Tuesday, November 30, 2010
Robert Bartlett and Annette Poulsen have posted their paper, Determinants of Buyout Returns: Does Transaction Strategy Matter, on SSRN. They make some interesting observations and conclusions about various LBO strategies - they put some useful color on the traditional understanding of the LBO and its role in improving efficient operation of firms.
Abstract: This paper reexamines one of the most studied questions in the scholarship of leveraged buyouts (LBOs): how do LBO sponsors create value for their investors in take-private acquisitions? In so doing, the paper makes two significant contributions to our understanding of LBOs. Most importantly, the paper provides the first-ever analysis of the equity returns to LBO sponsors. Due to data limitations, prior studies have traditionally relied on total returns to an LBO (that is, returns to both debt and equity investors) to analyze the source of LBO value creation. Drawing on a unique database of LBO transactions, this paper examines instead the actual internal rates of return (IRRs) realized by LBO sponsors on a deal-by-deal basis, thereby permitting a direct analysis of how LBO sponsors create value for their investors in leveraged buyouts. Second, the paper demonstrates how the traditional approach to examining the determinants of LBO returns overlooks a number of important LBO transaction strategies that are used to enhance a sponsor’s equity returns. In particular, the paper demonstrates that a significant component of LBO sponsor returns stems not from operating performance changes but from timing tactics that LBO sponsors use to accelerate the liquidation of their investments and thereby increase their IRRs. Among other things, this latter finding helps explain the gradual bias of private equity firms away from IPOs as an exit strategy for their portfolio investments and towards cash acquisitions.
Monday, November 29, 2010
The Deal Prof has a run-down on the Airgas decision. He has it about right:
The signal this reversal sends is that it basically says don’t worry about the language of your contracts so long as everybody “knows” what it means.
Potato, potahto, tomato, tomahto. Let's call the whole thing off ... But you know, for the life of me, I can't figure out what motivated the court to take this path with the decision.
Genzyme's CEO Henri Termeer gave an interview to Le Figaro in which he discussed the possible sale of Genzyme to Sanofi as well as the prospects of employing an earnout. You can read it here. I'd suggest the Google translate function which is surprisingly good. In any event:
Le Figaro. - Are you opposed to a takeover of Genzyme?
Henri Termeer. - The Board of Genzyme has been very clear. We do not absolutely opposed to this process, natural for a listed company, and we are looking to maximize corporate value for shareholders. But Genzyme is not for sale. Our company is recovering from its production problems and it is changing. It's never a good time to complete a transaction. And at $ 18.5 billion, or $ 69 per share, Genzyme is still not in a sales process.
Your refusal to enter into discussions with Sanofi is it just about price?
Yes. The price of 69 dollars per share is not acceptable to the Board of Genzyme. Today we have no starting point, nothing that allows us to begin discussions.
Would you like Sanofi in its offer has a clause that allows your shareholders to receive, under certain conditions, a surcharge?
It is a means commonly used in the pharmaceutical industry when companies fail to agree on a price. This is part of alternatives that could be explored. We are thinking about the molecule of Campath. This could be used for Sanofi and other companies with which we are discussing.
Are you proposing this solution to Sanofi?
It is not for us to do.
Thursday, November 25, 2010
Who announces a deal on Thanksgiving?! Delmonte, it seems.
Vestar Capital Partners and a fund run by Centerview partner James Kilts will join KKR in the deal, which ranks as one of the largest U.S. leveraged buyouts of the year. The three partners will assume about $1.3 billion in Del Monte's debt. When including the debt, the company said the deal value is $5.3 billion.
Del Monte can try to solicit high offers until Jan. 8, 2011 during a so-called "go shop" period. Del Monte said it expects the deal to close in March if it gets no higher bid.
The go-shop has nearly become a standard term over the past couple of years. This development is a bit of a puzzle. Sure, directors of sellers are likely afraid that they might face litigation if they don't so something to actively test the market. There's something to that. On the other hand, courts have -- particularly in recent years - been less demanding of selling directors. There's no reason to believe that for a high profile transaction like this one that a no-shop with a fiduciary out wouldn't be sufficient. Hey, don't get me wrong, I'm all for go-shops. I just wonder whether there's more to them given that financial buyers who have always been averse to auctions are now willing to give go-shops without too much complaining any more.
Now for more turkey.
Wednesday, November 24, 2010
Tuesday, November 23, 2010
See that there? That's egg on my face (ARG-DelSupCtOpinion). It's a total victory for Ted Mirvis and Wachtell. The Supreme Court even cited approvingly to the ABA's form book.
