Thursday, May 17, 2007
Bloomberg reports that on May 15 global announced M&A activity reached $2 trillion. M&A activity this year is at a record pace, and 60% ahead of last year. There are also some interesting statistics in the report. European M&A activity is higher this year than U.S. activity: $1.2 trillion versus $961 billion (both are announced transaction figures). Moreover, there has been $366 billion of announced leveraged buy-out activity, a little less than one-third of which is attributable to Kohlberg, Kravis and Roberts. The report also quotes a number of market participants who say that the pipeline is strong and that M&A activity is on track to surpass last year's all-time high of $3.49 trillion. It looks like another good (and busy) year.
Tuesday, May 15, 2007
The House Committee on Financial Services is holding a hearing today at 10 a.m. on Private Equity's Effects on Workers and Firms. You can watch a live webcast of the broadcast here. According to the House website:
The hearing will focus on the impacts on workers and firms of the increased role played by private equity funds in American financial markets. Specifically, the hearing will aim to address the following questions:
1. Given the typically high degrees of leverage in many of these transactions are the restructured firms able to make the investments in technology, capital equipment, and research essential to long run productivity growth?
2. Do workers – either through layoffs and/or pay and benefit cuts – find themselves disadvantaged through financial – or other – restructuring?
3. What are the implications of the very high degrees of profitability in many of these transactions on the growth of income inequality?
Among the speakers will be: Andy Stern, President of the newly-formed and increasingly influential Service Employees International Union; Douglas Lowenstein, President of the newly-formed industry group Private Equity Council; and Jon L. Luther, Chairman and CEO, Dunkin’ Brands Inc. Dunkin' Brands, owner of Dunkin' Donuts, was purchased last year for $2.4 billion by Bain Capital Partners, Thomas H. Lee Partners and The Carlyle Group. Luther can therefore be placed on the pro-private equity side of the testimony along with Lowenstein. Stern, not surprisingly, is in the anti-private equity column.
Monday, May 14, 2007
Chrysler was all the news yesterday and the blogs were quite busy posting. My favorite one was by the Wall Street Journal Blog which contained an interview with Robert Bruner, dean of the Darden School of Business at the University of Virginia and the author of a book of case studies of failed takeovers, titled Deals From Hell: M&A Lessons That Rise Above the Ashes. In the interview, Dean Bruner sentences Daimler to purgatory for the failed deal, concluding that:
It’s a terrible deal for value destruction and for loss of strategic position and impairment of brand name, but it’s not clear that any other buyer of Chrysler would have achieved a different outcome given the same operating environment since 1998.
The Wall Street Journal then proceeds to list five other "deals from hell" as taken from Bruner's book and stacks them against the Chrysler deal. They are:
1) Merger of Pennsylvania Railroad and New York Central Railroad, February 1968.
2) The leveraged buyout of Revco Drug Stores, December 1986.
3) AT&T’s acquisition of NCR, September 1991.
4) Quaker Oats’s purchase Snapple Beverage Corp., December 1994.
5) Merger of AOL Inc. and Time Warner, January 2001.
In all seriousness, though, I assign Bruner's book to my law school mergers & acquisitions class. I view it as an important teaching tool for future lawyers, helping them to understand the strategic reasons for takeovers and why they succeed or fail. This will hopefully lead them to better advise their M&A clients. For this reason, it is worth a read by practicing M&A lawyers too.
Bloomberg is reporting that the Ford family is discussing a sale of their controlling interest in Ford Motor Co. According to the report, Bill Ford, chairman of Ford, briefed directors on the family's intentions before last week's annual shareholder meeting. The family had previously met and received a presentation from Joseph Perella's new investment bank Perella Weinberg Partners on a share sale or alternative strategies.
Dealbreaker is scornful of the report and Dealscape has some background on Ford's troubles. But, in any event, a sale has a significant problem. The Ford family controls Ford through Class B shares which currently provide them 40% of the voting power over Ford itself. But, per the Ford Certificate of Incorporation, the shares cannot be sold to members outside the Ford family without converting into regular vote stock. According to one report, the Ford's only have a 4% economic interest in the company. The value of their shares therefore lies mainly in their super-voting potential and consequent ability to control Ford. But, as stated, they can't sell these votes to an outsider. Because of this, the Ford family is unlikely to initiate a transaction which does not capture the value of these super-voting shares. This likely rules out an outright sale of the stake itself, but leaves the door open for a partnership to acquire all of Ford. Perhaps one of those private equity funds might be willing. And, of course, the Ford family can always convert their Class B shares into common and sell them on the open market for about $640 million at today's share price.
Left open for another day is the appropriateness of a family with 4% of the equity ownership of a company controlling its destiny through super-vote stock. But that is really an issue for those Ford minority shareholders who willingly bought into such an arrangement.
Update: The Ford family's lawyer has issued a statement on behalf of the family denying discussion of a possible sale transaction.