Friday, August 27, 2010
And off they go. You'll notice that Dell is engaged in incremental bidding, while HP is jump bidding. That's because, HP has no way of knowing what Dell's private valuation of 3Par is so it's trying to use a version of "shock and awe" to knock Dell out of the bidding. Dell, on the other hand, is confident that it will always have the last look, so it need do no more than add $0.10 to HP's last bid. A week ago, this company was trading for about $9/share. Last bid was $30 a bid.- something like $2 billion. I suppose it's only money.
The Lex Column at the FT has this just about right:
Few things inspire a loss of rationality quite so much as the fear of missing out. The phenomenon is apparent around buffet tables, in one-day sales, and now in the pursuit of computer storage company 3Par.
Hypothetically matching HP’s latest $1.8bn offer, Dell would have to generate profits after tax of $180m from 3Par in order to make a respectable return of, say, 10 per cent in five years. At Dell’s current 29 per cent tax rate, that would require 2015 revenues of $1.2bn: a sixfold sales increase in five years, not to mention spectacular profitability. Who needs rationality when desperation and blind optimism conspire so well?
Thursday, August 26, 2010
So, after three days Dell has come back with a bid to match that of HP in the contest acquisition of 3Par (previous post here). Dell originally offered $18/share. HP jumped in to bid $24. And now, Dell has come back with a bid of $24.30. If they continue to bid up the price, Dell will always have the option to bid just a penny (or 30) more 3Par. The WSJ notes:
The original merger agreement between Dell and 3PAR gives Dell perpetual matching rights—or the ability to match any counter-offer within three days. For that reason, Dell is unlikely to raise its offer by a large amount, a person familiar with the matter said. Rather, if H-P raises its offer above $24.30, Dell will match it rather than bump it by several dollars, the person said.
And that's where matching rights become tricky. If I'm sitting in the C-Suite at HP I should anticipate this kind of outcome going in. Incremental bidding isn't a good thing for the second bidder. You have to expend all sorts of time and resources and will only win in the event the first bidder decides you're paying too much. Worse -- Dell has a termination fee in place, so HP's bid must be high enough to pay both the its private valuation of 3Par as well as the termination fee. That's to say, HP is subsidizing Dell's bidding. (See Ian Ayres article on lockups to walk through how a termination fee can result in the second bidder subsidizing a bidding contest).
Of course, the same might be true without a match right, but the presence of the explicit match right that the initial bidder will always get a last look and that the second bidder will never be able to sweep up the target with the initial bidder nodding happily as the second bidder overpays.
I haven't touched on BHP's hostile bid on Potash to date and hadn't planned to. But, now I feel like I have to. The SEC just charged two Spaniards (Juan Jose Fernandez Garcia and Luis Martin Caro Sanchez) with insider trading in advance of BHP's bid for Potash. Garcia and Sanchez fall into the growing category of idiot insider traders. Forget the insider trading charges, these guys should be charged with "idiot insider trading." Why? Well, two words: call options. I've blogged about the idiocy of using call options for insider trading before (here and here).
According to the complaint Garcia and Sanchez bought 331 out-of-the-money call options for Potash in the two weeks prior to the transaction being announced. Prior to these purchases, neither Garcia nor Sanchez had ever dipped into the call option market. And, what? The very first time they decide to buy options they load up on one company's options just prior to the announcement of a hostile acquisition and make $1.1 million in profits?! [Anyway, props to them for going big.]
The second reason that these guys are idiot inside traders is that bought all these options through their personal brokerage accounts. What? No old aunt in Croatia to run the trades through?!
The final reason why these guys are idiot insider traders is that Garcia was head of equity derivative research at Banco Santander, which had been advising BHP on its bid. Let's see BHP approaches its bankers at Banco Santander and says, we'd like to acquire Potash and the first thing that enters Garcia's mind is that he should trade on the info?! Garcia should have known better than to betray client confidences.
Anyway, is it any surprise that the SEC filed its complaint on August 25, just eight days after BHP announced its offer for Potash? Wait a minute -- the original complaint was filed last Friday (August 20) but only unsealed yesterday. That's three days between announcement of the deal to filing of the sealed complaint. Man, these guys are idiots.
Wednesday, August 25, 2010
Thanks to Courtroom View, I'm watching the arguments in the challenge to Hertz's acquisition of Dollar. The Dealbook has helpfully posted a copy of the plaintiff's brief requesting a TRO to hold up the deal.
Things aren't looking all that good for the plaintiffs so far. Vice Chancellor Strine is interested in hearing about improper motives and the plaintiffs really can't come up with any. Strine is suggesting that if shareholders let this deal go, they could get nothing - as in Lear. Apparently, the plaintiffs are relying on the same financial expert as the plaintiffs in Lear did and that didn't end up well for the shareholders.
