Monday, September 3, 2007
Here it is folks, the Fall M&A Preview. This is my take on the big (and not so big) M&A and other market legal issues and expected events for the Fall of 2007. It is going to be a fascinating time to be watching the markets.
The Big Picture
Expect strategic transactions to be driving M&A activity in the Fall as the private equity firms focus on clearing out some of the big deals on their plates. Regardless, also expect market innovation and adjustment to occur as these private equity firms attempt to close these deals and reallocate the liabilities and costs among the parties (ala Home Depot) as they, their targets and financing banks desperately avoid one of these big deals breaking. NB. This is a much harder task in the public company context than in the Home Depot paradigm.
There are now four potential material adverse change (MAC) cases by my count (Lone Star/Accredited; SML/PE Consortium; Genesco/Finish Line; Radian/MGIC). If markets further deteriorate, expect more of these cases as acquirers attempt to escape or renegotiate deals and use the MAC as a bargaining tool. The big MAC case right now is the Lone Star/Accredited one which is in litigation and has scheduled hearings before VC Lamb in Delaware Chancery on Sept. 26. An opinion would resolve significant questions over what constitutes disproportionality under a MAC clause and have much wider market ramifications for other, pending deals. So, as a law professor I am rooting against settlement and for an opinion, though, given that Lone Star is a financial buyer (unlike Tyson) resolution through litigation seems unlikely.
Private Equity (And SPACs and BDCs)
It is going to be a busy Fall for private equity as they attempt to close their pending deals. Here, I expect the private equity shops who can to use reverse termination fees as a bargaining tool to renegotiate deals. These fees provide them a clean way to walk away from a deal without further liability provided they pay a termination fee of approximately 3-4% of deal value (see my post on these here which was quoted in the N.Y. Times: thanks Andrew R. Sorkin!). This maneuver was used in the Home Depot deal where it was reported by the WSJ that the lending banks offered to pay the reverse termination fee if the private equity firms walked. Showing perhaps that this story was planted by the private equity firms themselves, the story also reported that the private equity firms balked at this stance due to the reputational effect of such a maneuver. Aren't they swell? Nonetheless, private equity firms are not charities, if the market does further deteriorate expect the private equity firms to strongly reassess this position, and in any event to use this provision to non-publicly attempt to renegotiate troubled deals.
One other thing to look for is how the many, pending initial public offerings of SPACs (special purpose acquisition companies) and BDCs (business development companies) fare. These are private equity derivative investments that have been all the rage of late (e.g., SPACs constituted twenty-eight percent or thirty seven of the 133 initial public offerings through July 20, 2007). I look at these offerings as the "canary in the mine-shaft" so to speak; they will be a good indicator through the Fall of the current state of private equity and the prospects for the takeover market generally. And BDCs will take a particular hit though no matter what given the implosion of KKR Financial, LLC, KKR's BDC. Nonetheless, I expect fund adviser ipos to continue to pop-up and for KKR's ipo to go through in the Fall. Their historical record right now is unlikely to get any better, and so it is a good time for them to sell even if they won't get Fortress's or Blackstone's pricing.
The M&A action in Europe these days is incredible; it is a much more vibrant and innovative takeover market than the U.S.-one as the actors struggle and adjust with the 25 differing takeover regimes. Here, the Takeover Directive has now been fully implemented; in its final form everyone knew it was weak medicine for harmonization. But the required implementing legislation has led to a reexamination by many countries of their takeover codes which has pushed the countries even farther apart. France has used this process as an excuse to adopt legislation permitting targets to issue stock warrants in the face of a hostile offer – a modified form of poison pill. Meanwhile, Britain has stayed in the opposite camp. It has maintained its prohibitions on takeover and transaction defenses in all circumstances (which the English call frustrating action). The result is grist for a worthy academic study on federalism and regulatory competition as the effects of these differing laws on their domestic/cross-border M&A markets take effect (one that I hope to pursue). Ultimately, despite any inhibiting effects of these laws the European takeover market is now as robust as the U.S.-one; expect it to stay that way through the Fall, as shareholders and institutional investors become increasingly active in the takeover process (e.g., ABN Amro/Barcalays/RBS; Arcelor/Mittal).
M&A Specific Issues
The Return of the Tender Offer? In the first five months of 2007, 15.5 percent of negotiated transactions were accomplished through tender offers (see my prior post outlining the reasons for this here). While that is a low figure, it is more than three times higher than in the same period last year. As strategic transactions return to the fore, expect more acquirers in negotiated transactions to continue to use this acquisition structure.
The Top-Up. Expect top-ups to become standard in tender offers, to the extent they are not already.
