M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

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Sunday, June 3, 2007

The Battle for Topps

The battle for Topps Company, Inc. continues to heat up.  On May 24, 2007, the company announced that it had received a $416 million offer from its rival, The Upper Deck Company, to acquire Topps for a price of $10.75 per share.  Topps currently has an agreement to be acquired by a group consisting of The Tornante Company LLC and Madison Dearborn Partners, LLC for $9.75 per share in cash.  The Tornante Company is headed by former Disney CEO Michael Eisner.

Last week, Deal Book reported that the hedge fund Crescendo Partners, owner of 6.6% of Topps, was alleging that certain Topps board members have conflicts of interest that prevent the company from negotiating in good faith with, Upper Deck.  Deal Book reported that "[i]n a letter sent to the company’s board of directors, a Crescendo Partners managing director Arnaud Ajdler, who is also a Topps board member, said the chief executive of Topps, Arthur Shorin, “does not want to see the company started by his father and uncles fall into the hands of a longtime rival.”

Crescendo today sent a second letter to the Topps board which states in part:

Finally, in your communications, you like to repeat that Crescendo wants to take over Topps without paying stockholders for their shares. Once again, you are misleading your stockholders. When a buyer wants to take a company private, as Mr. Eisner and Madison Dearborn are attempting to do, the buyer pays stockholders a premium for their shares. While this premium is typically 20 to 30%, you have approved a transaction that would pay stockholders a meager 3% premium and a significant discount to where the shares are currently trading. As you well know, Crescendo is NOT trying to take the Company private. If the ill-advised Eisner merger is voted down, Crescendo will ask its fellow stockholders, the true owners of Topps, to replace seven of the incumbent directors on the Board with a new slate. This well-qualified slate is committed to taking all necessary actions to improve the company's capital structure and operations for the benefit of ALL the stockholders. As detailed in our proxy statement, we believe that the Company could be worth conservatively between $16 and $18 per share if managed properly.

This is yet another example of the increasing potential for conflict between private equity and hedge funds as hedge funds emerge as activist investors in search of extraordinary returns and the private equity bubble rages.  But more immediately, the Topps Board now has a competing bid and a hostile proxy contest on its hands formented by one of its own members.  Stay-tuned. 

June 3, 2007 in Hedge Funds, Hostiles, Private Equity, Proxy | Permalink | Comments (0) | TrackBack (0)

Thursday, May 31, 2007

The First U.S. Listed Hedge Fund (Sort of)

Man Group plc, the U.K. based hedge fund operator listed on the London Stock Exchange, has filed a registration statement for an initial public offering of what is being touted as the first U.S.-listed hedge fund.  According to the registration statement, the fund will be listed on the New York Stock Exchange and called the Man Dual Absolute Return Fund.  It will be organized as a closed-end management investment company.  The initial public offering price is $20.00 per common share with a minimum purchase in the offering of 100 common shares. 

The fund is being marketed as a public hedge fund and so, accordingly, the fund will seek  "risk-adjusted [positive] returns with minimal correlation to the returns of major global equity and bond  market indices" (i.e., it will be an alpha fund).  Between 80% and 85% of total managed assets will be devoted to a U.S. quantitative long/short equity strategy with the remainder largely invested in a managed futures program called AHL Core.

But, for those now salivating over the chance to invest in a U.S. based hedge fund, don't get too excited yet.  Since the fund will be making a public offering it will become subject to the Investment Company Act (ICA).  This will require the fund to operate in a markedly different manner than typical hedge funds:

  • Restricted Leverage.  Unlike normal hedge funds which use extensive leverage and borrowings, this fund will be limited by the ICA to borrowings of no more than 33 1/3% of the fund's total managed assets.
  • Restricted Hedging.  Hedge funds have their name because of their unrestricted use of hedging.  Yet, the ICA limits the use of derivatives and permits only covered hedging.
  • Restricted Liquidity.  Hedge funds typically permit redemptions on a quarterly to yearly basis.  This fund will be a closed-end fund and there will be no ability to redeem shares.  Like other closed-end funds, this one is accordingly likely to trade at a discount.
  • Fees.  Funds subject to the ICA are limited under federal law and NASD rules as to the fee they can charge.  But hedge funds typically charge the so-called two and twenty.  There is a two percent administration fee and a payment of twenty percent payment of profits over a hurdle rate to the fund manager.  The Man fund registration statement has the adviser management fee blank, but the fund will not be permitted under the ICA to charge a profit participation fee.  The result is that the administration fee will likely be higher than the two percent to compensate but total compensation to the fund manager significantly less.  While fund holders might at first blush be happy about this where would you, as a hedge fund adviser prefer to work? Consequently, the fund adviser may not be able to recruit the best talent. 