In any event, Strine has already dropped one Snooki reference.
'Counseling services are available for those of you who are shocked by the fact that bankers have relationships with management...'
'It's possible that Dollar shareholders could end up with an Elvis Costello song.' [ed note: Less than Zero.]
'Why didn't they offer up a go-shop? You know, this could be like "Shaq v." Come on, bring it on.'
Def Counsel: 'Your Honor, the board of Dollar has lots of experience on other boards, including GM, Chrysler, United Airlines..."
VCS: "So, you're saying they have lots of experience with bankruptcy."
'I have Austin Power or I have awesome power?'
'Remember the Honeywell deal? The shareholders of Honeywell are really enjoying the benefits of that deal with GE. Oh, that's right? That deal didn't happen.' [On the importance of a deal actually getting done.]
'You want me to enjoin this deal so that Avis can be told in crayon something that they obviously already know?'
'If Avis can't figure this out, then maybe I don't want to rent a car from them. They might forget the number of tires on the car or to screw bolts on.'
Plaintiffs seem to be arguing that the board had an obligation under Revlon to reach out to Avis and invite them to make another bid - essentially to generate an auction. Strine disagrees and reminds him that Revlon is not about a duty to affirmatively reach out to another bidder. It's about treating fairly someone who has expressed an interest in the target.
Do strategic buyers sign deals with go-shops? Strine thinks not. He's generally correct. They don't. All this to the question of whether or the lack of a go-shop in the merger agreement was at all nefarious.
My best guess:
I suspect that Strine will deny this motion for an injunction. Strine has been consistently skeptical of plaintiff's arguments all morning long. The issue in order to get an injunction is that by letting the Hertz deal move forward, the shareholders are going to be irreparably harmed. Plaintiffs have been arguing that an injunction would create time for Avis to pursue its bid and that would benefit shareholders. It's a "why not" argument. Strine doesn't seem to have bought that argument. Irreparable harm is not a "why not" argument.
Tuesday, August 24, 2010
August is turning out to be a crazy month for M&A activity. This is somewhat surprising given that August is not usually known as a month with booming deal activity. So what is the currency of choice in this activity? Cash, cash and more cash. According to dealmakers “Cash on corporate balance sheets is at historically high levels and interest rates are expected to remain low.” Some are even predicting a revival of the M&A market. But, according to the NY Times Dealbook, the boom in M&A activity may not be sustainable: “it will take a broad pickup in the nation’s economic growth before merger mania can really take hold."
Overall, the busy August is likely a positive sign for law students eager to do deal work. Of course, this isn’t 2006 or early 2007, but I am optimistic!
So says the FT:
HP may trump its rival– but to do so it has put a valuation on 3Par that is, frankly, bonkers.
Unless, of course, there is value in needling your rival:
Perhaps the price factors in the value of annoying and distracting Dell. The one-time largest manufacturer of PCs has fallen into third place, and is still trying to make a multi-year turnround plan work. So, while Dell would receive a $54m break fee, and make a handsome profit on its one-third stake in 3Par, management time and energy will have been wasted. HP might be able to gain share for its $35bn PC business.
Just a reminder that in many acquisitions, things sometimes move very quickly away from rational questions of valuation. Sometimes, it just doesn't matter what the price is, even if it's too much. Reuters' DealZone a couple of weeks ago made a similar observation when it noted that deals in the coal business aren't always about business:
“We are talking about being big personalities who know each other going back decades … There is a really big CEO that I know in the industry who lost a girlfriend to somebody else years and years ago when they were in high school and to this day, he still hates that CEO.”
And so it goes.
