September 09, 2010
No TRO in Dollar Deal
No surprise, really. According to Reuters, Vice Chancellor Strine just handed down an opinion (84 pages - if someone wants to send it along, I'd gladly read it for you...) in which he denied the Dollar shareholder plaintiff's motion for a temporary restraining order to prevent Dollar's deal with Hertz from moving forward.
I'm pretty bad at guessing what's going on in the mind of most judges, but this one was pretty obvious.
Update: Vice Chancellor Strine frames the Revlon question nicely. Here from page 44 of the opinion:
Put simply, I do not quibble with the notion that the plaintiffs’ perspective is one that loyal fiduciaries reasonably seeking to obtain a value-maximizing deal could have adopted. But that, of course, is not the question. The question is whether the alternative approach that the Dollar Thrifty Board adopted was itself a reasonable choice that a loyal and careful board could adopt in the circumstances. I frame that question with purpose. The heightened scrutiny that applies in the Revlon (and Unocal) contexts are, in large measure, rooted in a concern that the board might harbor personal motivations in the sale context that differ from what is best for the corporation and its stockholders. Most traditionally, there is the danger that top corporate managers will resist a sale that might cost them their managerial posts, or prefer a sale to one industry rival rather than another for reasons having more to do with personal ego than with what is best for stockholders. Avoiding a crude bifurcation of the world into two starkly divergent categories – business judgment rule review reflecting a policy of maximal deference to disinterested board decisionmaking and entire fairness review reflecting a policy of extreme skepticism toward self-dealing decisions – the Delaware Supreme Court’s Unocal and Revlon decisions adopted a middle ground.
14D-9's and the 21st Century
It used to be that a board in response to an unwanted offer a board would just send a press release to PR Newswire and then file a 14D-9. My ... how times have changed. Potash is presently fending off an unwanted bid from BHP and rather than simply issue a press release, they go to YouTube! (H/T WSJ Deal Journal) Here's Potash CEO Bill Doyle explaining the board's reasons for rejecting the offer:
It's a simple, low budget production. I wonder why they thought it would be more useful than a press release. It's certainly not easier - it takes CEO time and still requires a filing with the SEC. Since you can't file a video clip, yet, the whole thing has to be transcribed before its filed. Here's the filing for the video. It's also not the kind of thing that CNBC or some other business network is going to want to air. I wonder what it's for.
Oh and here's Bill Doyle on those dastardly arbitrageurs ... you know who you are ...
To be honest, I still think the guys over at Woot! know how to use video to communicate with their customers and shareholders. Can you imagine the impact of a monkey puppet rejecting BHP's bid?!
September 02, 2010
Dell Says, "Thanks, but No Thanks."
HP’s $33-a-share offer values 3Par at 325 times the company’s earnings before interest, taxes, depreciation and amortization during the past year. In 21 computer-services deals in the past five years, acquirers paid a median 16 times trailing Ebitda, according to Bloomberg data.
Believe me, there's no way they are popping Champagne corks over at HP's Palo Alto headquarters.
September 01, 2010
HP and its Extra $15 Billion
So while we sit and wait for Dell to decide whether it wants to bid a penny more for 3Par, I think it's interesting to note that HP announced a stock buy-back over the weekend. In this case, HP committed an additional $10 billion to its ongoing stock repurchase program. Remember that before going into the 3Par bidding war, HP had something like $15 billion in cash. Now, it's decided to give away most of that in the form of a stock repurchase.
Why companies think a stock repurchase is better than simply announcing a dividend is a tricky question. The stock repurchase does somethings that are attractive for managers. First and foremost, the repurchase allows managers to shrink the number of outstanding shares in its capitalization. Once you have shrunk the denominator, presto the stock price goes up (for a day or so). Or, it should. For managers who might have bonuses and other compensation tied to stock price, getting the stock price to rise is a good thing. On the other hand, a one time special dividend doesn't have the same kick on the stock price. So it depends on what one is trying to accomplish with the buy-back.
A share repurchase can also have a strong signalling function. That's to say, when insiders think the market is undervaluing shares, goes the theory, they authorize a share repurchase. OK, I guess. But that's not what is happening with respect to HP. What's happening here is that shareholders are unhappy with HP's decision to take its excess cash and engage in a bidding war that it will likely lose (even if it wins) with Dell. Committing $10 billion of its $15 billion to a share repurchase credibly signals to investors that HP won't be engaging in more of these kinds of game - mostly because it can't any more.