There are other differences that I won't go into here.  Ultimately, the ability of this fund to earn the extraordinary risk-adjusted positive returns that hedge funds have become known for is uncertain in light of these substantial differences.  Accordingly, this fund would be better termed the first hedge fund-lite offering in the United States.  But, until the SEC ends its hostility to hedge funds and reforms the ICA to permit their public listing, this is probably the closest to a real hedge fund U.S. retail investors can get.  Whether it will successfully earn those hoped for positive uncorrelated returns is another matter.    

May 31, 2007 in Hedge Funds | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 23, 2007

Oaktree and GSTrUE

The Los Angeles Times is reporting that Oaktree Capital Management LLC, an alternative investment firm with over $40 billion in assets under management, has sold approximately 14% of itself for more than $800 million to less than 50 investors.  It was previously reported in the Wall Street Journal that Oaktree was circulating an offering memorandum to sell a 13% interest in itself for $700 million.  Oaktree is the latest firm to cash in on the private equity/hedge fund boom and follows in the heels of Fortress Investment Group's successful public offering and Blackstone's pending one. 

The Oaktree offering is private and its shares will trade on a new private market developed by Goldman, "GS Tradable Unregistered Equity OTC Market" with the catchy acronym GSTrUE.  Information about the market is limited as Goldman has done nothing to publicize it and Oaktree is apparently its first listing.  But, according to reports, Goldman is hoping that GSTrUE will become a viable alternative listing market for hedge funds, private equity and operating companies who wish to avoid SEC regulation.  Accordingly, the market will be limited to qualifying investment funds with over $100 million in investable assets.   

GSTrUE, however, will live under the shadow of U.S. regulation.  In order to avoid triggering Exchange Act reporting requirements for any listed company, Goldman and any such listed U.S. entity will need to make sure that the company does not exceed more than 500 shareholders.  This will likely place Goldman in the position of forced market maker when the cap is reached.  It will also even further reduce liquidity by limiting the number of trading shareholders and shares traded.  Moreover, Goldman has not disclosed whether there will be any other market makers for this market, but given the likely low liquidity and shareholder trading limitations, Goldman is likely to set fat spreads on trades.  Pricing is also likely to be opaque due to information and analysts' coverage gaps.  While Goldman has incentives to maintain lower spreads in order to attract listings, these problems may be why Oaktree's offering values it at only $5.7 billion, a much lower valuation than Fortress and the one mooted for Blackstone.  Time will tell if GSTrUE is a success, and it is certainly a worthwhile economic experiment on the validity of private markets, but I believe that GSTrUE's handicaps will likely make it more of a stepping stone for companies on their way to a full public market listing more than anything else. 

NB. The L.A. Times is reporting that Oaktree shares are now trading on GSTrUE at $50 a share after being offered at $44.  It would be more interesting to know the bid/ask spread. 

May 23, 2007 in Hedge Funds, Regulation | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 22, 2007

Acxiom's Hedge Fund Problem

Today, MMI Investments L.P., the hedge fund and Acxiom’s second largest stockholder owning 8.2% of the company, disclosed a letter delivered to the Acxiom board of directors in opposition to Acxiom's agreement last week to be acquired by Silver Lake Partners and ValueAct Capital Partners in a transaction valued at $3 billion (the letter is annexed to MMI's 13D amendment filed today).   ValueAct Capital Partners is also a hedge fund and so the news and blogs are highlighting this as a clash of two hedge fund trends:  hedge funds taking on private equity roles and hedge funds as activist shareholder investors.  It is also yet another real example this week of shareholder resistance to private equity/hedge fund buy-outs -- the other two being Clear Channel and OSI Restaurant Partners.  More interesting to me was the following language in MMI's letter to the Acxiom board:

Our concerns about valuation are only amplified by our frustration with both the timing and structure of this transaction. Given the strategic initiatives currently underway (and recent earnings pain that your existing stockholders have had to bear) we struggle to understand why this is the right time to sell our company. Moreover it is our belief that the “go-shop” mechanism is a poor substitute for a full auction for a comprehensively marketed property. We can only hope that the “go-shop” for our company is a genuine one, with clear, concise, and thoughtful distribution of information, and thorough outreach to potential buyers from Acxiom’s industry, as well as those in comparable or tangential industries, and financial buyers (many of whom have significant experience and resources in the marketing data and informatics industry).