The Rise of the Exchange Offer? I'm rooting for it. In the M&A Release, the SEC attempted to put cash and stock offers on parity by providing for early commencement of equity exchange offers in Rules 162 and 430 of the Securities Act. Now, with reform of the all-holders/best price rule, the main problem with tender offers has disappeared. So, with the return of the cash tender offer, I would expect to see the exchange offer begin to emerge. Exchange offers permit stock-for-stock acquisitions to be consummated on a tender offer time table instead of the 2-3 months for a merger. M&A lawyers would do well to inform their acquiring clients of this despite the significant extra lawyer time it involves.
Whither the Go-Shop? These provisions have been criticized here and elsewhere for their illusory nature, providing cover to private equity firms and management who attempt to take over a company. Go-shops have also been subject to increasing judicial scrutiny in Delaware in the NetSmart and Topps cases. Hopefully, this scrutiny and criticism will bring innovation among M&A practitioners to revise the terms of these provisions to provide them with more significance. But otherwise, they will continue to persist in some form in private equity deals.
Shareholder/Board Action. Expect shareholder activism to diminish to the extent we remain in a down market and shareholders take what they can get. Still, the Topps transaction is likely to be defeated. Also, to the extent shareholders do protest takeovers, expect boards to avail themselves of Strine's recent decision in Mercier to attempt to further influence the shareholder approval process in takeovers (more on this here).
The Global Competition for Listings. The comment period for the SEC's concept release on IFRS accounting for U.S. issuers expires November 13, 2007. While this is not a great idea (there are different considerations for U.S. issuers than foreign ones which make it more appropriate to compare apples with apples), the SEC is starting to "get" the fact that there is a global listings and offerings market and to actually compete in it. I believe that this is the most exciting regulatory development this year. Put this on top of the SEC's push for IFRS for non-U.S. issuers by 2009 and the effectiveness of the foreign issuer deregistration rules this Spring, and I am positively giddy. Also, expect an article by a news reporter this Fall headlined -- foreign issuers flee the United States -- reporting the high number of non-U.S. issuers who have now deregistered in recent months. It will likely quote an academic who says this points to Sarbanes-Oxley and the anti-competitive position today of the United States. Don't believe it. The deregistration/delisting wave is a product of the the pent-up demand for delistings and a restoration of market equilibrium in light of the new SEC rules permitting such deregistration. The more important indicator here is the number of new cross-listings -- and all signs through today point to this number as being a good one. [NB. if any law professor out there is interested in putting together a comment on the concept release please contact me -- I'm working on one right now and would welcome a co-signer or two]
Hedge Funds. The SEC will consider this Fall raising the Regulation D Rule 506 investing requirements for investment in hedge funds and private equity to $2.5 million for individual investors. Showing what it thinks of the benefits of economic cost/benefit analysis, the SEC did not cite a single financial or academic study to support raising this standard. Instead, the SEC continues to rely on the proposition that hedge funds are too "risky" for public investment, and issues of systematic risk to place these investments off limits to public investors. Here, I am reminded of the Massachusetts Securities Division which refused to permit residents of that state to invest in the initial public offering of Apple Computer because it was “too risky”. The SEC would do better to undertake real cost/benefit analysis of public investment in these funds, a study which would have to recognize their benefits for diversification and excess returns (i.e., alpha). For those who want more on these issues see Troy Paredes recent, terrific article on this.
Fairness Opinions. After four amendments and eight extensions, the time period for SEC action on Rule 2290, the FINRA rule on fairness opinions, will expire on October 31 (see the rule filings here). At this point, everyone would be better off if FINRA acknowledged reality and withdrew the rule. Instead, the SEC should sit down and take a hard look at fairness opinion practice. These opinions are subjective and not prepared using best practices or to any definitive standards; problems which are exacerbated by the conflicted nature of the investment bank in rendering these opinions. Moreover, SEC rules need to be updated in this area (e.g., fairness opinion disclosure is required in proxies but not for Schedule TOs). For more on this, see my article Fairness Opinions published in the American Law Review.
My New Years' Wish List. Since I get three wishes as blog editor here they are:
- Merger/Tender Offer Parity. The poison pill has sterilized the use of the tender offer as a takeover device. Consequently, there is no significant difference between the tender offer and merger structure any more. The SEC should undertake a comprehensive review to end the disclosure, timing and other regulatory differences between tender offers and mergers to put them on parity. (e.g., a company who is not current in its financial reporting can be the subject of a tender offer but, because of an SEC staff proxy rule interpretation, may not be able to issue a merger proxy, a particular problem in options back-dating cases. There is no reason for this. For more on these inappropriate differences, see here).
