November 8, 2012
Attack of the Penguin?
“Survival of the largest appears to be the message here,” said Scott Turow, Authors Guild president. “Penguin Random House, our first mega-publisher, would have additional negotiating leverage with the bookselling giants, but that leverage would come at a high cost for the literary market and therefore for readers. There are already far too few publishers willing to invest in nonfiction authors, who may require years to research and write histories, biographies, and other works, and in novelists, who may need the help of a substantial publisher to effectively market their books to readers.”
Penguin and Random House are controlled by Pearson and Bertelsmann, respectively. This combination is likely to raise antitrust concerns and that's the obvious target for the Authors Guild message. Of course, consolidation in the book publishing industry is going to happen. There's no standing against that wave. This transaction, though, will present a good test for those who like to define markets. On the one hand, the authors will argue that the market in question is the market for books. Pearson and Bertelsmann will counter that the prevalence of iPad, tablets and eBooks makes a broader market definition a requirement. They're likely to have the winning argument.
November 7, 2012
Now through the end of the year
Hey deal lawyers! Are you fired up and ready to go? Better be. In an interview in Fortune, Bill Lawlor at Dechert thinks it's going to be busy between now and the end of the year now that the election is behind us:
FORTUNE: What do yesterday's election results mean for the M&A markets?
BILL LAWLOR: If Romney had won there would have been an unleashing of animal spirits in M&A that we haven't seen since the Reagan years. But, now that we know its Obama, we expect to see a steadier, flatter arc to increased M&A activity.
Let's break that out a bit. Are you expecting significantly increased in the final weeks of 2012?
Yes, our phones are ringing off the hook. The reason is the expiration of the Bush tax cuts which are, at the margins, pushing deals to get done this year because of expected capital gains tax increases. Not just M&A, but also a rash of dividend recapitalizations in which companies are using cheap debt to borrow and issue massive dividends under the 15% capital gains rates that are now in effect.
Are those dividend recaps mostly coming from private equity-owned companies?
Yes, it's mostly in financial sponsor deals at this point -- essentially firms that have decided not to sell right now because the differential in capital gains isn't enough to get a deal done, but who still want to take advantage of the current rates. To be honest, I'm surprised we didn't see more of these over the past couple of years, since cheap debt has been around for a while. We've also got a couple in the hopper involving widely-held public companies.
OK. Nothing but dividend recaps and acquisitions between now and the end of the year. We'll see.
November 6, 2012
Disclosure and value creation ... or not
Two interesting papers that raise the question of the true value of disclosure. The first is by Steven Davidoff and Claire Hill, Limits of Disclosure. Disclosure has been a common regulatory device since it was by Louis Brandeis ("Sunlight is said to be the best of disinfectants", Other People's Money). Indeed, our system of securities regulation is built upon this premise. Davidoff and Hill look at just how effective disclosure was in the run up to the financial crisis with respect to retial investors and in regulation of executive compensation. They come away disappointed:
The two examples, taken together, serve to elucidate our broader point: underlying the rationale for disclosure are common sense views about how people make decisions — views that turn out to be importantly incomplete. This does not argue for making considerably less use of disclosure. But it does sound some cautionary notes. The strong allure of the disclosure solution is unfortunate, although perhaps unavoidable. The admittedly nebulous bottom line is this: disclosure is too often a convenient path for policymakers and many others looking to take action and hold onto comforting beliefs in the face of a bad outcome. Disclosure’s limits reveal yet again the need for a nuanced view of human nature that can better inform policy decisions.
In another paper, Jeffrey Manns and Robert Anderson, The Merger Agreement Myth, take on the question of whether M&A lawyers are really creating any value or if they are just haggling over nits that no one cares about. Manns and Anderson conduct an event study to figure out whether there is value to all that drafting. They take advantage of the fact that not all merger agreements are filed with the SEC on the same day they are announced. So, they look for stock price changes that they can attribute to the addition of new information after the market learns about the terms of the merger agreement. If lawyers add value, they hypothesize that prices should rise after the market has learned the terms of the agreement - that's the value attributable to lawyers. It's basically a disclosure argument. If disclosure works, then the market should be able to instantly - or reasonably quickly - absorb new information and have that information reflected in stock prices. Like Davidoff and Hill, Manns and Anderson come away disappointed:
Our analysis shows that there is no economically consequential market reaction to the disclosure of the acquisition agreement. Markets appear to recognize that parties publicly committed to a merger have strong incentives to complete the deal regardless of what legal contingencies are triggered. We argue that the results suggest that M&A lawyers are fixated on the wrong problems by focusing too much on negotiating “contingent closings” that allow clients to call off a deal, rather than “contingent consideration” that compensates clients for closing deals that are less advantageous than expected. This approach can enable M&A lawyers to protect clients against the effects of the clients’ own managerial hubris in pursuing mergers that may (and often do) fall short of expectations.
So, disclosure as a regulatory device, or as a determiner of value, is not that successful and suggests we start looking elsewhere.
November 5, 2012
Windfalls and attorney fees
Chancellor Strine weighs in on "windfall" fees in this week's ABA Journal:
Well, what’s a windfall?” Strine asks. “A windfall is: Someone else bought a [winning] Powerball ticket, and the wind blew it and it fell in someone’s lap.”
A windfall, the judge says, is when companies settle nuisance suits that yield a lot of money to shareholder lawyers and “bubkes, zero, nada, nothing” for their clients. Strine tells Jenkins that he and other defense lawyers “have shaped a world of windfalls.”
“I just actually think there are a lot of actual people who would say, ‘If my lawyer hits a grand slam for me, I’m OK with him getting one or two of the runs,’ ’’ he says.
This is, obviously, a continuation of a previous discussion about how to manage the problem of the proliferation of transaction-related litigation. Strine is staying in his lane, as it were. Bad cases will get little. Good cases will get generous fees, without his feeling any guilt about the size. But, there is only so much one state court can do on their own.
As an aside, the artwork for this article paints Strine in shades of green - literally. Not very flattering.