Thursday, March 31, 2011
If what people are saying is true ... well ... wow. Here's Berkshire Hathaway's press release and excerpts:
Finally, Dave brought the idea for purchasing Lubrizol to me on eitherJanuary 14 or 15. Initially, I was unimpressed, but after his report of a January 25 talk with its CEO, James Hambrick, I quickly warmed to the idea. Though the offer to purchase was entirely my decision, supported by Berkshire’s Board on March 13, it would not have occurred without Dave’s early efforts.
That brings us to our second set of facts. In our first talk about Lubrizol, Dave mentioned that he owned stock in the company. It was a passing remark and I did not ask him about the date of his purchase or the extent of his holdings.
Shortly before I left for Asia on March 19, I learned that Dave first purchased 2,300 shares of Lubrizol on December 14, which he then sold on December 21. Subsequently, on January 5, 6 and 7, he bought 96,060 shares pursuant to a 100,000-share order he had placed with a $104 per share limit price.
Dave’s purchases were made before he had discussed Lubrizol with me and with no knowledge of how I might react to his idea. In addition, of course, he did not know what Lubrizol’s reaction would be if I developed an interest. Furthermore, he knew he would have no voice in Berkshire’s decision once hesuggested the idea; it would be up to me and Charlie Munger, subject to ratificationby the Berkshire Board of which Dave is not a member.
As late as January 24, I sent Dave a short note indicating my skepticismabout making an offer for Lubrizol and my preference for another substantial acquisition for which Mid American had made a bid. Only after Dave reported on the January 25 dinner conversation with James Hambrick did I get interested in theacquisition of Lubrizol.
Neither Dave nor I feel his Lubrizol purchases were in any way unlawful. He has told me that they were not a factor in his decision to resign.
Dave’s letter was a total surprise to me, despite the two earlier resignation talks. I had spoken with him the previous day about various operating matters andreceived no hint of his intention to resign. This time, however, I did not attempt to talk him out of his decision and accepted his resignation.
Berkshire Hathaway announced its acquisition of Lubrizol on March 14, 2011 for $135/share. Just last week, the WSJ lauded Sokol's early role in helping Berkshire make the Lubrizol deal happen and pointed to that as evidence that Sokol would eventually succeed Buffet:
David Sokol, considered a possible successor to Warren Buffett at Berkshire Hathaway Inc., identified chemicals maker Lubrizol Corp. as a potential acquisition and took the lead in early negotiations to buy the company, according to a regulatory filing late Friday that detailed how last week's $9 billion deal came about.
It was Mr. Sokol, a Berkshire executive, who plucked Lubrizol from a list of 18 chemical companies that bankers at Citigroup Global Markets had compiled in December 2010 as possible acquisitions at Mr. Sokol's request, according to the filing. ...
Mr. Sokol's early involvement in the deal is further evidence that he has become an important lieutenant for Mr. Buffett in recent years, and may give more ammunition to followers of Berkshire who consider him the front runner to eventually succeed Mr. Buffett as Berkshire's CEO. Mr. Buffett had already tapped Mr. Sokol to turn around Berkshire's fractional-jet business, NetJets, and sent him to China to meet with executives at battery-maker BYD Inc. before investing in that company.
Dennis K. Berman of the WSJ attributed Sokol with the following previous quotation:
“Integrity is not complicated. If it seems to be, you probably do not belong on our team."
If nothing else, Sokol may be liable for usurping a corporate opportunity with his early purchases. For a guy like Sokol it's small money, but really embarrassing for him at the very least.
Update: Not all that impress with the "Well...Charlie did it, too" defense.
Wednesday, March 30, 2011
It's getting that any snake with a Twitter account can launch a bid on a multi-billion dollar company!