- Updating the Cross-Border Rules. The Cross-Border Rules were a significant step by the SEC to attempt to accommodate cross-border acquisitions. Yet, because of a number of technical problems with the rules (detailed here), they have not been fully utilized and instead issuers have increasingly relied on the exclusionary offer to avoid wholesale application of the U.S. securities laws. The SEC should take the easy steps to fix these problems and again encourage these transactions to include U.S.-based holders. It would also help if the SEC looked at the scheme of arrangement exemption under Section 3(a)(10); most U.K. acquirers now use it as the preferred method to largely avoid the U.S. securities laws in acquisitions, and I am not so sure that it functions the way the SEC thinks intended it should when it first permitted this exemption (I'll post more on this later this week).
- Abolish Rule 14e-5 as it applies to tender offers. My pet-peeve. Rule 14e-5 was promulgated in 1969 as Rule 10b-13 to prohibit bidder purchases outside of a tender offer from the time of announcement until completion. The primary reason put forth by the SEC for barring these purchases in 1969 was that they “operate to the disadvantage of the security holders who have already deposited their securities and who are unable to withdraw them in order to obtain the advantage of possible resulting higher market prices.” This is no longer correct; bidders are now obligated to offer unlimited withdrawal rights throughout the offer period. Moreover, Rule 10b-13 was issued at a time when targets had no ability to defend against these bidder purchases. Not true anymore either -- the poison pill and other regulatory bars limit or inhibit bidder purchases outside an offer. And Rule 14e-5 applies to tender offers but not mergers (the parity issue again). But the Market Reg. division of the SEC has assiduously protected this rule despite its obsolescence. The SEC would do better to deregulate and leave the possibility or actuality of bidder toeholds and post-announcement purchases to be regulated by targets through a low-threshold poison pill or other takeover defenses as well as through bargaining with potential bidders (For more on this see here).
Monday, August 13, 2007
Astute market watchers will note that Wachtell is currently on opposite sides of two Material Adverse Change disputes. Craig M. Wasserman at the firm is leading a team representing the consortium which has agreed to buy SLM Corporation (the consortium is claiming a possible MAC). Edward D. Herilhy is leading a team representing MGIC Investment and Radian Group Inc. (MGIC is disputing a possible claimed MAC). Interestingly, Wachtell junior partner Nicholas G. Demmo is listed in the transaction documents as being on both deal teams (it is noted here in the SLM merger agreement, and here on the cover of the MGIC/Radian S-4/proxy statement). And while there should be nice synergies (cost-savings?) for him in working on both sides of this issue, one has to hope that, on those late Wachtell nights, he doesn't make a mistake and confuse the two with his clients.
NB. I was also quoted on the MGIC/Radian dispute this weekend in the Milwaukee Journal Sentinel (see the article here).
Monday, July 23, 2007
I'll be attending the Law and Society Annual Meeting in Berlin for the remainder of the week. There I will be speaking on the panel: Securities Regulation, Corporate Governance, and Corporate Finance: Global Markets, Law, and Culture. I hope to see you there. In the meantime, I will continue to be blogging and will report any noteworthy events from the conference.
Sunday, July 22, 2007
The newly-public dispute between Sumner Redstone and his daugther Shari Redstone highlights the perils of minority shareholders in privately-held enterprises. The Redstones currently control their investments through the family holding company, National Amusements Inc., a Delaware corporation. It owns controlling interests in Viacom and CBS, Midway Games and the National Amusements theater chain. Sumner Redstone controls 80% of the company and Shari Redstone the remaining 20%.
According to the Wall Street Journal, Shari is asking to be bought out for $1.6 billion, valuing National Amusements at $8 billion. Sumner apparently responded to her request in a public letter to Forbes on Friday:
I am perfectly satisfied to leave the matter as it is. There is no practical difference between me controlling 80% of the stock of National and 100% of the stock of National . . . . If Shari wishes to be bought out I will consider this so long as the price is acceptable.
For Shari, the corporate situs of National Amusements in Delaware is unfortunate for her bargaining position. For partnerships, Delaware follows the strict majority rule and allows no remedy for oppression. National Amusements is a corporation, though, but Delaware also has a strict rule that in a close corporation context as here, there are no specialized fiduciary duties of majority shareholders to minority shareholders (Nixon v. Blackwell, 626 A.2d 1366 (Del. 1993)). Thus, Shari's rights vis-a-vis a buy-out and as a minority shareholder will be determined solely by any shareholder agreement among the parties. It has previously been reported that such an agreement exists and it restricts her from selling her stake except for back to National Amusements at book value, which would be a fraction of its market value. This puts Shari in a tenuous negotiating position; Sumner is absolutely correct that he can just leave her there and run National Amusement and its controlled subsidiaries at his discretion.
