Monday, April 29, 2013
I'll be the first the first to admit that the whole reverse merger situation with Chinese corporations really reveals the most cynical aspects of our capital markets. For those of you who haven't been paying attention to this issue, towards the end of the credit bubble and early on during the financial crisis there were a large of number of reverse mergers in the US involving Chinese corporations. The reverse merger is a back door way to take a company public. A privately held foreign company, in this case Chinese, acquires a publicly listed, but thinly traded, US corporation, usually a Delaware corporation through a reverse merger (the acquirer is the disappearing corporation and the target is the surviving corporation). The suriving corporation then changes its name to the Chinese corporation and presto, you have a publicy traded Chinese corporation incorporated in Delaware.
OK, so far so good. The next step is where things start to get 'hinky'. The newly public Chinese corporation then raises additional equity on US markets through a public offering. The money is transfered back to China and then ... it disappears. Surprised? There are lots of people who you might point a finger at in this exercise. The lawyers and investment bankers who arrange the reverse merger, the lawyers, investment bankers, and accountants who sign off on the public offering, the analysts who recommend shareholders buy shares in these companies. The list is very long. Now add to that list, the independent directors, usually US persons, who are required to sit on the boards of these companies (pursuant to the listing rules).
[Fuqi] listed its shares on Nasdaq through a reverse merger and in 2009 it raised $120 million through a public stock offering. Less than a year later, the company said it found accounting errors and uncovered transfers of cash out of the company totaling more than $130 million to entities that Fuqi has yet to verify were legitimate businesses. Fuqi has said the cash was recovered.
Fuqi's audit committee started to investigate, but its work stalled when management stopped paying the lawyers and accountants hired by the audit committee. The company said the lack of payment stemmed from a dispute with its insurer.
In protest, [independent directors] Brody and Hollander resigned from the board.
Shareholders sued the directors of Fuqi, including Brody and Hollander, who resigned in protest. Prior to suing, the shareholders had made demand, but the corporation sat on the shareholders' demand for over two years. The shareholders argued that notwithstanding the fact that they had previously made demand, it was futile because of the two year delay in responding. The essence of the shareholders claim was a Caremark oversight claim - that directors failed in the duty to monitor the corporation's activities and permitted more than $130 million to disappear. Glasscock sided with shareholders.
... lead me to believe that Fuqi had no meaningful controls in place. The board of directors
may have had regular meetings, and an Audit Committee may have existed, but there
does not seem to have been any regulation of the company’s operations in China.
The Vice Chancellor noted that independent directors had ignored several 'red flags' with respect to problems with internal controls and that directors did nothing to ensure that reporting mechanisms were accurate. The lack of internal controls was so bad that $130 million was transferred out of the company in Novermber 2010, but it wasn't found out by the directors until March 2011.
Also, and this is critically important for independent directors, a strategy of "noisy withdrawal" will not immunize independent directors from liability for bad acts that took place on their watch. Glasscock's ruling in Fuqi and Chancellor Strine's earlier in re Puda decision make two things clear: first, Caremark is alive - although it's a difficult standard to meet, there are facts that will meet that standard; and second, if you are an independent director, remember that it is serious business. Resigning in protest won't help. Better stick around and clean up the mess you created by your own inattentiveness.
Wednesday, October 3, 2012
It is one of those things that rarely happens in an M&A deal. Late last week, President Obama issued an order prohibiting Ralls Corporation, a U.S. affiliate of the Chinese machinery manufacturer Sany Group, from acquiring four U.S. wind farm project companies. The wind farms are near restricted air space the U.S. Navy uses for flight training. President Obama’s order followed a recommendation from the Committee on Foreign Investment in the United States (CFIUS), an inter-agency group headed up by the Treasury Department that evaluates the national security risks of foreign investments in U.S. companies or operations. See here for the Treasury Department’s press release on the order. WilmerHale also has a useful short release on this rather unusual Presidential action.
Reuters reports that Ralls has sued CFIUS and the President, although the chance of a successful suit is really slim given the President’s broad authority on national security matters. It will be interesting to see whether the court will even entertain Ralls’ arguments. The case is Ralls Corp. v. Committee on Foreign Investment in the U.S., 1:12-cv-01513, U.S. District Court, District of Columbia (Washington).
