June 10, 2010
WGM on Sponsor-backed Going Private Transactions
For the fourth year in a row, Weil, Gotshal & Manges has produced a survey of sponsor-backed going private transactions that analyzes and summarizes the material transaction terms of going private transactions involving a private equity sponsor in the United States, Europe and Asia-Pacific.
Weil surveyed 28 sponsor-backed going private transactions announced from January 1, 2009 through December 31, 2009 with a transaction value of at least $100 million (excluding target companies that were real estate investment trusts). Fourteen of the surveyed transactions involved a target company in the United States, nine involved a target company in Europe and five involved a target company in Asia-Pacific.
The survey can be found here.
Contingent Value Rights - not such a big deal
There's a healthy interest in contingent value rights (CVRs) as acquisition currency. Chatterjee and Yan have a good paper on the use of CVRs in acquisitions, Innovative Securities under Asymmetric Information. In general, CVRs are essentially a credible signalling device intended to back up statements by a buyer using its stock as an acquisition currency that its stock is not overpriced and that if it turns out to be over valued the buyer will, in effect, make the seller whole through the CVRs. It's like the opposite of an earnout - where the seller is deferring payment and making it contingent upon the buyer receiving information about the true valuation of the seller.
The CVR is an elegant way to bridge a valuation gap when the buyer is using stock. Anyway, it turns out not to be so much of a big a deal. Why? Well, of the 1,744 transactions in the SDC database since 2007 where stock is the acquisition currency only 6 (0.3%) have included an offer of a CVR. Given the volatility in the marketplace during the past few years, I'd have thought that sellers taking stock would have asked for more assurances.
June 9, 2010
Exit, Voice, and Corporate Governance
In the wake of the collapse Prudential - AIA transaction FT columnist John Kay reminds us to beware the cult of the heroic CEO and the mega-merger:
Many Prudential shareholders are relieved at the collapse of the company’s attempt to buy the Asian operations of American insurer AIG. The business history of the past two decades is studded with failed mega-mergers. Time Warner gave away half the world’s most successful media business for a web portal that proved to be worth almost nothing. Royal Bank of Scotland bid for ABN Amro at the peak of the credit boom and had to be rescued by the state.
Alongside these catastrophes are many smaller disasters. The story of Jean-Marie Messier, the French water company boss who used his shareholders’ and customers’ money to become a US media tycoon, borders on farce. The destruction of great companies of seemingly unchallengeable stability, such as GEC and Swissair, through inept acquisition strategies can only be rendered as tragedy.
Most of these deals are the product of a style of thought popular in business schools and consultancies. The Great Leader concerns himself with corporate strategy, and remains aloof from ordinary operational matters. He manages a collection of activities as a fund manager manages a collection of stocks. The scope of his vision is the key to success; price is secondary. “This is a strategic acquisition” is a euphemism for “we are paying more than this business is worth”.
Now comes word that Prudential’s Chairman will be meeting with major shareholders over the next week to discuss the future of Prudential’s management team. According to Reuters investors are, it seems, upset.
This investor also said management should forgo bonuses in the light of the money spent on the failed bid. "They spent a lot of shareholders' money on a deal that didn't happen. I think they should be hit as well."
Earlier today, Sky News reported that some of Prudential's largest investors, including Legal & General Investment Management and Fidelity, are demanding a shake-up of the company's leadership.
Richard Buxton, head of UK equities at Schroders, said: "Someone has to be accountable for 450 million pounds ($650 million) of losses as a result of the bungled deal.
"Otherwise it's carte blanche to every investment banker in town to encourage CEOs to do deals -- there's no downside. (It will be case of) 'Don't worry, if (the deal) doesn't happen, you'll still be safe in your job'."
So much of corporate governance has to do with norms and not legal rules. From a legal point of view, Thiam is safely ensconced in his position. His and the board’s decision to pursue AIA are protected by the British version of the business judgment presumption. But the business judgment presumption doesn't mean that boards can act in an unrestrained manner. True, the law and a court won't penalize a board for pursuing an ill-conceived, though rational, transaction. Here, it's the marketplace that will make its voice heard - and voice is what managers who pursue these kinds of transactions should expect.
Given the large share holdings of institutional investors who may not have the option of selling (exit) their positions in a company like Prudential because of Prudential's position in an index or the nature of a particular fund, voicing their objections is the only avenue left for investors. Voice, as Hirschman reminds us, is a "non-market force" characterized by politics rather than economics.
In a first approximation, the role of voice would increase as the opportunities for exit decline, up to the point where, with exit wholly unavailable, voice must carry the entire burden of alerting management to its failings.
It's in this context that we can think about a new kind of shareholder activism. I'm thinking about an institutional activism of the kind that's hard to really get kick started. In a world where index funds compete on costs, there's not a whole lot of incentive any investment manager to expend the resources required to influence management - or have their voice heard. But yet, if investors are increasingly locked into index funds, finding a way to generate voice for shareholders will be critical to the long-term success of what some call fiduciary capitalism. If not, then we may be required to accept heroic CEOs and their occasional expensive decisions.
I'm going to be thinking more about this and would be interested in hearing from people with ideas. I suspect the Carl Icahn's of the world - activists with high-powered incentives - will play an increasingly important role - if they don't already - going forward.
June 7, 2010
Pru: Lesson Learned?
Shareholder Anthony Watts summed up the feelings of many when he described the affair as "a shambles from start to finish" and "a disgrace".
"You failed to do your job properly, all of you. All of you are responsible for this failed deal," he told directors, saying they should "do the honourable thing" and resign.
His comments, and many more like them, drew loud applause during a stormy affair that showed just how far the insurer's reputation with its investors has fallen. Directors, who glowered at the assembled band of as many as 300 predominantly small shareholders, were accused of being "smug" and "arrogant" at the meeting, held at the Queen Elizabeth Centre in
It was pretty clear that management had learned its lesson and was appropriately contrite:
[C]hairman, Harvey McGrath, told shareholders at the annual general meeting in
, where several shareholders expressed their anger over the AIA bid. "One of the lessons we've learnt is that in the post-crisis world we live in, doing large cross-border acquisitions in financial services is going to be very difficult," McGrath said. "I think we'll continue to seek to grow this business organically. You should expect us to look at bolt-on acquisitions." London
Buying AIG's Asian unit in the aftermath of the Financial Crisis and AIG's collapse was a bold move. Had it worked, it might have been a game-changer for Prudential, giving access to markets throughout Asia (though not much in China). But when bold moves don't pay off, they can be risky for the guy at the top. This failed transaction cost Prudential approximately $600 million (termination fee and expenses) to walk away from. It also generated a host of shareholder anger that was on display today.
There's lots of talk that Prudential's CEO, Thiam, may be shown the door for his miscalculation. I suppose someone should pay for a $600 million mistake.