If Sumner indeed does follow this route, Shari will likely be left with the only remedy typically available of shareholders in this minority position: be a pest and hope that this will create an incentive for Sumner to buy her out. If she follows this route, expect her to be regularly trooping to Delaware Chancery to challenge the decisions made by National Amusements on any plausible fiduciary grounds available to her, with a focus on any arguably self-dealing transactions between these entities and Sumner as these are subject to heightened scrutiny.
Ultimately and in order to prevent these problems, minority shareholders in any private enterprise and their attorneys should before-the-fact bargain for exit and governance rights in the case of a dispute. Unfortunately for Shari, since these shares were reportedly a gift from her father she likely did not have this option.
The rift between Sumner Redstone and his daughter Shari very publicly broke on Friday. The Wall Street Journal started it with an article reporting that octogenarian Sumner no longer wished his 53-year-old to succeed him as controlling shareholder and chairman of CBS and Viacom when he dies, and was is in negotiations with her to end her involvement with the companies. Sumner responded by issuing his own letter to the editor of Forbes magazine chastising Sheri. In the letter Sumner stated that while his daughter "talks of good governance, she apparently ignores the cardinal rule that the board of the two public companies, Viacom and CBS, should elect my successor." Sumner had previously fallen out with his son Brent who had sued him -- the suit was settled less than six months ago for about $240 million. Hopefully, this makes us all feel better about the relativity of our own family disputes.
One could also question Sumner's bona-fides in invoking principles of good-governance with respect to Viacom and CBS. He controls each through a dual-class voting stock which over-represents his economic interest in the companies (which is about 12% in each). Moreover, he has not been afraid to exercise this control. According to the Wall Street Journal:
In 1996, he forced Frank Biondi out as CEO and took the reins himself. In 2004, Mel Karmazin quit as president after four years of friction with Mr. Redstone. Last September Mr. Redstone, by then executive chairman of Viacom, ousted CEO Tom Freston and appointed Philippe Dauman, who himself had been forced to leave as deputy chairman in 2000 when Viacom acquired CBS.
Sumner´s inability to cede control of these companies has led to jokes that for each their succession policy is for "Redstone to not die". Hardly the best governance policy. Moreover, according to the Viacom proxy statement and the CBS proxy statement in 2006 Sumner was paid over $16 million by Viacom and $12 million by CBS, respectively. Notably, CBS was up about 30% last year while Viacom's stock went down. Part of good corporate governance is pay for performance. And whether a controlling shareholder should compensate him or herself at all is even questionable -- their reward is embedded in their gain from an increased stock price. If Sumner is indeed adhering to principles of good governance he might want to consider this course.
P.S. M&A lawyers should know that this now puts former Shearman & Sterling M&A partner and current Viacom CEO Philippe Dauman in a more likely position to succeed Sumner. He met Sumner when he was assiged as an associate to prepare a Schedule 13D for one of Sumner's investments.
Friday, July 20, 2007
The U.K. Panel on Takeovers and Mergers, the U.K.'s takeover regulator, today announced the appointment of Robert Hingley as its new director general. He will replace Mark Warham of Morgan Stanley and serve a two-year appointment beginning as of December 1, 2007. According to the announcement, Robert Hingley is 47 and currently serves as Vice Chairman of Lexicon Partners, an independent corporate advisory firm based in London and Hong Kong. Previously Hingley was an attorney with with Clifford Chance and the investment bank Citigroup.
Hingley will actually serve on secondment from Lexicon partners for the two-year period. This is a common practice in the United Kingdom with respect to not only the Takeover Panel, but also the Financial Services Authority, the U.K. equivalent of the SEC, and the Office of Fair Trading, the U.K.'s antitrust regulator.
Jon Harmon over at the Force For Good blog has an interesting post on his email exchange with Sonja Tuitele, senior director - Corporate Communications & Investor Relations for Wild Oats. Apparently, Wild Oats' ethics policy "prohibit[s] unauthorized statements about the company to external audiences, including the Internet." John Mackey, the CEO of Whole Foods, and who was caught last week posting anonymously to the Wild Oats Yahoo! chat board, and is now under investigation by both the SEC and his own board should take note. Mackey has also suspended posting on his own public blog as of this week. Whole Foods is still continuing with its bid to acquire Wild Oats.
Thursday, July 12, 2007
The big story today is the illicit postings made over a period of seven years by Whole Foods CEO and co-founder John Mackey on the Yahoo chat board for Wild Oats. Apparently, he used the handle Rahodeb (his wife Deborah's name backwards) to make posts bad-mouthing Wild Oats and talking up Whole Foods. You can't make this stuff up. I haven't read all of the posts, but Mackey as CEO of Whole Foods has potential liability exposure under the anti-fraud provisions of the Exchange Act for the postings. To defend himself against these claims, he will likely claim that, among other things, the posts come under the puffery exception and otherwise it would have been unreasonable to rely upon them. Fair enough -- these days it may be patently unreasonable for anyone to rely on a chat board posting for their trades.