Monday, September 10, 2012
Now, I don't often say that, but things are happening up there that we should pay a little attention to. Canada has for a long time been much less solicitous towards the poison pill than Delaware (or other US) courts. In Canada, boards have the authority to adopt poison pills, subject to review by the provincial securities commissions. The commissions have the authority to order pills redeemed. In making the determination with respect to whether or not to order a pill redeemed, the commissions consider, among other things, whether the shareholders have voted to ratify the adoption of the plan. (I've blogged about Candadian pill standards before, see here).
In any event, the Canadians take a position that is very Gilson/Bebchuk-like on the scale of things in the long-standing takeover debate: the corporation is ultimately owned by the stockholders. In response to an unsolicited offer, boards may use defensive measures in order to help negotiate a higher price, but in the end, a board may not stand between shareholders and the opportunity to tender into a non-coercive offer. I suspect there's a finance study out there on takeover premia in Canada. If not, that sounds like a study/summer project.
Contrast the Canadian position with the Delaware position, which, following Airgas and Versata, can only be called a reluctant endorsement by the Chancery Court of "just-say-no". In that long-standing debate, it's pretty clear that Marty Lipton has won the day.
So, and this is where Canada is interesting, it looks like Canada is making increasing noises about moving away from its long-standing position with respect to poison pills and its more shareholder-centric approach to the takeover law and towards a more Delaware-like approach. Already last year, it was bubbling under the surface. High profile takeovers of Canadian firms by foreign acquirers tends to ignite the passions of nationalism. Recently, it's been proposed acquisition of Rona Inc by Lowe's Co - we can't have the Yanks owning our big-box hardware stores afterall. In any event, the acquisition played an important role in the recent provincial elections in Quebec, which saw the Quebec nationalist party put back in power. During that election, both the Liberal and PQ included anti-takeover legislation in their party platforms. Liberal leader Charest went so far as to announce a $1 billion "foreign-takeover fund" that would be used to finance domestic acquisitions of Quebecois companies. No clue whether he intended to use the proposed fund to fend off interlopers from Alberta, but we won't ever find out. Charest lost and he's on his way out. The incoming PQ has already signaled that they aren't supportive of a Lowe's/Rona deal (and here). I suppose the PQ could try to stymie foreign takeovers by requiring that all tender offer documents be in French. Or, it could repeat what the Canadian government did last year in the proposed Potash aquisition - declare the Rona hardware retailer a vital national asset and a transaction not to Canada's benefit block the deal. Uh ... too much?
Short of that, it looks like the more obvious path would be to adopt a constituency statute that would place more power in the hands of the board and permit them to more aggresively resist unwanted offers.
So, something to watch. Of course, putting more power in the hands of boards doesn't ensure that Canadian businesses stay Canadian, but I suppose that's a lesson our friends up North will have to learn on their own.
Thursday, August 30, 2012
You want to know why the HSR guy down the hall sighs and slumps his shoulders every time you burst into his office with the great news that you just signed a deal to acquire a company with big operations in Brazil? This is why:
Under the legislation, the [Brazilian] antitrust authority known as Cade has said it will take no more than 330 days to review a proposed merger. Previously, companies filed requests to review a deal after an accord had already been closed, allowing operations to be integrated before approval from Cade, which took as long as two years in some cases.
Brazil is proposing to revise its premerger notification system to speed up approvals from two years following closing to 330 days. I guess that's better, but still ... ugh. I don't know if this change is necessarily an improvement. Previously, you had to file post-closing and then let it sit for years -- with the risk that antitrust authorities might require you to 'unscramble the eggs' at some point. Now, you will be required to file within 15 days of signing, but then you have to sit for as long as 330 days (240 days, plus an additional 90 days in "complex" cases), not 30 days like in the US (The Economist).
Tuesday, July 26, 2011
M&A activity both in India and by Indian companies continues to grow after the slump experienced as a result of the financial crisis. According to recent data, “midway through 2011, M&A financing volumes, completed and pipeline, are already nearly 30 percent larger than the previous record set for an entire year.” The access to financing has allowed Indian firms to expand their outbound M&A activity. With respect to inbound M&A activity, Walt Disney just announced its plans to take private one of India’s leading media companies by offering to purchase the remaining outstanding shares of UTV Software Communications Ltd. in a deal estimated to be worth as much as 20.1 billion rupees (approximately $454 million). Disney already owns 50.44 percent of UTV. This is a big deal for the Indian entertainment industry and for Disney which has been working to tap into this extremely important market. Disney expects the closing to take several months especially since shareholder and regulatory approvals are significant hurdles in acquisitions of Indian firms.