There's been a swirl of news about a "bid" for AMR. I think the fact that AMR is even talking about this suggests they don't believe there is anything to the "bid" for the company. Over at Marketwatch, they note that the same group that has purported to make a bid on AMR recently made a "bid" for Eastman Kodak that Kodak concluded was a hoax. Barron's did a little more digging and came up with this gem: The guy apparently at the center of the "bid" for AMR and Kodak was the subject of an SEC civil action in 2002. From the SEC's litigation release:
Further, the complaint alleges that since Weintraub gained control of Vector, its filings with the SEC have failed to disclose one or more of the following: (1) In 1992, Weintraub pled guilty in Broward County, Florida to five felonies: one count of organized fraud and four counts of grand theft; (2) In 1998, Weintraub pled nolo contendere in Miami-Dade County, Florida to four felony counts for fraudulent practices; (3) Also in 1998, a civil judgment was entered against Weintraub in the amount of $22,897.36, which remains unsatisfied; and (4) In 2000, a civil judgment was entered against Weintraub in the amount of $33,549.62 which also remains unsatisfied. The complaint also alleges that Vector misrepresented Weintraub's background in its annual report for the year ended December 31, 2001 which was later also incorporated by reference into a Form S-8 registration statement. The complaint further alleges Weintraub has profited from Vector's misrepresentations and omissions by dumping millions of Vector shares into the public market for a profit of well over $200,000.
In any event, AMR's stock jumped 5% on the "news". Presumably, if anyone is engaged in attempted market manipulation, the recently re-invigorated cops on the beat will track that down. Moving on.
I've stayed away from the Galleon trial for the most part. Not because it's not interesting, in fact it's way too interesting. It would suck up all my free time if I were to try to follow it too closely. The testimony of Adam Smith (nice name for a hedge fundie, I guess) as reported in Bloomberg yesterday caught my eye, though.
“Research is sort of doing your homework ahead of time,” Smith told jurors. “Getting the number is more like cheating on the test.” ...
“I was tasked with doing research, getting an edge,” Smith testified when asked about leaks he said he got from an Intersil insider. ...
“Getting an edge is the key component to arbitraging consensus” when hedge funds are “looking for situations” in which a company’s results differ from Wall Street expectations, Smith said. “You need to have an edge.”
For Smith, getting an edge meant receiving inside information from friends and insiders. Smith has since pled guilty to insider trading and cooperating with the Feds. "Getting an edge " turned out to be not much of a career move for this Harvard MBA.
Tuesday, March 29, 2011
The WSJ Deal Journal is reporting that the NY Attorney General has jumped into the merger clearance business:
Attorney General Eric Schneiderman, who took office at the beginning of the year, announced today his office will “undertake a thorough review” of AT&T’s proposed $39 billion takeover of mobile phone company T-Mobile.
More work for lawyers, so I suppose that can only be a good thing. On the other hand, if more than a couple more AGs begin their own investigations of the AT&T/T-Mobile deal that could quickly spell the end of the deal. At least with the FTC/DOJ and the FCC clearance process the pathes are well trod. Not too many surprises will emerge from either of those bureacracies. The NY AG's office? Other AG offices around the country? Well, who knows what could result from that process.
Whenever I teach Revlon, I'll admit there is a tension. On the one hand, it's very tempting to simply say that when we're in Revlon-land, boards are required to turn into "auctioneers" and take the highest price they can get. On the other hand, that simple answer wouldn't be exactly correct. Revlon duties - to the extent there are any - are more subtle than that. Footnote 3 of Wells Fargo & Co. v. First Interstate Bancorp has a nice statement of what "Revlon duties" are:
What I take to be distinctive about this state of affairs [when “Revlon” duties apply] is three things principally. First, in this situation the board must seek to achieve greatest available current value; it may not, in effect, trade achievable current value for a prospect of greater future value, as it may normally do in the exercise of its good faith business judgment. Historically, one would say that courts would be slow to impose this limitation except in limited circumstances. See Robinson v. Pittsburgh Oil Refining Corp., Del.Ch., 126 A.2d 46 (1924). And indeed despite the fact that commentators tended to treat the Revlon case as revolutionary, recent cases have made clear that it did not deviate from this tradition very greatly. Second, when in this situation, a board's duty to be informed will require it to fully consider alternative transactions offered by any responsible buyer. Third, in part “Revlon duties” are not distinctive board duties at all, but a changed standard of judicial review. That is when “Revlon duties” are triggered a burden will shift to the directors and the court will undertake more active review of the traditional directorial duties of care and loyalty under a reasonableness standard. Paramount Communications v. QVC Network, Del.Supr., 637 A.2d 34 (1993).
Rather than create a special series of duties, Revlon falls within the established fiduciary duties of care that a board already has. More than anything else, Revlon takes the discretion of timing out of the hands of the board, but still leaves them with plenty of decisions to make and evaluates those board decisions against a reasonableness standard.
Monday, March 28, 2011
Preeta Das and Gina Chon have a story in this morning's WSJ highlighting the trouble Clearwire had with its bankers, Goldman Sachs.
