M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Thursday, March 25, 2010

Looking for a White Knight

The once-venerated fashion label, Emanuel Ungaro, is looking for a white knight to buy the company.  According to both the business press and the NY Post, Lindsay Lohan, Ungaro’s short-lived “artistic adviser” “may have been the straw that broke the fashion house's bank.”  It appears that Ungaro, like many other companies, has took on an enormous amount of debt and now is courting suitors and cutting costs to pay back this debt.  Ungaro’s business problems and its lack of fashion vision, may mean that no white knight will be willing to swoop in and rescue the company. 

Ungaro's problems present just one example of the enormous role that existing debt plays in M&A deals.  In another high profile debt-driven deal, the WSJ reported yesterdaythat the debtors of MGM, the iconic Hollywood studio, have thrown a wrench in the company’s plan to sell itself as part of efforts to pay off the billions of debt that it took on in connection with its 2004 leveraged buyout.  Given the private equity LBO boom of the 2004-2007 period, we are definitely not going to see the last of companies suffering under a heavy debt load and the influence of existing debt holders in acquisition transactions.  Companies may find a white knight, but that knight may need to court not just equity holders, but also existing debt holders.

- AA

March 25, 2010 in Current Events, Leveraged Buy-Outs | Permalink | Comments (0) | TrackBack (0)

UBS Insider Trading Ring

From the SEC's press release alleging that a former director at UBS shared inside information via “coded” e-mails with college friends:

“They thought it was clever to use code words such as frequent flyer miles and wedding registry gifts to conceal their insider trading scheme,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “These words were code for nothing more than ‘we are breaking the law.’”

According to the SEC’s complaint defendants Igor Poteroba, Aleksey Koval, and Alexander Vorobiev attended college together in the 1990s at the University of New Haven in Connecticut.  Poteroba joined UBS and was eventually promoted to Executive Director.  Koval was living in California and Vorobiev in Canada. 

Here's a sample of the coded e-mails the group used to trade ahead of deals that Poteroba knew about from his work (buying ahead of MGI Pharma):

Poteroba: Keep me posted as to how * * * [m]any frequent flier miles you’ve got this far and how many you plan to get by Friday[.] Will be in Boston tomorrow[.] Plans for a trip look fine so far[.] Worst case we can get a refund by Monday, hopefully we do not[.]

Koval: As I mentioned, I just got into this frequent flyer program. I got five thousand of sign-in bonus miles but thinking maybe if I fly often, I will get additional three to five K miles.

Poteroba: On the frequent flyer program topic you mentioned, I think you should sign up for another flight, if you can, since they are providing bonus mileage soon[.]

So creative!  Or, how about this one (ahead of ID Biomedical):

Subject Line: Potatoes

Poteroba: Let me know if you finished your recent harvest arrangements and how many kilos are available for my parents. They are in Turkey now and could use some once they are back.

Koval: This year the potato yield was not as high as the last one. Whatever is collected is now being transported in the warehouse, with special climate conditions, from where it is going to be available for delivery. My estimates are about 6.8 kilo per square yard. …Of course, some potato [sic] need to be left for the next year [sic] seeds [sic] but it should not be a concern since I have a vendor who will provide enough once the spring comes.

These guys are geniuses.  Who could ever see through this code (buying ahead of Molecular Devices)?

Subject Line: Let me know if you’ve started your wedding registry at Macy’s

Poteroba: Happy to talk about sales items and etc. … sale ends soon …so hurry up.

Koval: Yep, I have set it up. Better do it now when they have [a] sale. I could not believe how many things one needs once engaged. Single life was much easier if you ask me. It is always [a] good idea to know about coupons available. I try to follow up on the rebates programs currently in place but often miss many due to lack of time. Thanks for pointing it out to me. … Although wedding day is not yet announced, I hope to get all the important items ahead of time: I even started buying small things that [are] usually not important until you need them.

Poteroba:  Good points…sale ends on Friday…see if you can get registered for as many items as possible…more you get now…more you save…We should start tracking these events more actively.

OK, here’s a little gratuitous advice for young lawyers: don’t trade on your own deals and don’t have your college roommates trade on your deals, either.  A set of anomalous trades pop up on the screen in advance of an announced deal.  All those names get fed through the (commercially available) database and in about 15 seconds the machine spits out a match between the name on the trade and the name of an investment banker at the firm advising on the deal noting that they both went to the University of New Haven in the 1990s.  Please.  It’s not worth it.