The Supreme Court overturned the Chancery Court, basically holding that since everyone has always assumed the language "in the third year following the year of their election" means a "three year term" for directors, then four months between annual meetings is too truncated to count as an annual meeting. So a bylaw that moves the annual meeting to a date that isn't near the "traditional" date, but still "in the third year following the year of their election" is invalid. That seems like a victory for poor (or sloppy) drafting: "in the third year following the year of their election" or "three year term" ... whatev's.
Of course, the court leaves unanswered the next question - okay, so what's the minimum amount of time between annual meetings? Five months? Six months? More?
So the good news? By ruling against the bylaw, the Supreme Court has given new life to Air Products challenge to Airgas' "just-say-no" defense. Could it be that we might finally get "just-say-no" litigated? We'll see. Air Products' challenge to Airgas' poison pill is next up in the docket.
Monday, November 22, 2010
Gina Chon and Preeta Das at the WSJ have an article this morning suggesting that Genzyme might be open to a deal with Sanofi if it's given certain back-end protections for its shareholders. The basic problem that has stood in the way of Genzyme doing a deal with Sanofi has been valuation. Genzyme's board has consistently said that Sanofi's bid woefully undervalues Genzymes short and medium term prospects. It looks like that the parties might be reaching back into the old bag of trick for a deal device to bridge the valuation gap. They're calling it a contingent value right -- a right that would pay off for Genzyme shareholders in the event Campath (Genzyme's new drug) outperforms certain targets.
Wait a minute ... that sounds like an earnout. In fact, it is an earnout. The CVR is typically used when buyers are offering stock as consideration and the seller is not convinced that the short or medium term value of the stock is worth what the buyer claims. The CVR gives the selling shareholders the right to come back to the buyer for cash ex post in the event the price of buyer's stock fall belows a target rice.
The earnout on the other hand is a contracting device that helps to bridge the valuation divide from the other end. The buyer is not convinced the seller's asset is worth what the seller claims it is. The earnout lets the seller put her money where her mouth is. If ex post the seller turns out to be worth what the seller says it's worth, then the seller's shareholder get additional compensation. If not, not.
What's unique about the earnout that Genzyme may be talking to Sanofi about is that Genzyme is a publicly traded company. Typically earnouts are only used when the seller is privately-held. Rarely does one see a public company target getting an earnout. In any event, that doesn't change my general view of earnouts: it's best to just say no. Particularly given that the parties to this possible deal are not necessarily on the same page, it would probably be best for them to avoid disputes later down the road to do the hard valuation work now. But, hey, that's just my opinion.
Those of you reading in the US - have a great Thanksgiving. I'll be posting again next week.
One of the more surprising developments over the past couple of years has been the rehabilitation of Frank Quattrone. During the Internet bubble, Quattrone was investment banker to Netscape and Amazon among others. He got caught up with spinning hot stocks and when the Feds went looking for a scalp, Quattrone found himself in their cross-hairs. The case, ultimately, was a bust and died about four years ago.
Recently, Quattrone has been busy. Among other recent deals, he shepherded 3Par during its sale to HP (and the bidding contest with Dell), and Isilon's recent sale to EMC. Now, Quattrone is speaking out and giving his M&A exit advice to entrepreneurs. In a conversation with Ben Gurley (Benchmark Capital) at the Web 2.0 Conference last week in San Francisco, Quattrone noted the changed M&A lanscape. IPOs are no longer the preferred exit for VCs - although they used to account for 50% of liquidity event, they are now less than 10%. That's probably not be choice given the fact that IPO multiples remain higher than M&A multiples. Nevertheless, with the state of regulatory affairs post Sarbanes-Oxley, there isn't a lot of interest in taking small companies public.
On the M&A side, according to Quattrone the tech market is also more mature and has consolidated considerably - the top 10 tech companies now have 70% of the tech market cap and 70% of the cash (Microsoft, Google, Apple, Amazon, eBay, and Yahoo among others). That means the market is, on the one hand, potentially less competitive for sellers because the number of obvious buyers has shrunk to just a handful. On the other hand, the buyers who are left may be more willing - as in HP/Dell - to bid aggressively against each other as the big techs are all consolidating vertically.
In the conversation with Gurley (below) Quattrone provides some interesting insights into thinking strategically about selling a startup tech firm and directions that M&A in the tech sector are taking. Quattrone is optimistic about the near future prospects of M&A. Of course, he's an M&A banker, he has to be optimistic! In any event, this conversation is worth watching when you have time -- maybe between turkey and dessert, or at halftime.