Clearwire hired Goldman last summer to help the company's independent directors explore ways to raise more capital and evaluate a potential sale to Sprint or T-Mobile USA, people familiar with the matter said.
But the agreement didn't preclude Goldman from leaving Clearwire to work for Sprint. When Sprint sought Goldman's advice earlier this year, it was not specifically tied to an acquisition of Clearwire, according to these people.
They note that while Clearwire was considering selling to Sprint, Sprint said in a statement last December that it "continues to hold discussions with Clearwire regarding further investment in the company but has no plans at present to acquire Clearwire."
Banker conflicts are increasingly getting the attention of courts. Vice Chancellor Laster recently dinged Del Monte's board for its poor process - mostly involving its bankers.
All my students should make a habit of reading Warren Buffet's annual letters to his stockholders. Not only do they provide some interesting insight into awildly successful long-term investor's thinking, they also offer some wisdom and perspective that can sometimes be lacking with youth. From this year's letter to stockholders:
Last year – in the face of widespread pessimism about our economy – we demonstrated our enthusiasm for capital investment at Berkshire by spending $6 billion on property and equipment. Of this amount, $5.4 billion – or 90% of the total – was spent in the United States. Certainly our businesses will expand abroad in the future, but an overwhelming part of their future investments will be at home. In 2011, we will set a new record for capital spending – $8 billion – and spend all of the $2 billion increase in the United States.
Money will always flow toward opportunity, and there is an abundance of that in America. Commentators today often talk of “great uncertainty.” But think back, for example, to December 6, 1941, October 18, 1987 and September 10, 2001. No matter how serene today may be, tomorrow is always uncertain.
Don’t let that reality spook you. Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective.
We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.
... and I didn't just stumble upon this letter while googling Anne Hathaway...
Saturday, March 26, 2011
David Marcus over at The Deal has a really good piece on how Vice Chancellor Travis Laster is pushing everyone's buttons these days -- in a good way! His ruling in Del Monte got a lot of attention, but what looks the case that will define his early days his is ruling in In re Revlon from last Spring. There he ordered a change in lead plaintiff's counsel in a ruling that got a lot of attention. From Marcus' piece:
Actual litigation, Laster emphasized, is what he wants. Shareholder suits "serve as a valuable check on managerial conflicts of interest," he wrote in Revlon, and therefore should be treated seriously by both lawyers and courts.
"Traditional plaintiffs' law firms who bring lawsuits on behalf of stockholders without meaningful economic stakes can best be viewed as entrepreneurial litigators who manage a portfolio of cases to maximize their returns through attorneys' fees," he wrote. "A systemic problem emerges when entrepreneurial litigators pursue a strategy of filing a large number of actions, investing relatively little time or energy in any single case, and settling the cases early to minimize case-specific investment and maximize net profit." Replacing counsel who engage in such practices should encourage other lawyers to bring more meritorious cases.
Laster admitted that such an approach risks driving plaintiffs' lawyers to other jurisdictions. But, he wrote in response, "While in the short run policing frequent filers may cost some members of the bar financially, in the long run it enhances the legitimacy of our state and its law." In this view, stingy fee awards to lawyers who are generally looking to turn a quick profit for opportunistic strike suits will drive that less desirable work to other courts, while generous fee awards for good work will only make Delaware a more appealing venue for meritorious suits.
Laster shifted his focus to company-side lawyers in a case that immediately got their attention. In a piece of shareholder litigation last fall, Laster focused his ire on David Berger, a litigation partner at Wilson Sonsini Goodrich & Rosati PC in Palo Alto, Calif. Laster threatened to bar Berger from litigating in Delaware by removing his pro hac vice status because of how Berger represented NightHawk Radiology Holdings Inc. in settling shareholder litigation arising from the company's merger with Virtual Radiologic Corp. (Pro hac vice allows lawyers not admitted in a jurisdiction to appear before its courts.) Shareholders initially sued NightHawk in Chancery, and in oral argument Laster found "there were meaningful, litigable" issues in the deal that the plaintiffs opted not to pursue. Instead, they focused on weak disclosure claims.
"So imagine my surprise," Laster told lawyers at a Dec. 17 hearing in the case, upon learning that NightHawk and its shareholders had agreed to a disclosure-based settlement approved by an Arizona state court that probably didn't know about Laster's view of the case. The parties settled the claims that Laster rejected and passed over those he'd told them might have merit.