Thursday, July 21, 2011
Allen & Overy just released their annual M&A Index. There some interesting bits there. For instance, 2011, they report a 776% increase in value of public hostile acquisitions. That's a big number, but off a small base. It's still less than 2% of all deals in their database. Here's the summary graphic of US deals:
Tuesday, May 24, 2011
The FT has a nice review of Kraft's acquisition of Cadbury one year on. The initial results of the acquisition appear to be mixed. On the one hand,
Speaking to the Financial Times before Monday’s statement from the committee, [Kraft CEO Rosenfeld] said: “We have clearly shown ourselves to be good stewards of the brands, and yet the continued assault has been somewhat surprising.
“I think we’ve done everything possible to address concerns, to respond to issues, and the focus remains on making sure that this integration is successful."
Defectors from Cadbury and politicians beg to differ. They say the speed of the integration, allied to the fact that the hostile nature of the bid precluded due diligence, has made the process more fraught. Ms Rosenfeld’s perceived disdain, for workers as well as parliament, has added to the rancour.
In the wake of the acquisition and what were understood to be broken promises related to the status of the Cadbry plant in Bournville, the UK Takeover Panel revisited its rules and the UK Parliament tasked a Select Committee to undertake an investigation. The Committee's report, Is Kraft Working for Cadbury?, was released earlier this month. The report - though critical of Kraft in many respects - was guardedly optimistic:
Our overall conclusion, therefore, is that, while there remain some significant concerns about Kraft takeover of Cadbury, a number of positive signs may be beginning to emerge. Those positive messages would have been considerably more convincing if conveyed directly to bodies such as ourselves from the top of the organisation. As for the future, Kraft's witnesses asked us to judge Kraft on its deeds. We shall.
For the timebeing, that seems to be it from the Parliament and its investigation.
Friday, March 4, 2011
I have written previously about the increase in outbound M&A activity by Indian firms. As I noted in my article “Rising Multinationals: Law and the Evolution of Outbound Acquisitions by Indian Companies,” changes in India’s regulatory regime have played an important role in the emergence of Indian multinationals. Extensive legal reforms since economic liberalization have set the stage for outbound acquisitions by Indian multinationals. However, I also argue that Indian law continues to impose significant constraints on the ability of Indian firms to engage in outbound acquisitions. Legal constraints limit the size of outbound deals as well as the methods that Indian multinationals use in pursuing outbound acquisitions, including limiting their ability to be creative in undertaking different types of acquisition structures.
It appears that the Confederation of Indian Industry (the CII is India's leading business association) has also turned its attention to these issues (HT: Indian Corporate Law Blog). In a recent press release, the CII points to some of the hurdles for Indian firms. According to the press release, the CII has submitted suggestions to the Department of Industrial Policy and Promotion, Government of India for creating a more “facilitative environment for transnational M & A activity of Indian corporates.” It will be interesting to see how the Indian government responds to the concerns expressed. In the past, the CII has had significant influence over the trajectory of Indian corporate law reforms.
Saturday, February 12, 2011
Reuters reports on China's announcement that China will begin subjecting inbound M&A activity to national security reviews - its own version of the US CFIUS process. Although the US security review system entails a voluntary filing, I suspect the Chinese version that they are currently envisioning will be slightly more intrusive. Here's the official goverrnmenent announcement (translated by the Google machine):
In order to guide foreign investors and orderly development of the domestic enterprise, safeguard national security, by the State Council, is to establish a foreign investor acquires a domestic enterprise security review (hereinafter referred to as M & A security review) system in the matter are as follows:
First, the scope of M & Security Review
(A) safety review of the range of M & A: Foreign investors, supporting the takeover of a domestic defense industry and military enterprises, key, sensitive military installations around the business, and relationships with other units of national security; foreign investor acquires a domestic national security of the important agricultural products, it is important energy and resources, critical infrastructure, an important transportation services, key technologies and major equipment manufacturing and other enterprises, and the actual control may be achieved by foreign investors.
(B) a foreign investor acquires a domestic enterprise, is the following:
1 foreign investor purchases shares of enterprises with foreign investment or subscribe for capital increase domestic non-foreign-invested enterprises, domestic enterprises to make the change into a foreign-invested enterprises.
2 foreign investment in a foreign investor purchases the equities of Chinese enterprises, or enterprises with foreign investment capital increase subscription.
3 foreign investors to establish foreign-invested enterprises and enterprises with foreign investment agreement through the purchase of a domestic enterprise assets and operates its assets, or through the foreign-invested enterprises to purchase shares of domestic enterprises.