Saturday, November 20, 2010
The WSJ is reporting that the FBI has an insider trading dragnet in the works (also being reported by Bloomberg). From the tone of the article, it sounds like it could be bigger than the Galleon sweep. They reprinted an e-mail from Broadband Research to its clients:
"Today two fresh faced eager beavers from the FBI showed up unannounced (obviously) on my doorstep thoroughly convinced that my clients have been trading on copious inside information," the email said. "(They obviously have been recording my cell phone conversations for quite some time, with what motivation I have no idea.) We obviously beg to differ, so have therefore declined the young gentleman's gracious offer to wear a wire and therefore ensnare you in their devious web."
Another research firm in the article suggests that as many as three dozen firms have been contacted as part of this investigation. The focus of the investigation are apparently expert-network firms that connect hedge funds and professional investors to experts and consultants, some of whom I imagine have inside information.
Friday, November 19, 2010
I rarely link to Above the Law - I'm not a snob or anything, it's just that they rarely talk about anything relevant to this blog. Today is different. ATL notes that Thomson Reuters is looking to sell its BarBri unit, because training future American lawyers "no longer fits [Thomson Reuters'] long-term strategic vision."
In the same post, ATL calls attention to the fact that Thomson Reuters will be acquiring India-based legal process out-sourcer Pangea3. Pangea3's press release is here. According to the CEO of Thomson Reuters:
"Pangea3 is true to our mission to help the legal system perform better, every day, worldwide; we will now bring to the legal marketplace a responsive, high-quality, transformative resource for a broad range of legal support work. This is particularly important as law firms and general counsel adjust to the realities of the 'new normal,' where efficiency, quality and responsiveness are paramount."
Yikes. I think it's been pretty clear for some time that things would be moving this way. The globalization of services is in all honesty an unstoppable force. The only question is how quickly might the moves come. It looks like some of the big information providers have heard from clients that they'd like the move to come sooner rather than later.
I'm starting to think that Afra's focus legal developments in India is going to pay off bigtime!
OK, go back to work.
Remember Brien Santarlas, the former Ropes & Gray associate who along with Arthur Cutillo, got wrapped up in the Galleon insider trading scandal last year (here)? He took $30,000 in exchange for his tips on transactions. In addition to paying $32,500 in fines, he was recently disbarred. So now you know. (H/T Lawshucks)
Thursday, November 18, 2010
A couple of days ago Felix Salmon did a video-blog on Bernanke's bubbles. I'd embed it here, but the folks over at Reuters have apparently decided that Felix is still a little too new to the whole video-blog thing to let anyone embed this post. Believe me, he's all over the place. He'll get better.
In any event, the substance of his talk got me thinking. Then, I started seeing bubbles. Bubbles everywhere, especially in dividend recapitalizations. A dividend recap is pretty simple really. The company takes on debt and then immediately sends that debt out to its shareholders as a special dividend. The dividend recap can be used by managers of public companies to "mimic" a leveraged buyout without actually doing an LBO. The effects are generally the same. The target is heavily levered following the transaction and managers are faced with very hard constraints in order to make regular interest payments on the debt taken to pay the special dividend.
Last week, KKR and Bain Capital took a $1.53 billion special dividend from their investment in HCA. Now, they didn't take that dividend from profits. They leveraged up HCA - taking advantage of historically low interest rates - to pull more cash out of the company by way of a dividend recap. The investors already took out $2.25 billion last Spring in a similar maneuver. It now looks like investors will be able to take out more than $400 million more than their initial investment through this dividend recapitalization.
Of course, with the low cost of credit, the dividend recap at HCA is not the only PE target looking to get cash back to investors through added leverage. Bain and its partners at Dunkin' Brands are planning on taking out $400 million through a dividend recap. Then there's PETCO, and Burlington Coat Factory among others. KPS Capital has taken $500 million out of its invested firms through dividends recaps this year.
The FT looked at dividend recaps and notes that they are nearing pre-financial crisis levels:
Other dividend deals have emerged this year, financed by loans and junk bonds of more than $40bn, the most since 2007 and a rate that is on track to top the dollar amount of deals sold for dividends in 2005.
What's making all this possible? Apparently, in the face of historically low interest rates, the global search for yield continues. That means that investors are willing to hand out cash to pay off PE investors who might otherwise not be able to exit their investments via an IPO or M&A transaction.
I'm have a bad feeling about this and I'm seeing bubbles everywhere. If PE investors have to lever up their targets in order to escape them, something has gone wrong. Of course, the PE investors still have an equity position, but the leverage eliminates any downside risk by pulling money off the table. Of course, it shifts all the downside to the credit markets, but I suppose the lesson from the credit bubble is who cares what happens to investors in credit markets. Right?
