May 15, 2013
Weil, Gotshal 2012 survey of sponsor-backed going private transactionsWeil, Gotshal & Manges recently published its sixth survey of sponsor-backed going private transactions, which analyzes and summarizes the material transaction terms of going private transactions involving a private equity sponsor in the United States, Europe, and Asia-Pacific. (We covered last years survey here.)
The survey covers 40 sponsor-backed going private transactions with a transaction value (i.e., enterprise value) of at least $100 million announced during calendar 2012. Twenty-four of the transactions involved a target company in the United States, 10 involved a target company in Europe, and 6 involved a target company in Asia-Pacific.
Here are some of the key conclusions Weil draws from the survey:
- The number and size of sponsor-backed going private transactions were each lower in 2012 than in 2011 and 2010; . . . .
- Specific performance "lite" has become the predominant market remedy with respect to allocating financing failure and closing risk . . . . Specific performance lite means that the target is only entitled to specific performance to cause the sponsor to fund its equity commitment and close the transaction in the event that all of the closing conditions are satisfied, the target is ready, willing, and able to close the transaction, and the debt financing is available.
- Reverse termination fees appeared in all debt-financed going private transactions in 2012, . . .with reverse termination fees of roughly double the company termination fee becoming the norm.
- . . . no sponsor-backed going private transaction in 2012 contained a financing out (i.e., a provision that allows the buyer to get out of the deal without the payment of a fee or other recourse in the event debt financing is unavailable).
- Some of the financial-crisis-driven provisions, such as the sponsors’ express contractual requirement to sue their lenders upon a financing failure, have diminished in frequency. However, the majority of deals are silent on this, and such agreements may require the acquiror to use its reasonable best efforts to enforce its rights under the debt commitment letter, which could include suing a lender.
- Go-shops remain a common (albeit not predominant) feature in going private transactions, and are starting to become more specifically tailored to particular deal circumstances.
- Tender offers continue to be used in a minority of going private transactions as a way for targets to shorten the time period between signing and closing.
April 19, 2012
Facebook's Billion Dollar Bet on Instagram
Facebook's billion dollar bet on Instagram is one of those deals that keeps me up at night. A billion dollars for a company with no revenues, hmmmm... I am even more worried now that reports indicate that the Facebook board was essentially absent in advising Zuckerberg on the decision to purchase Instagram.
Acquirer overpayment often occurs in these large transactions. While some papers connect these losses to classic agency cost problems, numerous finance scholars have studied the role that non-economic forces, such as ego and hubris, play in corporate transactions (for just some of these pieces, see here and here). Several of these studies find that empire-building preferences and overconfidence predict heightened managerial acquisitiveness, including acquisitions that result in losses in acquirer shareholder wealth. This is particularly true when managers have significant internal resources. Ulrike Malmendier and Geoffrey Tate demonstrate how CEOs can overestimate their abilities to generate returns and create value. In particular, they illustrate how overconfident CEOs are associated with an increased likelihood of conducting M&A transactions, and also poorer deals for their shareholders as measured by bid announcement returns. Simlilarly, Mathew Hayward and Donald Hambrick examined hubris as a determinant of the size of premiums that CEOs will pay for acquisitions. In their examination of 106 large acquisitions, Hayward and Hambrick find “losses in acquiring firms’ shareholder wealth following an acquisition, and the greater the CEO hubris and acquisition premiums, the greater the shareholder losses [following an acquisition].” Moreover, the study also indicates that the relationship between acquisition premiums and CEO hubris is stronger in cases where board vigilance is lacking, i.e. when the board has a high proportion of inside directors and a CEO who also serves as chair of the board. More recent papers build on these results. In an unpublished manuscript, John, Liu, and Taffler find that overconfident CEOs pay higher bid premiums and that this effect is reinforced when the target CEO is also overconfident. Similar findings are reported by Chatterjee and Hambrick who show that narcissistic CEOs in the computer industry carry out more and larger acquisitions.
None of this bodes well for Facebook's Instagram deal. It may be that at the end of the day the deal turns out ok. But I would be cautious when a young star CEO runs around spending the company's resources without any board involvment.