In the judge's view, the settlement raised the specter of "collusive forum shopping." Once a public company announces a sale, different shareholders often sue for alleged breaches of fiduciary duty in different jurisdictions. Defense lawyers complain about the resulting inefficiency and expense, but the multiple forums may allow defendants "to force plaintiffs to reverse-bid for the lowest possible settlement," Laster said at the hearing. In other words, the company settles with the plaintiffs' lawyer who often accepts the smallest settlement -- and, possibly, the smallest fee, but one that on an hourly basis may be quite lucrative. "Defense lawyers benefit from this game, too," Laster said. "They get to bill hours without any meaningful reputational risk from a loss. They then get a cheap settlement for their client. Disclosures are cheap."
It's worth reading the whole piece here.
Thursday, March 24, 2011
Bloomberg is reporting no sale for Barnes & Noble.
Riggio, the largest shareholder, and the rest of the board began examining a possible sale under pressure from Ron Burkle, who began building a stake in the company in late 2008.
The board responded to Burkle’s stock purchases by introducing a so-called poison pill in November 2009 to limit his ownership to 20 percent. Yucaipa Cos., Burkle’s Los Angeles- based investment fund, sued to overturn the pill and lost.
Yucaipa then waged a proxy contest last year to add Burkle and two other candidates to the board, losing to Riggio’s slate. Yucaipa held almost 19 percent of Barnes & Noble as of October, compared with about 30 percent for Riggio, according to data compiled by Bloomberg.
The dispute between Yucaipa and the BKS board was the subject of litigation in Delaware last summer. In that case, Ron Burkle
claimi[ed] that the adoption of the pill, and the board's refusal to amend the pill per Burkle's specific suggestions, was a breach of the directors' fiduciary duties. As relief, Yucaipa argues that the pill's threshold as to Yucaipa should be increased to equal that applicable to Riggio, and that the pill trigger should be amended to allow Yucaipa to form a coalition with other investors to run a joint slate in a proxy contest this autumn. Yucaipa supports this request for relief with the argument that the pill was a disproportionate response to an illusory threat.
Here's the opinion in that case -- the court largely upheld the board's position.
Justice Randy Holland has been confirmed for a third term. With that he becomes the first Justice on the Delaware Supreme Court to be appoint three times (from the AP):
The state Senate has confirmed Delaware Supreme Court Justice Randy Holland to a third term on the state's highest court.
With Wednesday's confirmation, Holland becomes the first Supreme Court justice in state history to be appointed to a third term.
Holland was first appointed to the Supreme Court in 1986 at the age of 39, becoming the youngest person ever to serve on the court. He already is the longest serving Supreme Court justice in Delaware history.
Here's a link to Markell's press release.
Tuesday, March 22, 2011
The Takeover Panel in the UK is moving forward with reforms adopted in the wake of Kraft's acquisition of Cadbury. One of the reforms is a near ban on termination fees.
Among the biggest changes will be a tightened “put up or shut up” period, requiring a publicly named bidder to declare its formal intentions within 28 days, from a system where the clock starts ticking at the request of the target company.
Other changes include banning incentives that give special protection to the first bidder, commonly known as break fees.
This move highlights two different directions that regulatory bodies have moved with respect to the question of deal protections. On the one hand, we have Delaware. It's reasonableness standard with respect to any ex post review of deal protections is pretty deferential of board action. Absent allegations of loyalty conflicts, a board acting in good faith basically has a green light to grant deal protection measures. On the other, we have an series of ex ante rules that govern what a board can or cannot do in advance of an acquisition, including setting strict limits on termination fees. These are two very different ways of looking at the world. If you were to only read Delaware case law, you'd think that no bidder would ever come forward absent strong deal protection measures. But, when you look at the UK's takeover market you know that it's just not the case. There is room for diversity in regulatory approaches.
Sunday, March 20, 2011
AT&T announces that is acquiring T-Mobile for $39 billion. My first thought is that this will take a long time to clear the HSR process. I haven't given this much thought, yet, but if this transaction doesn't at least go through a 'second request' we should just shut down the FTC altogether. I mean, there is no question that this transaction will result in AT&T being the single largest wireless carrier by far. Because this is a telecom deal, the FCC will also have a say in whether this deal can go forward. The FCC's mandate to ensure that mergers are in the "public interest" has come under some criticism for being too far reaching at times. The FCC was able to squeeze out of CenturyLink/Qwest commitments to build out low-income broadband access as a condition to approving that merger just last Friday. I wonder if the FCC can squeeze out of AT&T a commitment not to drop more of my calls?