4 the territory of foreign investors to buy corporate assets, and invest the assets of the foreign-invested enterprises operating assets.
(C) to obtain effective control over foreign investors, foreign investors means a domestic enterprise through the acquisition of a controlling shareholder or actual controller. Include the following:
1 foreign investors and its parent holding company, subsidiary after the acquisition of the total shares held by more than 50%.
2 several foreign investors in the acquisition of shares held after the combined total of more than 50%.
3 foreign investors in the acquisition of shares held after the total amount of less than 50%, but according to their holdings enough to enjoy the right to vote, or the shareholders meeting of shareholders, resolution of the board have a significant impact.
4 other decision-making led to a domestic enterprise, finance, personnel, technology transfer of effective control over the situation to foreign investors.
Second, the contents of M & Security Review
(A) of the M & A transaction on national security, including the defense needs of the domestic production capacity, the domestic services capacity and the impact on equipment and facilities.
(B) of the M & A transactions on the stable operation of the national economy.
(C) of the M & A transactions on the impact of basic social order of life.
(D) M & A transactions involving national security, the impact of key technology R & D capabilities.
Third, M & A security review mechanism
(A) the establishment of a foreign investor acquires a domestic enterprise security review of the Inter-Ministerial Joint Conference (hereinafter referred to as joint) system, the specific commitment to the safety review of mergers and acquisitions.
(B) under the leadership of the joint meeting of the State Council, the Development and Reform Commission, Ministry of Commerce take the lead, according to foreign capital industries and sectors involved, together with relevant departments to carry out M & Security Review.
(C) of the joint meeting of the main responsibilities are: analysis of a foreign investor acquires a domestic enterprise to national security; research, coordination of the foreign investor acquires a domestic enterprise security review of the major issues; on the need for safety review of the foreign investor business transactions within the safety review and decision.
Fourth, M & A security review process
(A) a foreign investor acquires a domestic enterprise, shall be in accordance with the provisions of this notice by the investor to the Ministry of Commerce to apply. That fall within the scope of the safety review of mergers and acquisitions, the Ministry of Commerce should be brought to within 5 working days to review the joint meeting.
(B) a foreign investor acquires a domestic enterprise, relevant State Council departments, national trade associations, industry enterprises and downstream enterprises that require acquisition of security review, conducted by the Ministry of Commerce security review of the proposed merger. Joint acquisitions deemed necessary by the safety review, may decide to conduct the review.
(C) of the joint review of the Ministry of Commerce deals brought to safety, the first general review of the general review of the failed, to conduct a special review. The parties shall deal with the joint safety review, to provide security review required materials, information, and accepted the inquiry.
Review of written comments of general way. Ministry of Commerce received the Joint Security Review deals brought to the application, within 5 working days, the departments concerned to seek a written opinion. After receiving the additional request in writing the relevant departments, should be within 20 working days to submit written observations. Such as the departments concerned that the deal does not affect national security, are no longer conduct a special review by the joint meeting of all the written comments received within 5 working days to review comments, and written notice to the Ministry of Commerce.
M & A transactions, if any departments that may impact on national security, joint written comments should be received within 5 working days after the start the special review process. Start the special review procedures, joint organization of the safety assessment of mergers and acquisitions, combined with assessment of the review of M & A transactions, basically the same comments, review comments made by the joint meeting; there are significant differences, by the joint meeting of the State Council for decision. Joint meeting since the launch of special review procedures within 60 working days to complete special reviews, or to the State Council decision. Review comments in writing by the joint meeting of the Ministry of Commerce.
(D) the safety review process in the acquisition, the applicant may apply to the Ministry of Commerce program to modify or withdraw merger transaction.
(E) acquisition of security review was made by the applicant written notice of the Ministry of Commerce.
(Vi) acts of a foreign investor acquires a domestic enterprise to national security have caused or may cause significant impact on the joint meeting with the relevant departments should be required to terminate the Ministry of Commerce of the transaction parties, or transfer the relevant shares, assets or other effective measures to eliminate the merger and acquisition on national security.
V. Other provisions
(A) the relevant departments and units to establish the overall concept, enhance a sense of responsibility and keeping state secrets and commercial secrets, improve efficiency, expanding opening up and foreign investment to improve standards at the same time, promote the healthy development of foreign capital to safeguard national security.
(B) the acquisition of domestic enterprises involving foreign investors new investment in fixed assets, fixed assets investment by state regulations for project approval.