That's a good thing I suppose.
August 27, 2010
3Par Bidding Contest
And off they go. You'll notice that Dell is engaged in incremental bidding, while HP is jump bidding. That's because, HP has no way of knowing what Dell's private valuation of 3Par is so it's trying to use a version of "shock and awe" to knock Dell out of the bidding. Dell, on the other hand, is confident that it will always have the last look, so it need do no more than add $0.10 to HP's last bid. A week ago, this company was trading for about $9/share. Last bid was $30 a bid.- something like $2 billion. I suppose it's only money.
The Lex Column at the FT has this just about right:
Few things inspire a loss of rationality quite so much as the fear of missing out. The phenomenon is apparent around buffet tables, in one-day sales, and now in the pursuit of computer storage company 3Par.
Hypothetically matching HP’s latest $1.8bn offer, Dell would have to generate profits after tax of $180m from 3Par in order to make a respectable return of, say, 10 per cent in five years. At Dell’s current 29 per cent tax rate, that would require 2015 revenues of $1.2bn: a sixfold sales increase in five years, not to mention spectacular profitability. Who needs rationality when desperation and blind optimism conspire so well?
July 04, 2010
Amazon Acquires Woot!
Not the most conventional of press releases, but this has got to be the best merger announcement ever. Woot! announces its acquisition by Amazon. Typically, for a public-private deal the merger agreement requires that the seller make no public announcements with respect to the transaction. All announcements should come from the acquirer. But, if the seller is going to be this fun and creative, why not!
We thought there must be easier ways of making it big
without working like dogs and sweating like pigs
…and then “boom!” we got acquired by Amazon!
So no more rolling in late with our pajamas on.
..."You can labor all day til you're tired and old or
you can wait for Amazon to call and when they do you say '$old!' "
Update: For its part, Amazon didn't make any public announcement re the transaction, but Woot!'s CEO released this "serious" comment on the company's website describing the transaction. It includes this jewel of a line in the FAQs:
Q: Is Snapster [the CEO] leaving?
A: Are you kidding? He’s out the door about ten seconds after that check clea-- that is to say, Snapster will continue as Woot.com CEO, just like before, and the rest of our staff’s not going anywhere either.
June 29, 2010
The Role of Diligence
This is another post aimed at summer associates and junior lawyers. That research memo on blue sky laws in Guam can be safely put aside - you've got your first real M&A assignment. A senior associate has asked you to help her with "due diligence" on an acquisition target. If you are like me at that stage, you quickly realize that you have precious little understanding of what's expected of you in a diligence exercise. Instruction given junior lawyers with respect to diligence exercises is typically minimal and very narrowly focused. Jeff Weiner has recently posted his Conceptual Framework for Due Diligence in M&A that's worth downloading and reading. It's a good 20,000 foot overview of the importance and the role of the diligence exercise. OK, but you're saying, will it help me build a capitalization table or figure out if the target's board book is in shape? Probably not, but it does place the exercise in context and makes it clear that it's not just a make work assignment. For a more granular "how to" on diligence Jeff recommends Crilly's Due Diligence Handbook. However, given the price tag for the handbook, you won't want to buy one for yourself.
June 17, 2010
AOL Drops Bebo from its Friends List
As previously announced, AOL Inc. (the “Company”) has been exploring strategic alternatives for its Bebo, Inc. (“Bebo”) subsidiary including a sale or possible shutdown. The Company has completed this process and is today announcing the sale of substantially all the assets of Bebo to an affiliate of Criterion Capital Partners, LLC.
The Company currently anticipates that following this transaction it will treat the common stock of Bebo as worthless for U.S. income tax purposes. The Company’s current U.S. income tax basis in Bebo is approximately $750 million. As a result of the anticipated worthless stock deduction for the common stock of Bebo under U.S. income tax law, the Company expects to record a deferred tax asset and corresponding benefit to its U.S. income tax provision in the second quarter of 2010 in a range of $275 million to $325 million. The Company’s tax conclusion with respect to the common stock of Bebo is subject to examination by the U.S. Internal Revenue Service. Additionally, given the recent volatility in the Company’s stock price and disposition activity, the Company will be required under generally accepted accounting principles to test the goodwill of its sole reporting unit for impairment in the second quarter of 2010.
AOL/TimeWarner acquired Bebo for $852 million in March 2008. As part of the recent spin-off, AOL was holding Bebo on its books for the full value Now, it's written it down to zero. Ouch.