In the end, the Whole Foods-Wild Oats saga highlights for attorneys the problems of head-strong clients/CEOs who likely do not take advice well, as well as the perils of second requests. But just because you have a dumb CEO still doesn't justify the FTC actions here challenging Whole Foods' proposed acquisition of Wild Oats. As far as I know, there is no stupidity provision in the antitrust laws though some may argue there should be one in the law generally.
Addendum: read the posts here.
Monday, July 9, 2007
Both the Chicago Board of Trade and Chicago Mercantile Exchange put their business combination to a shareholder vote today. The vote comes on the heels of Friday's announced increase in the merger exchange ratio from 0.350 to 0.375 shares of CME Holdings common stock for each share of CBOT Holdings common stock valuing CBOT at $11.9 billion up from an initial October valuation by the parties of $8 billion. All other terms of the merger remain the same. In connection with the increase, Caledonia Investments PYT. Ltd, CBOT's largest shareholder with 7% of the company, announced that it will support the transaction. Over the weekend, rival bidder IntercontinentalExchange Inc. decided that it would not raise its mostly stock offer for CBOT, which is now valued at a roughly equivalent amount as CME's.
The transaction looks likely to now go to CME and CBOT. It also highlights the quirks in Delaware law: how Delaware law permits transaction participants to characterize their stock-for-stock merger as a business combination rather than an acquisition to avoid "Revlon duties" and favor one bidder over another. Here, because the CBOT/CME transaction was mostly stock it was likely not considered to be a change of control transaction under Revlon (which would require the board to obtain the highest price reasonably available), but rather a simple business combination along the lines of Paramount Communications, Inc. v. Time Inc., 571 A.2d 1140 (Del. 1990). There and here, post-transaction control was fluid and there was no change in control that would trigger "Revlon duties". Accordingly, Revlon was not applicable and the CBOT board's decision to combine with CME (and arguably favor it over ICE in the process) reviewable under the business judgment rule. Moreover, while shareholder pressure here did work to increase the consideration, CME's final raise likely knocked ICE out even if ICE had been willing to measurably increase the bid. The arbitrageurs who own CBOT stock earned a significant return with the CME raise and are therefore likely to favor its certainty over a higher ICE bid despite the will of many longer-term shareholders. A similar happening to that in the recent OSI Restaurant Partners going-private. And, it is also likely to win approval of the CME-CBOT transaction today.
For shareholder who wish to attend the meetings today (and get some free food, etc.) here are the addresses: The CME Holdings special meeting is at 3:00 p.m. on July 9, 2007 at UBS Tower—The Conference Center, One North Wacker Drive. The CBOT Holdings special meeting is at 3:00 p.m. on July 9, 2007 and the CBOT special meeting of members will be held at 2:30 p.m. on July 9, 2007, each at Union League Club of Chicago, 65 West Jackson Boulevard.
Sunday, July 8, 2007
I was quoted in yesterday's San Francisco Chronicle in the article IPO Talk Raises New Questions. The piece is a good primer on those who would like an overview of the issues associated with the rash of private equity and hedge fund adviser initial public offerings. In it I am quoted as stating that I "would avoid these firms 'for a lot of reasons. As a corporate-law professor, I'm offended that you don't have a vote. Second, these are risky investments and people may not be appreciating the risks involved . . . .' Finally, the private equity boom 'is not going to last.'" True enough.
Tuesday, July 3, 2007
On July 2, 2007, the Company issued a press release announcing that the Company’s Board of Directors has concluded, after consulting with its financial advisor, that none of the indications of interest received to date represented or was likely to lead to a transaction that was in the best interests of the Company and its shareholders. There are currently no ongoing discussions with the parties that submitted the indications of interest. The Company will continue to review other strategic corporate options with a view towards maximizing value for the Company’s shareholders.
It all started on March 12 when Trump announced that it had engaged "Merrill Lynch to assist the Company in the identification and evaluation of strategic corporate options including, but not limited to, capital structure, financing and value-creation alternatives." The stock subsequently rose on the hopes of a sale, but on yesterday's news, the company's stock fell almost 16% in trading. But such losses are nothing new for Trump's stockholders. These casino properties have been in and out of bankruptcy several times including most recently in 2004. Still Donald Trump, has remained with the company throughout this entire period and is now Chairman of the board. And according to the company's proxy statement was paid over $1.878 million dollars last year for his services. Corporate governance gurus take note.