Monday, August 23, 2010
Last week Dell announced that it would acquire 3PAR. This morning, HP announced that it would be topping Dell's bid by some 33%. HP's bid is an anecdotal data-point in favor of Vice Chancellor Strine's thesis that matching rights are not anti-competitive (see Toys r Us). You see, Dell's agreement with 3PAR includes a series of strong matching rights of the type I written about before (here, here).(The Deal Professor has also recently written about this issue - here.) That's to say, it includes information rights as well as a good faith obligation on the part of 3PAR to negotiate with Dell (from the Dell/3PAR merger agreement):
6.3(b) … Notwithstanding the foregoing or anything to the contrary set forth in this Agreement, if, at any time prior to the Appointment Time, the Company Board receives a Superior Proposal or there occurs an Intervening Event, the Company Board may effect a Company Board Recommendation Change provided that (i) the Company Board determines in good faith (after consultation with outside legal counsel) that the failure to effect a Company Board Recommendation Change would reasonably be expected to be a breach of its fiduciary duties to the Company Stockholders under applicable Delaware Law, and in the case of a Superior Proposal, the Company Board approves or recommends such Superior Proposal; (ii) the Company has notified Parent in writing that it intends to effect a Company Board Recommendation Change, describing in reasonable detail the reasons, including the material terms and conditions of any such Superior Proposal and a copy of the final form of any related agreements or a description in reasonable detail of such Intervening Event, as the case may be, for such Company Board Recommendation Change (a “Recommendation Change Notice”) (it being understood that the Recommendation Change Notice shall not constitute a Company Board Recommendation Change for purposes of this Agreement); (iii) if requested by Parent, the Company shall have made its Representatives available to discuss and negotiate in good faith with Parent’s Representatives any proposed modifications to the terms and conditions of this Agreement during the three (3) Business Day period following delivery by the Company to Parent of such Recommendation Change Notice; and (iv) if Parent shall have delivered to the Company a written proposal capable of being accepted by the Company to alter the terms or conditions of this Agreement during such three (3) Business Day period, the Company Board shall have determined in good faith (after consultation with outside legal counsel), after considering the terms of such proposal by Parent, that a Company Board Recommendation Change is still necessary in light of such Superior Proposal or Intervening Event in order to comply with its fiduciary duties to the Company Stockholders under applicable Delaware Law. Any material amendment or modification to any Superior Proposal will be deemed to be a new Superior Proposal for purposes of this Section 6.3. The Company shall keep confidential any proposals made by Parent to revise the terms of this Agreement, other than in the event of any amendment to this Agreement and to the extent required to be disclosed in any Company SEC Reports.
Now starts an interesting dynamic. Presumably, now that 3PAR has received an offer from HP (here), they are already talking with Dell. One expects that inside Dell people are asking themselves if 3PAR is really worth it.
Truth be told, I have no idea. In fact, that's the point here. No one really knows how much someone else values a target, you can guess, but you can't be sure. All you can know (or estimate) is what your own private valuation of the target is. In any event, Dell is undoubtedly going through the exercise of reassessing its valuation of 3PAR. Did it undervalue 3PAR initially? If its valuation was correct, did Dell underbid for 3PAR in hopes of getting a good deal? Now, Dell has to decide whether 3PAR is worth a bidding contest.
This is where things get tricky. Unless run by a disciplined executive, bidding contests can get emotional and parties can confuse the true goal of acquiring something with residual value for the acquirer with simply winning the contest. We'll see how the Dell side of this plays out.
If Dell decides not to match HP's bid, people in Palo Alto will no doubt congratulate themselves. But, I'm sure someone will also ask whether or not HP had just paid too much.
Friday, August 20, 2010
I've been following developments in the Barnes & Noble/Burkle drama for a few months now. I'll admit I was a little surprised when Burkle and BKS let an opportunity to settle the case fall away last week. I figured that both sides would have been better off without a decision. But, hey, I've been wrong before. So where are we now?
Yesterday, Burkle and BKS both filed proxy materials with the SEC (BKS filing here and Yucaipa filing here) and the contest for the three contested board seats is on. BKS has a staggered board so only one-third of the board is up for a vote at any one time. While Leonard Riggio will run for re-election to the board, Micheal Del Guidice and Lawrence Zilavy will not. Is it any surprise that Del Giudice will not run for re-election? Although teh BKS board won its court case against Yucaipa to keep its shreaholder rights plan in place, Del Giudice was arguably the loser. Although Strine ultimately concluded that Del Giudice acted in good faith, it can't help to have the following description of your Lead Independent Director in the record as you enter a proxy contest:
More controversial is the case of Michael Del Giudice. Del Giudice has had a high-profile career as a key staffer in New York politics. He and Riggio are Democrats, and Del Giudice admits that Riggio has regularly contributed, at Del Giudice’s request, to candidates that Del Giudice suggests. For a political powerbroker, that kind of relationship is valuable. More importantly, Del Giudice’s day job is as the Chairman of Rockland Capital, which co-manages a fund called Midland Cogeneration Venture (“Midland”). Midland is not a huge fund, being around $164 million in size. Riggio has made sizable investments totaling $4.8 million in Midland in the past, and recently committed $20 million over the next three years to another fund that Rockland manages, which is $275 million in size. Although Del Giudice has crafted a contractual provision that supposedly ensures that he does not directly profit personally from the monies attributable to Riggio’s investments, Del Giudice’s main occupation is running Rockland, which depends heavily on funds under management forits revenues. Indeed, it seems to me obvious that it is material to the success of Del Giudice’s fund that wealthy, prominent people like Riggio entrust their capital to it. The funds Riggio invests relative to the size of the Rockland funds, in my view cannot be viewed as immaterial.