In any event, the FCC has recently been talking about reworking its merger approval process, perhaps narrowing its scope. Jonathan Baker, the Chief Economist over at the FCC posted a couple of days ago to the FCC's official blog on the proposed changes to the FCC's merger approval process.
AT&T and T-Mobile have a transaction web-site up already: http://www.mobilizeeverything.com. Go there for merger docs, etc.
Thursday, March 17, 2011
...and what are you going to do about it?
Well, sue you ... of course! Reuters and Bloomberg are reporting that shareholders have filed a suit challenging News Corp's recent acquisition for $675 million of Shine, a company owned by Rupert Murdoch's daughter. The complaint alleges that Murdoch treated News Corp like the "family candy store" in doing the deal. "Paying for nepotism" is a pretty hefty charge and not a run-of-the-mill merger challenge. Typically, challenges are brought against the target board. Here, the challenge is brought against the acquiring board. Acquirers in merger transactions generally get the protection of business judgment. The sets of facts that generate more intense scrutiny from the courts of acquiring boards are extremely limited and really the stuff of law school exams. For example, let's say you controlled a company and you used your control position to have the company acquire a firm that belongs to your daughter at an above market price ... wait a minute ...
Entire fairness. Look it up.
Oh, and because this is a loyalty question, there's no protection from 102(b)(7) if this goes the wrong way for directors. They could be on the hook personally for this.
Update: Here the complaint.
Wednesday, March 16, 2011
I love these kinds of papers...Here's Edgerton's Agency Problems in Public Firms: Evidence from Corporate Jets in Leveraged Buyouts:
Abstract: This paper uses rich, new data to examine the fleets of corporate jets operated by both publicly traded and privately held firms. In the cross-section, firms owned by private equity funds average jet fleets at least 40% smaller than observably similar publicly-traded firms. Similar fleet reductions are observed within firms that go private in leveraged buyouts. I discuss assumptions under which comparisons across and within firms provide estimates of lower and upper bounds on the average treatment effect of taking a firm from public to private in a leveraged buyout. Both censored and standard quantile regressions suggest that results at the mean are driven by firms in the upper 30% of the conditional jet distribution. Results thus suggest that executives in a substantial minority of public firms enjoy more generous perquisites than they would if subject to the pressures of private equity ownership.
Just so that you don't think this has faded into the distance...Kraft is once again in front of a Parliamentary committee explaining its actions prior to its acquisition Cadbury last year. Kraft's CEO, Irene Rosenfeld, decided not to appear. That apparently didn't go over well - "quite contemptuous", "a slap in the face". Here's the video of Kraft executives sitting uncomfortably while being grilled. This issue still has legs.
Tuesday, March 15, 2011
Buffet has jumped back into the M&A game, and it looks like the inside traders are right behind him. You'd think that the SEC wasn't in the middle of a massive campaign against insider trading complete with criminal prosecutions. Why? Well, according to Bloomberg someone has been trading in call options just ahead of Berkshire Hathaway's recent acquisition announcement:
Trading of bullish Lubrizol Corp. (LZ) options surged to the highest level in a year on March 9, before Berkshire Hathaway Inc. (BRK/A)’s offer today to buy the world’s largest producer of lubricant additives lifted the shares 28 percent.
Call trading surged to 2,931 contracts on March 9, and open interest for the April $110 calls jumped to 2,654 from 41. A block of 2,168 April $110 calls traded for $2.35 each on March 9, data compiled by Bloomberg show. Lubrizol’s four-week average trading volume is 413. The April $110 calls advanced almost 11- fold to $24.70 today. The Wickliffe, Ohio-based company surged 28 percent to $134.68.
“That is more than suspicious,” said Ophir Gottlieb, head of client services at Livevol Inc., a San Francisco-based provider of options market analytics. “It looks like a naked purchase of calls, and that’s highly suspicious if not straight insiders trading.”
I suppose the potential hostile offer by NASDAQ for the NYSE might raise antitrust issues, but the real worry should be the potentially anticompetitive effects of the rumored Starbucks-Peets tie-up. That might be a real headache - literally.