Still, the company's initial and subsequent disclosure here appears to have been correct under the securities laws. This is particularly true since its predecessor company, Trump Hotels & Casino Resorts was the subject of a landmark SEC cease-and-desist order for violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder for misleading disclosure with respect to pro forma financial statements. Still, the disclosure highlights the boiler-plate warning for shareholders that when these initial announcements are made there are no assurances that an agreement will be reached for a transaction. This type of speculation is better left to the M&A arbs.
Bloomberg today released global law firm M&A league tables for the first half of 2007 and Sullivan & Cromwell is at the top. According to Bloomberg, S&C advised on six of the 10 largest deals totaling $458.3 billion, including Barclays Plc's planned acquisition of ABN Amro Holding NV for $90.7 billion. The ABN Amro transaction was a virtual requirement to make the top ten as eight of the top 10 legal advisers for the half are advising on some aspect of the transaction. Here are the rest:
Top-Ranked M&A Law Firms for 2007's First Half
Firm Value of Deals (in billions)
Sullivan & Cromwell $458.3
Clifford Chance $327.8
Wachtell Lipton $310.7
Simpson Thacher $284.4
Allen & Overy $267.9
Cravath Swaine $232.4
Shearman & Sterling $225.9
Uria Menendez $223.7
Davis Polk $219.2
Bloomberg's rankings only count principal advisory roles (i.e., only deals in which a law
firm represented buyers, sellers or targets). The rankings are therefore more accurate than other rankings which include financial advisory roles (i.e., including deals in which a law firm is also representing an investment bank for the buyer, seller or target).
The rankings show the continuing dominance of both English and American firms, with U.S. firms in the lead. And congratulations to Shearman & Sterling which is back in the top ten after a long absence!
Thursday, June 28, 2007
As I write, Blackstone is now trading at $30.32 per unit, slightly below the initial public offering price of $31 a unit. And many a commentator is now saying the completed ipo is not a success because the trading price is now below the initial offering price. But is this right?
It is certainly not typical. Most companies experience a sharp rise in their share price on the first trading day of their ipo. According to data prepared by Jay Ritter, this rise has averaged approximately 19% since the 1960s. But it has varied greatly over the years: averaging 21% in the 1960s, 12% in the 1970s, 16% in the 1980s, 21% in the 1990s, and 40% in the four years since 2000 (mostly due to the inclusion of the last years of the technology bubble).
But is this really a good thing? Isn't this rise a sign that these ipo shares were underpriced, the sellers simply leaving money on the table? Certainly public perception is that the rise is such a good thing; who can forget those internet bubble days when the latest offering popped more than 100% and the masses cheered. But, this begs the question as to why sellers would repeatedly and deliberately leave money on the table. And this is a question that is one of the great puzzles of corporate finance. There is a great deal of literature on this subject, and theories can be grouped into four different explanations: asymmetric information, institutional reasons, control considerations, and behavioral approaches. According to Alexander Ljungqvist "[i]nstitutional theories focus on three features of the marketplace: litigation, banks’ price stabilizing activities once trading starts, and taxes. Control theories argue that underpricing helps shape the shareholder base so as to reduce intervention by outside investors once the company is public. Behavioral theories assume either the presence of ‘irrational’ investors who bid up the price of IPO shares beyond true value, or that issuers suffer from behavioral biases causing them to put insufficient pressure on the underwriting banks to have underpricing reduced." For more on these theories see Alexander Ljungqvist, IPO Underpricing: A Survey.
But with no agreed explanation for persistent ipo underpricing, ultimately, a successful ipo becomes one of perspective. For Peter Peterson, the senior chairman of the Blackstone group and who is retiring, the lower price is yet another good deal. He has sold his shares and reaped $1.9 billion appearing to leave very little money on the table. But for those who bought into the ipo on the first day, his gain has come at their expense.
Sunday, June 24, 2007
I´m back fresh from a restful break. In this vein, I thought I would recommend some good summer reading for deal junkies and the like. This is the light reading; I´ll recommend some brainier stuff on Friday.
Hedgehogging by Barton Briggs. Briggs was global strategist at Morgan Stanley, but left the position to start the global macro strategy hedge fund Traxis Partners. In Hedgehogging, Briggs spins on the day-to-day life of running a hedge fund by (anonymously) profiling many of the top managers. Hint: get ready to pity these poor managers as they experience unbearable pressure to raise money, earn that twenty part of the two and twenty, and afford their lifestyle. In between, Briggs writes about various hedge fund strategies and trading triumphs. Think Accidental Investment Banker, but for hedge fund types. The book is a good, light vacation read for those who want a taste of what the hedge fund life is like and what hedge fund managers actually do on a day-to-day basis.