(C) acquisition of domestic enterprises involving foreign investors to change the state-owned property, the management of state assets by state regulations.
(D) a foreign investor acquires a domestic financial institutions, security review separately.
(E) Hong Kong SAR, Macao Special Administrative Region, Taiwan investors in mergers and acquisitions, with reference to the provisions of this notice.
(Vi) M&A safety review system since the date of the notice issued 30 days after implementation.
Rules for this review process are expected to be released in March.
Tuesday, January 18, 2011
Clearly since the financial crisis, Iceland has been on its heels. Dealing with the incredible debt that Icelanders have been left to pay has forced some very difficult decisions on the current government. One of those was the decision to sell HS Orka hf, the state-owned geothermal company to the Swedish energy concern Magma. The sale was completed on Dec. 23, 2010. It's hard to really visualize how important Orka is in Iceland. Think about this: in Reykjavik, there are no private homes with "boilers" for heating. That's because Orka runs a centralized geothermal heating system for all the residents of the country's capital city. Orka is responsible for all the heat and hot water. It's central to the economic and social life of the country.
It's no surprise then that the sale of the company to foreigner owners has generated a lot of controversy. Yesterday, the Icelandic singer Bjork presented the Icelandic PM with a petition calling for Iceland to buy back the company from its new foreign owner. The petition had 47,000 names on it - that's an incredible 15% of that small country's population. Indications are that the government will respond to the petition by forcing a sale back to the government and keeping the utility in public hands.
Monday, January 17, 2011
Shareholders in South Africa just approved Walmart's $2.3 billion acquisition of South African retailer Massmart. Now the Congress of South African Trade Unions (COSATU) - who opposed the sale - have called for the 'mother-of-all-boycotts':
"We urge shareholders to vote against this deal. If the deal goes through, COSATU will do what it does best. We will organize a mother of all boycotts against Massmart," COSATU's first deputy president, Tyotyo James, told shareholders immediately before the vote.
In the end, the threat of a boycott wasn't enough to deter shareholders from voting in favor of the transaction (79%). However, threading the needle that is local politics of South Africa will prove a challenge for Walmart in completing this deal.
Monday, January 10, 2011
Rene Stulz and his co-authors have a new paper, Globalization, Governance, and the Returns to Cross-Border Acquisitions, examining the returns cross border acquisitions. Interesting, it looks like acquirers from countries where corporate governance is poor tend to over-pay. That makes sense. Also, it looks like the country of the acquirer doesn't explain as much of the stock returns as the industry and year of the acquisitions. Bubbles matter.
Abstract: Using a sample of control cross-border acquisitions from 61 countries from 1990 to 2007, we find that acquirers from countries with better governance gain more from such acquisitions and their gains are higher when targets are from countries with worse governance. Other acquirer country characteristics are not consistently related to acquisition gains. For instance, the anti-self-dealing index of the acquirer has opposite associations with acquirer returns depending on whether the acquisition of a public firm is paid for with cash or equity. Strikingly, global effects in acquisition returns are at least as important as acquirer country effects. First, the acquirer’s industry and the year of the acquisition explain more of the stock-price reaction than the country of the acquirer. Second, for acquisitions of private firms or subsidiaries, acquirers gain more when acquisition returns are high for acquirers from other countries. We find strong evidence that better alignment of interests between insiders and minority shareholders is associated with greater acquirer returns and weaker evidence that this effect mitigates the adverse impact of poor country governance.
Thursday, January 6, 2011
Kraft had promised not to close the Bristol (UK) plant and save the plant's jobs as part of its acquisition of Cadbury. That turned out to be a false promise. The plant has just closed.
Cadbury has confirmed the last bar of chocolate has rolled off the production line at its Somerdale factory in Keynsham. The closure of the plant, which at one stage was one of the biggest employers in the area, marks the end of Bristol's 250-year long association with the chocolate industry...
At its height, the factory employed about 750 people and produced around 52,000 tonnes of chocolates each year, including Crunchie, Caramel, Double Decker, Picnic, Chomps, Mini Eggs and Turkish Delight...
Meanwhile Roger Carr, the businessman who oversaw the £11-billion sale to the US multinational Kraft in February, was knighted for services to industry in the New Year Honours List. Sir Roger was praised by the City for getting a good deal for shareholders when the Cadbury sale went through in February.