October 06, 2011
Weil, Gotshal survey of sponsor-backed going private transactions
Weil, Gotshal has just released its fifth annual survey of sponsor-backed going private transactions, analyzing and summarizing the material transaction terms of going private transactions involving a private equity sponsor in the United States, Europe and Asia-Pacific. Have a look.
August 24, 2011
Interesting new reads in M&A
For anyone who missed it, the latest issue of Transactions has several papers related to M&A deal-making. The issue includes Don Langevoort's insightful essay on The Behavioral Economics of Mergers and Acquisitions about which we blogged previously. The issue also includes an interesting response by Joan Heminway entitled A More Critical Use of Fairness Opinions as a Practical Approach to the Behavioral Economics of Mergers and Acquisitions.
Abstract: This paper responds to Professor Donald C. Langevoort's essay entitled "The Behavioral Economics of Mergers and Acquisitions" (12 Transactions: Tenn. J. Bus. L. 65 (2011)). Together with Professor Langevoort's essay and another responsive work written from the standpoint of behavioral psychology – Eric Sundstrom's "Tall Steps, Slippery Slopes & Learning Curves in the Behavioral Economics of Mergers & Acquisitions" (12 Transactions: Tenn. J. Bus. L. 65 (2011)) – this paper preliminarily explores solutions to behavioral issues in the context of mergers and acquisitions.
Specifically, this paper contends that changes in the contents, construction, use, and assessment of fairness opinions may better enable fairness opinions to counteract the potential and actual biases of corporate management and shareholders in M&A decision-making. The paper begins by briefly reviewing the nature (attributes, benefits and detriments), regulation, and utilization of fairness opinions in the M&A transactional process, including the ways in which fairness opinions manifest, support, and attempt to counteract behavioral norms. Next, the paper suggests best practices in the construction and use of fairness opinions that take into account our knowledge of behavioral psychology as it relates to M&A transactions. The net effect of these best practices is to transform what may be unconscious behavioral norms into conscious biases that, once exposed, can be confronted and, as desired, mitigated.
May 11, 2011
The Latest Reverse Termination Fee Study
The Practical Law Company has issued a new study of study of reverse termination fees and specific performance in public merger agreements. The study (which can be accessed here) covers 2010 deals (181 merger agreements with a signing value of at least $100 million). It looks like specific performance remained the dominant contractual remedy for a buyer’s failure to close the transaction due to a breach or financing failure, especially in the case of strategic buyers. Financial-buyer deals, however, were more varied.
May 26, 2010
More On Reverse Termination Fees and Merger Agreement Remedies
I’ve mentioned reverse termination fees previously on this blog. For those of you who attended the ABA Business Law Section’s meetings in April, you’ll know that the Practical Law Company has put together an analysis of RTFs and other remedies "available to target companies in public merger agreements for a buyer's failure to close the transaction because of a willful breach or a financing failure." The PLC study is a sophisticated analysis of RTFs and specific performance remedies in public deals announced between Q1 2009 and Q1 2010. I highly recommend taking a look. The study can be found here.
December 28, 2009
Just in time for the holidays
The M&A Market Trends Subcommittee of the ABA just announced that the 2009 Private Target Deal Points Study is now available to Subcommittee members here. Highlights of the 2009 Study were presented last month at an ABA telecast on "M&A Negotiation Trends: Insights from the 2009 Deal Points Study on Private Targets." The MP3 is available here. If you want full access to this and the many other valuable studies published by the subcommittee, you must be (or know really well) an active member. You can directly sign up for update alerts here. One supplement already in the pipeline focuses on financial sellers (i.e., VCs and private equity groups). Benchmarking "financial seller deals" with the Study sample generally, the subcommittee is trying to answer the age-old question: "Do financial sellers really get a better deal?" It expects to release this supplement at the Subcommittee's meeting in Denver (April 23-24) MAW
The M&A Market Trends Subcommittee of the ABA just announced that the 2009 Private Target Deal Points Study is now available to Subcommittee members here. Highlights of the 2009 Study were presented last month at an ABA telecast on "M&A Negotiation Trends: Insights from the 2009 Deal Points Study on Private Targets." The MP3 is available here.