What makes Del Giudice notable is that he has been determined by the Barnes & Noble board to be independent under the strict NYSE rules that have existed since the Enron-WorldCom meltdown. I do not lightly ignore that determination, but on the limited record before me I cannot conclude that the business and political ties between Del Giudice and Riggio render Del Giudice independent of Riggio. What also makes this issue more piquant is that Del Giudice was the director selected by his colleagues to be the lead director of the Barnes & Noble board. [citations omitted]
Given the Vice Chancellor's conclusion that Del Giudice was not independent of Riggio, it would be hard for BKS to go into a proxy contest arguing that their Lead Independent Director was independent. Ditto for Zilavy, Riggio's personal financial advisor, but he was admittedly already not an independent director. So out they both go.
Yesterday, they were replaced by two independent nominees, David Wilson and David Golden. BKS' soliciting materials along with Wilson and Golden's bios can be found here. Against them will be the Yucaipa slate, which includes Burkle, Stephen Bollenbach, and Michael McQuary (bios here). Not surprisingly, Yucaipa discloses that should its directors win seats, they will immediately seek to be appointed to a special committee to seek out "strategic alternatives" for BKS - that's code for a sale of the company.
The shareholder meeting is scheduled for Sept 28, so we'll continue to check in on this as it develops.
[Apologies for not linking to the opinion last week when it came out when I posted about Strine's dig at corporate law geeks. I was using Typepad's post-by-email function as I was in an undisclosed overseas location ... okay, on vacation in Spain. Turns out the post-by-email function isn't all that good. Sorry. Below is a link to the opinion, care of Dealbook.]
Thursday, August 19, 2010
I've posted on matching rights in merger agreements before. And, over at The Deal Professor, just yesterday Steven did a nice post on deal making innovations with the observation that matching rights are becoming more and more common. Almost as if on cue, Intel announced its acquisition of McAfee. The merger agreement is loaded with matching rights for Intel that make it extremely difficult to imagine how a third party might justify putting together a competing bid.
For example, in section 6.3 the agreement provides Intel with information rights in the event a Superior Proposal is received by McAfee. That's to say if Symantec were to throw an unsolicited proposal over the transom, McAfee would have to share it with Intel and provide Intel two days notice before it began negotiations with the second bidder. Of course, that gives Intel a leg-up on any brewing bidding contest. But if that were not enough, the merger agreement gives Intel an explicit match. The matching right prevents McAfee's board from changing its recommendation in favor of the Intel transaction in the event it receives a Superior Proposal until it has:
(A) provided to Parent five (5) business days’ prior written notice that it intends to take a such action... (B) during such five (5) business day period, if requested by Parent, engaged in good faith negotiations with Parent to amend this Agreement in such a manner that the Acquisition Proposal that was determined to constitute a Superior Proposal no longer is a Superior Proposal ...
Explicit matching provisions like this have only one purpose - to shut out potential second bidders by ensuring the only way they will win a potential bidding contest is by overpaying. That's not a position a second bidder likes to be in. The presence of such rights thus weakens the power of a post-signing market check. Prior to the Delaware Supreme Court's decision in Lyondell, I might have been worried that by shutting down a post-signing market check and not conducting a pre-signing market check that a board might be in some danger of running afoul of its Revlon obligations. I'm less worried about that now, but am still uneasy that the prevalence of explicit matching rights in merger agreements where board's have Revlon obligations makes it difficult for a board to argue that it took reasonable steps to maximize shareholder value upon a sale for cash.
Monday, August 16, 2010
In this helpful Client Alert Latham & Watkins reviews the accounting and tax issues associated with equity awards to company employees during the months preceding an IPO, and provides a summary of the related concerns of the Staff of the SEC. The alert includes specific, practical guidance on how to avoid cheap stock issues during the SEC Staff’s review of an IPO registration statement.
Thursday, August 12, 2010
OK, I'll admit. This hurt:
... At bottom, Yucaipa is simply positing an absurd scenario, at best fit
for a discussion by a Red Bull fueled group of nerdy second year law
school corporate law junkies, who find themselves dateless (big
surprise) on yet another Saturday night.
From page 57 of the Vice Chancellor Strine's opinion applying Unocal to the BKS' board's decision to adopt a pill in the face of Ron Burkle's accumulation of stock. Dealbook has the opinion here.
Wednesday, August 11, 2010
Noting that the two-step acquisition structure (i.e. a front-end tender offer followed by a merger) has continued to rise steadily in the United States public company M&A market this year,Fulbright has published this guide to the benefits and potential pitfalls of the tender offer in today’s market.