Although AOL hasn't disclosed the sale price, Bloomberg reports that AOL got only $10 million for Bebo.
June 10, 2010
WGM on Sponsor-backed Going Private Transactions
For the fourth year in a row, Weil, Gotshal & Manges has produced a survey of sponsor-backed going private transactions that analyzes and summarizes the material transaction terms of going private transactions involving a private equity sponsor in the United States, Europe and Asia-Pacific.
Weil surveyed 28 sponsor-backed going private transactions announced from January 1, 2009 through December 31, 2009 with a transaction value of at least $100 million (excluding target companies that were real estate investment trusts). Fourteen of the surveyed transactions involved a target company in the United States, nine involved a target company in Europe and five involved a target company in Asia-Pacific.
The survey can be found here.
June 07, 2010
Pru: Lesson Learned?
Shareholder Anthony Watts summed up the feelings of many when he described the affair as "a shambles from start to finish" and "a disgrace".
"You failed to do your job properly, all of you. All of you are responsible for this failed deal," he told directors, saying they should "do the honourable thing" and resign.
His comments, and many more like them, drew loud applause during a stormy affair that showed just how far the insurer's reputation with its investors has fallen. Directors, who glowered at the assembled band of as many as 300 predominantly small shareholders, were accused of being "smug" and "arrogant" at the meeting, held at the Queen Elizabeth Centre in
It was pretty clear that management had learned its lesson and was appropriately contrite:
[C]hairman, Harvey McGrath, told shareholders at the annual general meeting in
, where several shareholders expressed their anger over the AIA bid. "One of the lessons we've learnt is that in the post-crisis world we live in, doing large cross-border acquisitions in financial services is going to be very difficult," McGrath said. "I think we'll continue to seek to grow this business organically. You should expect us to look at bolt-on acquisitions." London
Buying AIG's Asian unit in the aftermath of the Financial Crisis and AIG's collapse was a bold move. Had it worked, it might have been a game-changer for Prudential, giving access to markets throughout Asia (though not much in China). But when bold moves don't pay off, they can be risky for the guy at the top. This failed transaction cost Prudential approximately $600 million (termination fee and expenses) to walk away from. It also generated a host of shareholder anger that was on display today.
There's lots of talk that Prudential's CEO, Thiam, may be shown the door for his miscalculation. I suppose someone should pay for a $600 million mistake.
May 28, 2010
Richards Layton on Freeze-outs
Richards Layton just released this client alert on In re CNX Gas Corp. Shareholders Litigation, in which the Delaware Chancery Court attempts to clarify the standard applicable to controlling stockholder freeze-outs (a first-step tender offer followed by a second-step short-form merger). In short, the Court held that the presumption of the business judgment rule applies to a controlling stockholder freeze out only if the first-step tender offer is both
(i) negotiated and recommended by a special committee of independent directors and
(ii) conditioned on a majority-of-the-minority tender or vote.
May 17, 2010
WGM on Mitigating Fraudulent Conveyance Risk
When an over-leveraged LBO turns out to have an unsustainable capital structure, creditors in an ensuing bankruptcy or other restructuring MAY seek to recover payments made to selling shareholders in the LBO as fraudulent conveyances. In this client alert, WGM describes what selling sponsors can do to mitigate the risk of successful post-LBO fraudulent conveyance claims.
April 27, 2010
K&E on Purchase Price Adjustments
As we've noted before, purchase agreements relating to the acquisition of a private target often contain one or more post-closing purchase price adjustments (for example a working capital adjustment). As this K&E M&A update notes
While the appeal of purchase price adjustments is indisputable, they are often subject to postclosing disputes. One of the drivers of these disputes is inattention to the details of drafting the adjustment provisions, often exacerbated by the fact that these clauses straddle the realm controlled by the legal practitioners and that managed by the financial and accounting experts.
The update offers a plethora of tips on drafting these provisions properly.
April 16, 2010
Speed-dating and the Return of Irrational Deals?