Wednesday, November 17, 2010
The executive search firm Spencer Stuart recently released its annual study of the state of corporate governance among the S&P 500 (H/T BusinessWeek/Bloomberg). The 2010 Spencer Stuart study includes information on a host of issues including board size and composition, governance practices and processes and compensation.
The study also includes a breakdown of comparative board data. It's a great survey that worth downloading - so get it here.
The study is the 25th such study they've done, so they took advantage of the opportunity to compare corporate governance today with 25 years ago:
We continue to see a trend toward governance practices favored by shareholders, even though these changes are not yet required by regulators. For example, 72% of boards now elect directors to one-year terms, up from 40% a decade ago. Majority voting is also becoming the norm: 71% of boards — up from 65% last year — require directors who fail to secure a majority vote to offer their resignation.
Assuming an average of nine independent directors, annual compensation for an S&P 500 board is nearly $2 million, or $215,000per director per year. This is up just 1% from last year. 57% of the typical director compensation package is paid in equity — 43% as stock grantsand 14% as options. Fewer boards are paying meeting fees (41%, down from 62% in 2005), but those that do are paying 18% more than theywere five years ago: an average of $2,186 per meeting.
The shift to declassified board structures continues to gather pace: the percentage of boards serving one-year terms has risen every year since 2005, when it stood at 51%. In the past year alone, it rose from 68% to 72%. Over the past year, 30 additional boards adopted policies requiring directors who fail to secure a majority vote to offer their resignation. Currently, 71% of the S&P 500 have a majority voting/resignation policy in place, up from 65% in 2009 and 56% in 2008.
Tuesday, November 16, 2010
M&A activity involving Indian firms has been very active since economic liberalization opened up the Indian markets. As I note in my forthcoming paper, the rise in Indian M&A activity includes a rapid expansion of outbound acquisitions by Indian firms. Indian firms' outbound M&A activity gained traction beginning around 2000, and gained considerable speed in 2005. Now, rarely a week goes by without some story on an outbound deal by an Indian firm.
The Deal magazine has a story this week on one of India’s leading M&A lawyers, Zia Mody. For those who do not know her, Ms. Mody is described in the story as follows:
“To fully understand Zia Mody's standing in the ranks of the Indian M&A legal fraternity, think of Marty Lipton, the legendary co-founder of Wachtell, Lipton, Rosen & Katz. Now clone him several times over. And make him a woman. And Indian.
It's difficult to find a major India-related M&A transaction in which Mody isn't involved. That's especially true for Indian transactions with an important international component, whether inbound or outbound. Mody, 54, has emerged in India as a critical legal interpreter of corporate transactions, guiding Indian firms overseas and foreign capital into India.”
Ms. Mody is certainly legendary in Indian corporate law circles. Given the extent of cross-border transactions involving Indian firms, her name may become as ubiquitous as that of Marty Lipton outside of India as well.
Monday, November 15, 2010
Along the lines of "what were they thinking" - here's Donald Langevoort's new paper on the Behavioral Economics of Mergers and Acquisitions. Too often we are left wondering what CEOs were thinking when they decided to do this deal or that. I'll confess to bemusement following HP's recent tussle with Dell over 3Par, but that's only one example. Langevoort puts M&A decisions under the behavioral microscope.
Abstract: The world of mergers and acquisitions seems like a setting in which rationality necessarily dominates. There are high stakes, focused and sustained attention, and expert advisers who are repeat players. In the economics and management literature, however, there has been a great deal of research on what might be called “behavioral M&A” - using insights from psychology to explain observed patterns of behavior in the acquisitions marketplace. To date, the law has largely been uninterested in the psychological dynamics of corporate acquisitions. This essay looks at recent research on such issues as the role of overconfidence, hubris, anchoring, etc. in explaining buy-side behavior, as well as comparable influences on the sell-side, and argues that there is a plausible case for behavioral explanations for the value destruction that often occurs because of acquirer overpayment and its spillover effects. It then turns to possible legal lessons, and suggests a normative (maybe ideological) account for why courts hold tightly to the assumption of rationality. In the end, the behavioral literature is likely to be more interesting and important to lawyers, directors and others engaged in the practice of M&A than a cause for judicial revisionism.
Clifford Chance looks into its crystal ball (i.e. it's 2010 Asian M&A Survey) and suggests that the short-term future of M&A in Asia is bright.
