October 16, 2010
Are CEOs Losers in M&A?
The WSJ highlights the potential costs of CEOs of a sale of their company:
Only 14.5% of chief executives would do better selling their companies at a 25% premium than they would under their current pay packages, according to an analysis of compensation packages for CEOs of companies in the Standard & Poor's 1500 index by compensation consultancy Shareholder Value Advisors.
In many cases, the loss of expected future pay and the time value of options would more than wipe out gains on equity and on the spread between the option exercise price and the take-out price.
The analysis showed that most CEOs—729, or 78.9% of the sample—would be significantly worse off (or more than a 5% loss) if their companies were acquired at a 25% premium, though shareholders likely would be better off. Of those CEOs, 428, or 46% of the full sample, would see their wealth fall by 50% or more in a sale that brought shareholders a 25% premium.
Another 61 (6.6%) CEOs would come out roughly even (within +/- 5%) with a sale at a 25% premium.
It's hard to say how these kind of incentives affect decisions by CEOs when there's an offer on the table, but it might be worth thinking about whether these wealth effects result in entrenchment.
October 13, 2010
Cogent - matching rights and termination fees
I just want to add a couple of things to Afra and The Deal Professor's posts on the recent In re Cogent opinion from Vice Chancellor Parsons. In addition to providing clarity on the question of top-up options, the opinion provides more data points in at least two other areas of interest. First, Vice Chancellor Parsons signs up to the "sucker's insurance" school with respect to matching rights in merger agreements. Here's the relevant portion of the opinion on the plaintiff's matching rights argument.
The first two items challenged by Plaintiffs are the no-shop provision and thematching rights provision, both of which are included in §6.8 of the Merger Agreement.The no-shop provision, according to Plaintiffs, impermissibly restricts the ability of the Board to consider any offers other than 3M’s. It also prohibits Cogent from providing nonpublic information to any prospective bidder. Similarly, Plaintiffs object to the matching rights provided for in the Merger Agreement, under which 3M has five days tomatch or exceed any offer the Board deems to be a Superior Proposal. Plaintiffs arguethat these two provisions, taken together, give potential buyers little incentive to engagewith the Cogent Board because they tilt the playing field heavily towards 3M. As a result, according to Plaintiffs, prospective bidders would not incur the costs involved withcompiling such a Superior Proposal because their chance of success would be too low.
After reviewing the arguments and relevant case law, I conclude Plaintiffs are not likely to succeed in showing that the no-shop and matching rights provisions are unreasonable either separately or in combination. Potential suitors often have a legitimate concern that they are being used merely to draw others into a bidding war. Therefore, in an effort to entice an acquirer to make a strong offer, it is reasonable for a seller to provide a buyer some level of assurance that he will be given adequate opportunity to buy the seller, even if a higher bid later emerges.
I tend to disagree that providing a first bidder with strong matching rights along the lines of those in the Cogent merger agreement is going to be a strategy that will maximize value for shareholders (previous posts here). Will it encourage an initial bid where there otherwise might not be one? Probably, but that's a different story. If a seller is looking to generate initial bids there are other ways to do so that don't deter second bidders. Vice Chancellor Strine and now Vice Chancellor Parsons, I suppose, think the fact that matching rights are so common in merger agreements and the fact that we see the occasional jumped bid means that matching rights are not a deterrent to second bids. I don't think that's right, but let's let that sit for another day.
The second additional point interest in the Cogent opinion is the fact that Parsons gives dealmakers some guidance on calculating termination fees. In a few opinions, Vice Chancellor Strine has asked whether it might make sense to calculate termination fees as a percentage of enterprise value and not equity or deal value (In re Dollar Thrifty, In re Toys r Us and In re Netsmart). Vice Chancellor Parsons makes it pretty clear where he stands on this question. If you're going to be in his court, best to talk equity value when calculating termination fees. Plaintiffs argued that although the termination fee was only 3% when using equity or transaction value, it was 6.6% when calculated as percentage of the enterprise value. Parsons was happy relying on equity value in determining that the termination was not unreasonable.
October 12, 2010
Gymboree sold ... where are the lawsuits?
Humor me. It's just a thing I've been working on recently. Gymboree announced yesterday that it has sold itself to Bain in a going private transaction (Reuters) for $2.2 billion. So ... how soon before the first lawsuit is filed and will it be in Delaware or California?
A Canadian cargo cult?