Liar´s Poker: Rising Through the Wreckage on Wall Street by Michael Lewis. In this time of a possible private equity/hedge fund/credit/liquidity bubble, its time to revisit a classic from another heated time. In Liar´s Poker, Lewis engagingly describes his four years with the Wall Street firm Salomon Brothers during the 1980s; a time when Salomon´s mortgage trading group ruled Wall Street. The book is filled with trading stories and personalities and describes vividly such Wall Street legends as John Meriwether and Lew Renieri. Sure, Lewis was only there as a junior sales banker for four years, but he ably captures Salomon´s frenzied trading culture and describes the mortgage trading business in a very accessible way. The culture Lewis details would ultimately lead to Salomon´s demise when Paul Mozer, one of its traders, engaged in a rigged bidding scheme for treasury bonds. The gambit would be discovered and would bring down the entire bank in scandal setting off a series of events which ended Salomon´s independence.
Stealing Time: Steve Case, Jerry Levin, and the Collapse of AOL Time Warner by Alec Klein.The story of the America Online and Time Warner merger. At the time announced, this was the largest merger in U.S. history; this deal is also ranked among the most spectacular M&A failures in history. It is therefore a must read for any M&A attorney. And Klein tells the story in news reporter fashion, showing the strategies and personalities which created the deal and led in part to its failure. By the way, not everyone lost on the deal including, most importantly, the lawyers. Cravath represented Time in the transaction and received the astronomical flat fee of $35 million (though still not as sweet as Wachtell´s $20 million flat fee for two weeks work defending Kraft in 1988 against Philip Morris´s unsolicited bid).
Thursday, June 14, 2007
Highlighting that even investment bankers may need to fear globalization, Merrill Lynch & Co. has announced an $11 million dollar investment in Copal Partners. Copal is an analytics and research Indian outsourcing firm which, according to the Wall Street Journal, specializes in creating "deal books" for corporate mergers and takeovers. Merrill is the third investment bank to invest in Copal along with Deutsche Bank and Citi. The three banks now own approximately 25% of Copal.
And Copal is a growth business. Founded only five years ago, it is officially based in the United Kingdom but maintains a research staff of about 540 near New Delhi. Initially focused on the business of outsourcing by investment banks of research and deal preparation tasks, Copal is now expanding into other research opportunities, including research in credit and equity, as well as starting up a consulting business. As Copal and other Indian firms grow their experienced talent base in this area, expect the investment banks to shift even more junior preparation work abroad.
Thursday, June 7, 2007
We live in times of a private equity fueled M&A boom, and with it deals are increasingly rumored. Today's reports are that Brian Tierney head of Philadelphia Media Group, which last year acquired the Philadelphia Inquirer and the Philadelphia Daily News last year for $515 million, is interested in a possible offer for Dow Jones. This would be a counter to Rupert Murdoch's News Corp.'s $5 billion offer. This comes a few days after it was announced that billionaire Ron Burkle has joined forces with Dow Jones' union to explore an alternative transactions. Burkle has previously made an unsuccessful attempt to buy The Los Angeles Times. His bid would presumably employ an ESOP structure (and tax-dodge) similar to that being used by Sam Zell in the take-private of the Tribune Cos.
These reports are a bit unusual in that they are confirmed. But am I the only one who has noticed that the rumor mill is flying these days? Take this Marketwatch article on prospective white knights for Alcoa's $33 billion unsolicited offer for Alcan. According to Marketwatch, Norsk Hydro, BHP Billiton, and Rio Tinto are all said to be rumored bidders. The article continues that other potential suitors for Alcan also include "Brazil's Co. Vale do Rio Doce, the U.K.'s Anglo American, Xstrata Plc of Switzerland and Russia's Rusal." To be complete, the Article concludes by stating that Chinese companies and private-equity groups could emerge as potential bidders. Well, there. So far, no other bidders have emerged for Alcan.
And other rumors in the past twenty-four hours alone include that Time Warner may buy Scripps, Monster Worldwide is in play due to its CFO's resignation, Nissan-Renault is looking for a new partner, and TD Ameritrade Holding Corp. is being pushed by hedge fund shareholders to acquire a rival. While some of these reports are undoubtedly true, others smack of "throw it up on the wall and see if it sticks" journalism. Moreover, some of this reporting (as in the case of the Dow Jones reports above) appear to be merely preliminary reports of what would ordinarily be merely indications of interest.
As with all booms/bubbles it may be time for all of us to take a step back.
Wednesday, May 30, 2007
May is coming to an end, and this sixth wave of takeover activity is on pace to reach record levels. According to preliminary statistics released by Thomson Financial, M&A deals worth over $496 billion have been announced world-wide so far in May; while the figure in the United States is over $191 billion. Year to date, there has been $2.2 trillion in world-wide announced M&A activity with $830 billion of that occurring in the United States. Private equity has accounted for roughly half of this years' M&A activity in the United States. This world-wide activity is the highest ever for a May, and if it continues, will surpass the prior record set in 2000.