Of course, the workers get shown the door, while Carr gets a knighthood. I wouldn't expect anything less. You'll remember that Kraft's promise to save the jobs at the UK plant was an important part of Kraft's public relations campaign to get the deal done. The broken promise generated political pressure to force a reexamination of the Takeover Rules, now in progress.
Friday, November 19, 2010
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.
Tuesday, November 16, 2010
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.
Monday, November 15, 2010
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.
Sunday, 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.
Monday, November 8, 2010
The Star up in Canada defends the country's right to say no to foreign investment, but still worries that the fix might be in:
Yes, the Canadian government's actions last week sent a message to the rest of the world: that we are no longer willing to be the Boy Scouts of international finance.
If the Potash Corp. episode has taught us anything, it is that the Investment Canada process is far too opaque. When Industry Minister Tony Clement said the takeover of Potash Corp. did not meet the “net benefit” test under the Investment Canada Act, he was prevented by law from saying why. If Clement turns around after the 30-day appeal period and says BHP has improved its offer and now meets the test, how would we know?
Some looking at the situation with Potash seem to think that the Investment Canada Act and the current climate could prove the ultimate takeover defense for Research in Motion (Blackberry). Given the extremely competitive market for smart phones, that's some comfort for RIM's board, I suppose.
Thursday, November 4, 2010
Last week the Premier of Saskatchewan gave the thumbs down to the BHP bid for Potash. Yesterday afternoon, Canada's Industry Minister Tony Clement released a statement expressing a similar sentiment:
"I can confirm that I have sent a notice to BHP Billiton indicating that, at this time, I am not satisfied that the proposed transaction is likely to be of net benefit to Canada.
"I came to this decision after a careful and rigorous review of the proposed transaction. BHP Billiton has 30 days to make any additional representations and submit any undertakings.
"At the end of that period, I will make a final decision.
"The confidentiality provisions of the Investment Canada Act prohibit me from discussing specifics of an ongoing case.
"I can assure Canadians, however, that I will provide an explanation of the reasons behind my final decision at the time that decision is made, in accordance with the provisions of the Act.
"Canada has a long-standing reputation for welcoming foreign investment. The Government of Canada remains committed to maintaining an open climate for investment."
So the ball is now back in BHP's court. It looks like it's up to them to woo the government of Canada if they want this deal to happen.
Friday, October 29, 2010
BHP Billiton's hostile bid for Potash Corporation of Saskatchewan continues to provide interesting lessons for M&A buffs. You can’t underestimate the power of a hostile deal, especially a cross-border one with regulatory uncertainty, to raise enormous amounts of risks for both sides.
For Potash Corp this week has brought both good and bad news. The good news is, potash (the mineral) is in high demand, with Potash Corp reporting stellar quarterly profits. The bad news is that, in a weird twist not often seen in hostile deals, the stock of Potash Corp may not be trading as high as it should be (i.e. the fundamental value isn’t reflected in the current stock price) because of the uncertainty surrounding the BHP bid. In fact, Potash’s Q3 investor presentation spends much time driving home this point, providing a “hypothetical unaffected stock prince analysis” and honing in on the inadequacy of BHP’s offer.
Potash Corp investors that are hoping that as a result of the company's strong earnings BHP would raise its offer may not see that happening anytime soon. Recent reports indicate that, in addition to Saskatchewan, the Canadian federal and other provincial governments may get in the way of any possible takeover by a non-Canadian buyer. Despite the fact that BHP’s offer is likely too low at the moment in light of the improving trends in fertilizer prices, based on statements (“I think we're going to get screwed” ) by a source allegedly close to BHP, it appears raising the offer is not likely at the top of their list given the tense negotiations with the Canadian government. Of course, BHP issued a statement trying to distance itself from this comment, stating that "We have absolute confidence in the integrity of the Investment Canada process. We continue to have ongoing negotiations with the Investment Review Division, but we do not comment on these discussions in the media.” We will see on November 3rd when the Canadian authorities complete their review of the bid.
BHP and its management are under a lot of presssure with this deal. In addition to the problems they are encountering with the Canadan government, if they lose this deal, it will be the second big hostile deal that they have failed to complete in the last two years. Furthermore, losing out on the Potash deal will be painful and costly given the amount of resources they have devoted to it over the past several months.
In the meantime, Potash Corp’s CEO is also trying to calm things down, indicating that the company is looking for a white knight and has engaged in “very active conversations about alternatives to BHP’s hostile offer.” Given the way the things are going in Canada with the BHP bid, it will be interesting to see whether these other options involve foreign buyers.