November 20, 2010
Insider trading dragnet?
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.
November 19, 2010
Thomson Reuters acquires Pangea3
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.
Reward for insider trading? Disbarment.
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)
November 18, 2010
The dividend recap bubble?
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?
November 17, 2010
Board trends survey
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.
November 16, 2010
Lawyers Involved in Indian M&A
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.
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.
2011 Asian M&A
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.
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.