And our respondents believe this trend will continue. More than 70% expect cross-border outbound M&A from strategic acquirers based in the Asia-Pacific region as well as intraregional M&A within the Asia-Pacific region to show an increase on last year. Even those who are not as bullish expect that it will stay at the same level with only 2% predicting cross-border outbound M&A will decrease year-on-year and only 1% predicting intra-Asia-Pacific M&A will drop compared with last year.
Mirroring the activity to date most of our respondents expect China to be home to the most buy-side activity: 62% of our respondents named China as the country that will produce the maximum number of investors and acquirers. During the next 12 to 18 month period and a whopping 85% named China in their top three.
Almost as if on queue, there are concerns that Chinese investors might be lining up to take a large bloc of GM's IPO.
Sunday, November 14, 2010
Not entirely surprising given the decision by the Canadian government not to approve the potential sale of Potash to BHP. BHP could have come back within 30 days with an improved offer and tried to convince the government of its ability to generate a "net benefit" for Canada with its ownership of Potash. But in the end BHP decided against taking that route - arguing that it had already gone a long way. It issued the following statement:
The company had offered to commit to legally-binding undertakings that would have, among other things, increased employment, guaranteed investment and established the company’s global potash headquarters in Saskatoon, Saskatchewan.
The investment commitment included US$450 million on exploration and development over the next five years over and above commitments to spending on the Jansen project. An additional US$370 million would have been spent on infrastructure funds in Saskatchewan and New Brunswick. BHP Billiton would also have applied for a listing on the Toronto Stock Exchange.
In addition, BHP Billiton was prepared to make a unique commitment to forego tax benefits to which it was legally entitled and, as a condition of the Minister’s approval, BHP Billiton was prepared to remain a member of Canpotex for five years. Both of these undertakings were intended to allay any concerns the Province of Saskatchewan may have had regarding potential losses in revenues.
Further, to give the company an even stronger Canadian presence, BHP Billiton undertook to relocate to Saskatchewan and Vancouver over 200 additional jobs from outside Canada. BHP Billiton would have maintained operating employment at PotashCorp’s Canadian mines at current levels for five years and would have increased overall employment at the combined Canadian potash businesses by 15% over the same period.
In the end that wasn't enough. The Investment Canada Act turns out to be a pretty potent takeover defense.
Friday, November 12, 2010
Bad Canadian lawyers. Still. According to the Ontario Securities Commission Mitchell Finkelstein, a partner at the Bay St. firm of Davies Ward Phillips and Vineberg, is alleged to have gathered information on were four major Canadian business transactions that took place between 2004 and 2007. Here's how the OSC describes Finkelstein actions in the complaint:
Kohlberg Kravis Roberts & Co. (“KKR”) acquisition of Masonite International Corporation (“Masonite”), announced December 22, 2004 (the “Masonite Transaction”) – Davies acted on behalf of Masonite and Finkelstein was counsel on the matter. On the evening of November 16, 2004, Davies’ lawyers, including Finkelstein, met with management of Masonite to discuss the Masonite Transaction.
In the following three days, there were several telephone contacts between Azeff and Finkelstein, the last one occurring approximately two hours before the first buy order was placed on November 19, 2005 by Azeff and/or Bobrow.On January 26, 2005, Azeff met with Finkelstein in Toronto. In the two days following the meeting, Finkelstein made two cash deposits in $50 and $100 bills to his two bank accounts.
Cash. He took cash. The OSC isn't clear on how much was deposited, but as any good lawyer knows, if you're making a large cash deposit banks are required to report it to the Treasury Department - in the US anyway. Canada has a similar requirement.
In any event, the OSC alleges that Azeff (the tippee) passed along the informatio to Miller who in turn sent the following e-mail out to clients:
Call me I have a tip … Stock trades on TSX at around $34 - cash takeover of $40 Timing should be before xmas but you never know with lawyers … I'm long
So what probably started out a tip to a friend in exchange for some extra walking around money got broadcast over the Internet in the form of an e-mail to clients that identifies the source of the info as a "lawyer". Great.
OK, kids, don't do this at home.
The Deal Prof does a great job of plowing through Genzyme's old proxy statements to give us a deeper look at why Sanofi will be unlikely to do much to stop Genzyme from re-staggering its board should it want to. The reason revolves around Massachusetts' staggered board statute (156D, Sec. 8.06). Unlike Delaware staggered boards are the default for Massachusetts public companies. Steven walks through the proxies and points out that back in 2006 the board, and not the shareholders, de-staggered the board. Because the board took the initial action, the statute permits the board to stagger it at any point in the future without going to the shareholders.
That's a good trick. And one more reason why if Sanofi wants this deal to happen, it's going to have play nice.