Acxiom has yet to file the acquisition agreement.  But according to a conference call last week, Acxiom's "go-shop" is a relatively robust form of the provision.  Pursuant to its provisions, Acxiom will have 60 days to solicit other superior proposals, and if it agrees to one, is required to pay only a reduced break-up fee of 1% of the equity value of the company.  Nonetheless, on that same conference call Acxiom management disclosed it permitted only one other bidder to conduct due diligence prior to agreeing to the ValueAct transaction, and only then because Acxiom was approached.  According to Acxiom, the transaction will require a 2/3rd majority vote of Acxiom's shareholders to win approval.  Given this requirement, shareholder resistance and the fact that Acxiom stock is trading above the offer price, the current offer appears to be only an opening gambit, yet again highlighting the perils of "go-shops" and the head-start and cover they provide to a chosen acquirer.

Update:  Acxiom filed its merger agreement later today; it contains the above provisions.   

May 22, 2007 in Hedge Funds, Private Equity, Takeovers, Transaction Defenses | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 15, 2007

AFL-CIO Opposes Blackstone IPO

The FT is reporting that the AFL-CIO has written the SEC arguing that private equity group Blackstone's planned initial public offering should be halted.  According to the Financial Times, "the union says that the unique structure chosen by Blackstone’s senior executives to raise funds from stock markets while keeping a tight grip on the running of its business is an attempt to evade the coverage of the Investment Company Act of 1940."  (Update:  a copy of the letter can be downloaded here).  In brief, the AFL-CIO is arguing that a majority of Blackstone's assets are in the form of carried interest that has been “marked to market” . Carried interest is the term for the 20% Blackstone takes on deal profits over and above its 2% administration fee.  The AFL-CIO is arguing that because the carry is only paid when a deal reaches certain profit milestones, it is a form of call option.  Call options are securities, and given that more than 40% of Blackstone's assets are in carry, if the union is right Blackstone would fall under the regulatory schematic of the Investment Company Act of 1940 as an investment company unless another exemption applied.

The argument is a clever and convoluted one, but is almost certainly an incorrect interpretation of the definition of a call option under the Act.  The alternative view would arguably pick up a number of regular operating companies and investment banks who have profit participation contracts and mark those profits to market.  Not to mention the argument would cause serious doctrinal problems for the SEC which recently let the similarly-structured Fortress ipo go forward without claiming the Investment Company Act applied (the AFL-CIO attempts to get around this problem by claiming that Blackstone's practice of marking-to-market makes it distinct from Fortress and is the key to qualifying the carry as a security). 

But the  AFL-CIO is absolutely correct that the Blackstone offering is an attempt to evade application of the Investment Company Act.  Under the Act, it is very clear that the Blackstone funds themselves as currently structured cannot currently be offered to the public.  But, Blackstone is getting around this prohibition by selling shares in itself, the fund advisor.  Blackstone's evasion is permissible under the current structure of the U.S. securities laws.  Despite almost certainly being wrong, the AFL-CIO argument does highlight the out datedness of the Investment Company Act and the increasingly bizarre results it engenders.  Investing in a private equity fund adviser is essentially equivalent to investing in the funds themselves.  There should be no regulatory difference in their regulation by the SEC, and no ability for private equity funds to game this regulation as Blackstone is doing here.  In fact, if anything investing in the adviser is more risky.  The subject is for a more extended post, but it is far past the time that the SEC updated the Investment Company Act, which was passed in 1940, to regulate mutual funds for the modern age of hedge funds and private equity. 

May 15, 2007 in Hedge Funds, Private Equity, Regulation | Permalink | Comments (0) | TrackBack (0)