If you want full access to this and the many other valuable studies published by the subcommittee, you must be (or know really well) an active member. You can directly sign up for update alerts here.
One supplement already in the pipeline focuses on financial sellers (i.e., VCs and private equity groups). Benchmarking "financial seller deals" with the Study sample generally, the subcommittee is trying to answer the age-old question: "Do financial sellers really get a better deal?" It expects to release this supplement at the Subcommittee's meeting in Denver (April 23-24)
June 04, 2009
Reverse termination fees
Buy-side optionality in merger agreements is an area of a lot of interest these days. I know Steven has spent time on this blog and over at The Deal Professor blog thinking about it, particularly in the context of financial buyers. I’ve been giving it some thought as well.
When the Brocade-Foundry transaction was announced (July 2008), it was unusual because it involved a strategic buyer and a reverse termination fee and became part of a discussion of increased optionality in merger agreements. Most of that discussion has focused on optionality that private equity buyers have been able to negotiate. I’ve been building a dataset on of reverse termination fees for a paper I’m writing focused on optionality with respect to strategic buyers. I’ve been surprised, first at the number of transactions in which the buyer agrees to pay a fee to a seller, and second at the relative diversity of provisions providing for a fee to be paid to the seller in the event the buyer seeks to terminate. In blog-like fashion, here’s a quick run down.
In my dataset of transactions with only strategic buyers from 2003 to 2008, approximately 18% of those transactions include a reverse termination fee. Of the transactions with reverse termination fees, the vast majority (71%) simply track the termination fee in terms of size. This probably for no other reason than it simplifies negotiation. Of those transactions in which the fees do not track each other, the reverse termination fees are higher than the termination fees (70%). This makes sense if you think there fiduciary duties that constrain the size of termination fees don’t work the same way on the buy-side. There’s something to that.
In terms of triggers, while termination fees are pretty consistently triggered by some combination of a termination and a competing proposal, reverse termination fees are a little more diverse. Some reverse break fees are triggered by a termination subsequent to a lack of buy-side financing (as in the private equity buyer case). Others are triggered upon a termination subsequent to a competing proposal for the buyer. Terminations for regulatory/anti-trust reasons also can sometimes trigger a reverse termination fee. The extreme case, of course, is triggered when the seller terminates because the buyer refuses to close (all other conditions having been met). This is the ‘pure’ option.
In any event, I hope to get a version of this paper out by August. If you have come across varieties of reverse termination fee triggers that you think are important that I have left out of this brief taxonomy, please feel free to comment below.
Update: Here's an early draft of my paper, Optionality in Merger Agreements.
May 26, 2009
May 25, 2009
Rubinovitz on Fixed Costs
Robert Rubinovitz's paper, "The Role of Fixed Cost Savings in Merger Analysis" is now appearing in the Journal of Competition Law & Econ. Here's the abstract:
Among the many motivations for mergers, clearly one of the more important considerations is the extent to which the merger will generate cost savings for the firms involved. Standard economic models demonstrate that a decrease in marginal cost leads to a lower price, whereas a decrease in fixed costs does not necessarily have this effect. Thus, from the Antitrust Agencies' perspective, in a merger analysis, emphasis should be placed on marginal cost savings because these efficiencies will create short-run benefits for consumers, in terms of lower price and higher output, and should be given the most weight. Of late, increasing attention has been given to how fixed cost savings can improve consumer welfare. One key insight is that demonstrating the direct effects of fixed cost savings on consumer welfare may require a longer time horizon than marginal cost savings or may require embedding these savings in a dynamic context. This paper exhibits an approach that provides straightforward predictions on the relationship between fixed costs, prices, and consumer welfare. When the fixed cost of producing quality decreases, it is shown that consumer welfare increases. The clear implication of this model is that fixed cost savings should be given weight in the analysis of the potential effects of a merger on consumer welfare.