Someone asked me recently what I thought was behind the recent upswing in insider trading activity - particularly in the merger space.  In truth it’s really hard to say.  On the one hand, maybe there’s not really an upswing, but rather with a change in administration we have a new set of cops on the beat who might be more interested in sending a message to the marketplace, especially in light of the market collapse, that integrity in the market is important. 

On the other hand, and I know this is the feeling of some regulators, it’s been over two decades since we’ve gone through a major series of insider trading prosecutions.  Maybe the value of deterrence purchased in the 1980s with those prosecutions has worn off on a younger generation.  Indeed, if you look this group, they weren’t even in the US as young people to absorb those lessons.  They probably think that Rudy Giuliani was only the Mayor of New York!  So, no real answer there, but two reasonable hypotheses.

At least this latest ring had no lawyers in the mix!  Small blessings.


March 25, 2010 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 24, 2010

K&E on Poison Pill Plumbing

Following the recent uptick in implementation of poison pills, K&E has published this client alert that nicely details the mechanics of various provisions of a shareholders rights plan.


March 24, 2010 in Takeover Defenses, Transaction Defenses | Permalink | Comments (3) | TrackBack (0)

Live Nation - Ticketmaster Analysis

Meese and Richman have a recent paper analyzing the competitive effects of the pending Ticketmaster-Live Nation merger, A Careful Examination of the Live Nation-Ticketmaster Merger.  It's a little long, so pick out your favorite Springsteen album and set your iPod to loop before you start.   If you're interested in this deal and/or antitrust, this paper is worth reading.  

Abstract: As great admirers of The Boss and as fans of live entertainment, we share in the popular dismay over rising ticket prices for live performances. But we have been asked as antitrust scholars to examine the proposed merger of Live Nation and Ticketmaster, and we do so with the objectivity and honesty called for by The Boss’s quotes above. The proposed merger has been the target of aggressive attacks from several industry commentators and popular figures, but the legal and policy question is whether the transaction is at odds with the nation’s antitrust laws. 

One primary source of concern to critics is that Ticketmaster and Live Nation are two leading providers of ticket distribution services, and these critics argue that the merged entity would have a combined market share that is presumptively anticompetitive. We observe, however, that this transaction is taking place within a rapidly changing industry. The spread of Internet technologies has transformed the entertainment industry, and along with it the ticket distribution business such that a reliance on market shares based on historical sales is misleading. A growing number of venues, aided by a competitive bidding process that creates moments of focused competition, can now acquire the requisite capabilities to distribute tickets to their own events and can thus easily forgo reliance upon providers of outsourced distribution services. If self-distribution is an available and attractive option for venues, as it appears to be, then it is unlikely that even a monopolist provider of fully outsourced ticketing services could exercise market power. Ultimately, a proper assessment of the horizontal effects of this merger would have to weigh heavily the emerging role of Internet technologies in this dynamic business and the industry-wide trend towards self-distribution. 

The second category of arguments by critics opposing the merger rests on claims that vertical aspects of the transaction would produce anticompetitive effects. Indeed, Ticketmaster’s and Live Nation’s core businesses are in successive markets, and thus the proposed transaction is primarily a vertical merger, but there is broad agreement among economists and antitrust authorities that vertical mergers rarely introduce competitive concerns and are usually driven by efficiency motivations. This wealth of academic scholarship, which is reflected in current antitrust law, has not - from our vantage point - been properly incorporated into the public dialogue concerning the proposed merger. To the contrary, critics articulate concerns, including the fears that the merger would lead to the leveraging of market power and the foreclosure of downstream competition, that are refuted by accepted scholarship. Moreover, there are a number of specific efficiencies that, consistent with economic and organizational theory, are likely to emerge from a Live Nation-Ticketmaster merger and would be unlikely but for the companies’ integration. For these reasons, we submit this analysis in an effort to inform the debate with current economic and legal scholarship.


March 24, 2010 in Antitrust | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 23, 2010

For Sale: One Slightly Worn Basketball Team

According to multiple press reports (here, here, and here) , the owners of the Golden State Warriors have officially hung out a "for sale" sign.  They're asking $400 million, but the franchise is slightly worn and may need a little paint.  Who knows, maybe they're hot to sell and will come down.  Anyway, Larry Ellison is hanging around looking for a toy.