Wednesday, May 23, 2007
I was doing some research yesterday on Google's new private trading market for its employee stock options -- it has gone fully live -- when I stumbled across this Google 8-K filed yesterday:
In May 2007, Google Inc. invested approximately $3.9 million in the Series A preferred stock financing of 23andMe, Inc., an early stage biotech company focused on helping consumers understand and browse their genome. . . . Anne Wojcicki, who is a co-founder of 23andMe and who is also a shareholder and member of the board of directors, is married to Sergey Brin, Google’s President, Technology and one of its founders. . . . .Prior to Google’s investment in 23andMe, Sergey provided approximately $2.6 million in interim debt financing to 23andMe, which was repaid as part of this financing transaction.
The disclosure continues with a description of the process by which Google's audit committee approved the transaction and received an arms' length valuation in connection with this approval. Google's audit committee is headed by former Pixar CFO Ann Mather who herself has been caught-up in the options back-dating scandal. 23andMe also issued a statement with respect to the investment stating "[w]e are thrilled and honored to have attracted the backing of such a diverse, proven and innovative group of investors.” No doubt.
Google could have waited to disclose this information in its year-end filings, so they do receive some credit here for transparency.
Tuesday, May 22, 2007
Tracinda Corp., the investment vehicle for Kirk Kerkorian, today filed its 17th amendment to its Schedule 13D with respect to its 56% stake in MGM Mirage. The Amendment contains the following language:
Tracinda Corporation announced today that it intends to enter into negotiations with MGM MIRAGE (NYSE: MGM) to purchase the Bellagio Hotel and Casino and City Center properties. Tracinda also wishes to pursue strategic alternatives with respect to its investment in MGM MIRAGE which may include financial restructuring transactions involving all or a substantial portion of the remainder of the Company. Tracinda has made no decision with respect to any such restructuring transactions and reserves the right not to engage in or approve any transaction.
This is catch-all disclosure that is far from clear. It does nothing to tell you what Kerkorian really intends. But according to the Wall Street Journal:
Analysts said the properties Mr. Kerkorian wants to acquire from MGM Mirage are the company jewels: the luxurious Bellagio and the nearby CityCenter, an ambitious $7.4 billion megaproject set to open in late 2009 that combines private residences, boutique hotels, a resort casino and a retail-and-entertainment district.
MGM shares are up 27% in trading today.
A special committee of MGM Mirage directors will now be formed to negotiate with Kerkorian with respect to his preferred transaction (whatever it might be). If Kerkorian does agree to acquire MGM's most productive assets or the entire company, expect shareholders to rightfully complain if the price is not perceived as sufficiently high or if Kerkorian attempts to skew the process by rejecting or foreclosing alternative transactions. Also, I would suspect that we will once again see the hedge funds leading the activist shareholder charge here, asserting themselves even before an agreement is reached in order to shape an ultimate transaction. Tracinda is a Delaware corporation, and so the plaintiff's lawyers have already also likely sped into Delaware Chancery and filed suits asserting that any transaction with Kerkorian is not "entirely fair". Hopefully, they will zealously defend their clients and do not use any suit for its settlement value to support their attorneys' fees as they have done before.
Update: MGM Mirage has announced the formation of a special committee of independent directors to consider Kerkorian's statement and strategic alternatives available.
Monday, May 21, 2007
On Friday, the Delaware Supreme Court issued a landmark decision on the scope of directors' fiduciary duties to creditors once a Delaware company enters the zone of insolvency or becomes insolvent. The case is North American Catholic Educational Programming Foundation, Inc. v. Gheewalla. In Gheewalla, the Court held that creditors do not have a direct claim against directors for a breach of fiduciary duty once the company enters the zone of insolvency or becomes insolvent. However, with respect to a claim when the company is insolvent, the Court stated that "[c]reditors may nonetheless protect their interest by bringing derivative claims on behalf of the insolvent corporation on any other direct nonfiduciary claim.”
Previously, although it was uncertain, it was generally thought that that directors of a Delaware corporation had some measure of fiduciary duty to creditors once a corporation entered the zone of insolvency. However, the Court here rejected this belief, stating that in the zone of insolvency directors' fiduciary duties run only to the corporation and its shareholders (apparently the Court agrees with Stephen Bainbridge). The Court's holding is likely to have wide-spread implications for bankruptcy and restructuring deals, and I will have more analysis once I have had the opportunity to furhter review the decision. For a bit more of an in-depth analysis of the decision at this time, I refer you to this memo prepared by the well-known, crack Delaware law firm of Richards, Layton & Finger.