The local community reaction to a potential acquisition is sometimes a matter of great importance. That's particularly true where governmental authorities will eventually be required to pass on the proposed deal. Such is apparently the case in Canada where the Potash/BHP fight is heating up. BHP has responded in part by throwing cash out of the back of a cargo plane.(WSJ):
Last week, BHP said it will sponsor Saskatoon's holiday light show, at a cost of 300,000 Canadian dollars ($296,000) over three years. That commitment follows the splash BHP made earlier this year—before launching its takeover plans—when it spent an undisclosed amount to sponsor the International Ice Hockey Federation's World Junior Championship in the city.
Sponsoring a hockey championship in Canada? BHP is going all in. Potash was having none that:
A day after BHP announced its sponsorship of the light show, Potash Corp. shot back, pledging to spend C$5 million to refurbish Kinsmen Park in the city's center.
All of this because Canada requires provincial government officials to offer an opinion whether they believe the proposed transaction will be a "net benefit" to the community before the federal government signs off on acquisitions by foreign acquirers under Canada's Foreign Direct Investment Review Act:
The Investment Canada Act is intended to ensure that all foreign direct investment in Canada provides a net benefit to the country. However, the Act does not specify what constitutes a “net benefit.” It is up to the industry minister to make that decision, giving consideration to the following factors:
- the effect of the investment on the level of economic activity in Canada, employment, resource processing, utilization of parts and services produced in Canada, and exports from Canada;
- the degree and significance of participation by Canadians in the Canadian business or new Canadian business and in any industry or industries in Canada;
- the effect of the investment on productivity, industrial efficiency, technological development, product innovation and product variety in Canada;
- the effect of the investment on competition within any industry in Canada;
- the compatibility of the investment with national industrial, economic and cultural policies; and
- the contribution of the investment to Canada’s ability to compete in world markets.
If, in the minister’s view, a proposed investment is unsatisfactory in any of these areas, it can be rejected. As of 30 June 2007, there have been 12,342 applications to acquire Canadian businesses, and 3,652 applications to start new businesses in Canada, since the Act came into effect. Of the foreign acquisitions of Canadian companies, 1,545 were of sufficient size to trigger a review under the Act. To date no investments have been rejected under the Investment Canada Act.
So, until the minister of industry gives an opinion if you find yourself up in Saskatoon, watch out for falling cargo pallets!
October 11, 2010
Top-Up options are fairly standard in friendly tender offers. A top-up option provides that so long as x% of shareholders tender in the offer, the target will issue the remaining shares to put the acquirer over the 90% threshold so that it can complete a short-form squeeze-out merger. The minimum number of shares triggering the top-up varies but the target share issuance can be no more than 19.9% of the target's outstanding shares due to stock exchange rules (although it's debatable whether this really matters or not). Also, as Brian has pointed out before, make sure you do the math to determine if the target has enough authorized but unissued stock so that the top-up is possible (this should really make you remember the importance of paying attention in your basic Business Associations class).
Now, for people interested in learning more about Top-ups, Davis Polk has issued a client memo on two recent Delaware cases touching upon top-ups. As the Deal Professor notes, Chancellor Parsons’ recent opinion in the In re Cogent, Inc. S'holders Litig. case provides a good “road map for how deal lawyers should negotiate and structure top-up options in order for them to comply with Delaware law.”
Airgas to Appeal
Apparently, Airgas has decided to appeal Chancellor Chandler's decision regarding the Air Products' bylaw amendment that pushed up its next annual meeting to January 2011. Honestly, that appeal has almost no chance to win (why? see my previous post: Advantage Air Products). I suppose, though, if you are Airgas' board, fighting for your life, judicial economy goes out the window and there is no expense that you will spare.
update: Over at footnoted.org they observe that it has cost Airgas more than $23 million to date to fend off Air Products.
Today's Lex column in the FT.com has a quickie review of some of the potential defenses available to Genzyme in its fight to stave of Sanofi - the pacman defense*, the macaroni defense**, the poison pill, scorched earth tactics, and then the sandbag. Lex doesn't seem to think much of Genzyme's options.
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Definitions from the Latham Book of Jargon:
* Pac-Man Strategy: in a hostile takeover situation, when a takeover Target company launches a tender offer for the company that is trying to acquire it.
** Macaroni Defense: a tactic used by a corporation that is the Target of a hostile takeover bid in which the Target issues a large number of Bonds that must be redeemed at a higher value if the company is acquired. In the event of a takeover, the debt will expand, just as macaroni expands when cooking.