March 23, 2010 | Permalink | Comments (0) | TrackBack (0)

Kraft as "corporate pillager"?

Things have been percolating across the pond with respect to the official post-mortems of Kraft's acquisition of Cadbury.  In the UK, the acquisition was the source of a good deal of angst -- generating "Keep Cadbury British" campaigns amongst employees who feared the acquisition would be followed by job losses and a moving of production offshore.  Central to Kraft's present challenges are statements made by Kraft that the transaction would in fact not result in a net loss of jobs in the UK and would respect the traditions of the British icon.   According to the Daily Mail, those statements now seem questionable.  

During her pursuit of Cadbury, [Kraft CEO Irene] Rosenfeld stridently declared her 'great respect and admiration for Cadbury, its employees, its leadership and its proud heritage'.

Yet just days after Kraft's purchase, the mask came off. Rosenfeld suddenly ditched repeated pledges to reverse plans for the closure of Cadbury's Somerdale plant near Bristol, putting 400 jobs in jeopardy as production is shifted to Poland.
The promise had been a central plank in the publicity battle fought by Kraft during its pursuit of Cadbury. Now it looks like a piece of disgraceful cynicism.

It has also emerged that Kraft is reviewing Cadbury's final salary scheme - an emblem of its historically caring attitude towards employees - possibly putting current workers on to a less generous scheme, while closing the plan to new members.

This came even after a personal pledge by Rosenfeld in a letter to Cadbury chairman Roger Carr on August 28, 2009 - and in subsequent takeover documentation - that employees' pension rights would be 'fully safeguarded'.

All of this has led to a political uproar in the UK. The Takeover Panel is considering changes to the Takeover Code in light of the reaction to the Cadbury transaction and is in the midst of a consultation with respect to rule changes.  In addition, last week, Parliament called in Kraft to question representatives over the takeover.  Rosenfeld declined an invitation to appear and sent a designated punching bag.  No surprise the session didn't really go well.

Kraft executives have made the extraordinary admission that key elements of their bid for Cadbury were based on information gleaned off Google. ...

This emerged as Marc Firestone, a Kraft executive vice-president, issued his firm's first apology to workers.

He said he was 'terribly sorry' for breaking the promise on Somerdale, adding: 'I do sincerely personally express my apology.'

Keeping Somerdale open was a key pledge made during the controversial £11.9bn bid battle for Cadbury. Kraft reneged on it just days after winning control last month.

The American company insisted it did not know 'tens of millions of pounds' of equipment had been installed in a new Polish factory.

That's the way these things go I suppose.  Rosenfeld is coming under quite a bit of criticism in her UK for dissing the Parliamentary proceedings. Compare Kraft with Toyota -when Toyota was the subject of recent US Congressional hearings, Toyota's CEO found his way to Congress and took his lumps.  Rosenfeld on the other hand didn't bother to show up when the Parliament called.  Of course, Toyota's CEO made the pilgrimage, in part, because Toyota has significant ongoing business interests at stake and wants to ensure that it can keep selling cars in the US market.   Kraft, however, is in a different place.  With its deal done, it's not all that interested in the political wreckage left behind.  If it results in an overhaul of the takeover rules that won't have a material effect on Kraft going forward.  

It's hard to know how this is going to play out over time - whether Parliament is simply venting and does not have a legislative agenda, or whether there is anything that will come out of the Takeover Panel's review.  The talk already is about redefining director fiduciary duties so that directors of UK corporations act more like "stewards" for the long-term interest rather than "auctioneers."

If the result of all of this is that the takeover rules are reworked to provide directors with a more active role in defense of the corporation in the face of a takeover threat that would be a wholesale reversal of a long-standing UK governance principle and put the UK on a footing closer to that of Delaware.  That would be a disappointing development.  I say disappointing mostly because with Delaware on the one side and the Takeover Code on the other, one has a natural experiment.  In the UK we have the embodiment of Ron Gilson's passive approach to director action in the face of a takeover.  While in Delaware we see Marty Lipton's active managers stewarding the corporation through the shoals of takeover threats.


March 23, 2010 in Cross-Border | Permalink | Comments (0) | TrackBack (0)