair of articles analyzing some common but complex contractual terms.  The first was on various anti-dilution provisions and the circumstances under which they are used.  The second examined the effect various provisions in venture capital contracts have on economic outcomes.  Our goal was to provide a way for practioners and academics to think about these provisions and better understand them.

 

Unfortunately, I believe that she is fighting an uphill battle.  In my (admittedly limited) experience, too many legal scholars believe these inquiries are too practical and therefore don't have much value.  So (with a handful of exceptions) even those who think this is a productive area of inquiry are discouraged from this path.

 

MAW