It’s been a good April for deal junkies. There are predictions of a pickup in deal-making (although some question whether these predictions are just that). If the last few months spate of both friendly and hostile deals are a good indication, then predictions that “The next two quarters will probably be defined as a very aggressive period of speed-dating, where companies will try out different combinations to see if they make strategic sense and are actionable,” (by Paul G. Parker, head of global mergers and acquisitions for Barclays Capital) may likely come to fruition. Obviously there are a lot of pluses to more deals being done (especially for those of us who study deals and deal-making). As I asked in my post earlier this week, one of the big questions will be whether deal technology like reverse termination fees (RTFs) will persist in 2010 and if so in what form. This was hot topic at the M&A panel held this week at the Tulane University’s Corporate Law Institute. I for one hope and expect to see the continuing complexity of RTFs where buyers and sellers actually take into account deal risk, such as financing risk, rather than a return to the problematic option-style RTF structure of the private equity deals of 2004-2007. But then again, you never know…
Chancellor Strine joked at Tulane that “We need to get past point at which boards prudently take into account risk. We need to get them to do irrational deals” since "Those are the deals that make this conference fun.”
I guess you could say that those are the deals that make my job fun as well ;-)
April 14, 2010
What is going on with reverse termination fees?
We at the M&A Law Prof blog are somewhat enamored of reverse termination fees (RTFs). I have a draft paper (Transforming the Allocation of Deal Risk Through Reverse Termination Fees) coming out this fall in the Vanderbilt Law Review and Brian has a paper (Optionality in Merger Agreements) coming out in the Delaware Journal of Corporate Law. Brian’s paper examines whether reverse termination fees are “a symmetrical response to the seller’s judicially-mandated fiduciary put and whether such fees represent an efficient transactional term.” Brian’s paper is terrific, so I encourage you to read it (and no, he isn’t paying me to tell you this). For those interested in learning more about the history of the use of RTFs, take a look at Elizabeth Nowicki's nifty empirical account of "reverse termination fee clauses in acquisition agreements for deals announced from 1997 through 2007, using a data set of 2,024 observations."
My paper is an account of the use of RTFs in strategic transactions. The abstract gives a summary:
ABSTRACT: Buyers and sellers in strategic acquisition transactions are fundamentally shifting the way they allocate deal risk through their use of reverse termination fees (RTFs). Once relatively obscure in strategic transactions, RTFs have emerged as one of the most significant provisions in agreements that govern multi-million and multi-billion dollar deals. Despite their recent surge in acquisition agreements, RTFs have yet to be examined in any systematic way. This Article presents the first empirical study of RTFs in strategic transactions, demonstrating that these provisions are on the rise. More significantly, this study reveals the changing and increasingly complex nature of RTF provisions and how parties are using them to transform the allocation of deal risk. By exploring the evolution of the use of RTF provisions, this study explicates differing models for structuring deal risk and yields greater insights into how parties use complex contractual provisions not only to shift the allocation of risk, but also to engage in contractual innovation.
My study only spans deals announced before mid-2009, so I am thinking about a part 2 of this paper that looks at the use of RTF structures in deals after mid-2009. My question is whether, and if so how and why, RTF provisions have changed now that they have become a somewhat more mature provision in acquisition agreements and in light of predictions that happy days may be here again for dealmakers. If you have any comments on this paper, they are especially welcome before the end of April but even after that I may be able to make some minor tweaks, so please send me your thoughts.
February 17, 2010
K&E on "Just Say No"
According to this client memo from K&E, recent takeover battles are bringing into question the continued vitality of the “just say no” defense, which allows the board of a target company to refuse to negotiate (and waive structural defenses) to frustrate advances from unwanted suitors.
According to the authors, "just say no" is more properly viewed as a tactic rather than an end, and when viewed this way,
it is apparent that the vitality of the “just say no” defense is not and will not be the subject of a simple “yes or no” answer from the Delaware courts. Instead, the specific facts and circumstances of each case will likely determine the extent to which (and for how long) a court will countenance a target’s board continuing refusal to negotiate with, or waive structural defenses for the benefit of, a hostile suitor.
January 19, 2010
Keep Cadbury British...
Keep Cadbury Birtish! ... or not. I suppose everything has its price, even national icons. In this case, the price is about $19 billion. Cadbury's board just unanimously recommended Kraft's offer to its shareholders. Summary of the terms from the Kraft "micro-site" is below:
- Under the terms of the Final Offer, Cadbury Securityholders will be entitled to receive:
representing, in aggregate, 840 pence per Cadbury Share and GBP 33.60 per Cadbury ADS.
for each Cadbury Share 500 pence in cash
0.1874 New Kraft Foods Shares
for each Cadbury ADS 2,000 pence in cash
0.7496 New Kraft Foods Shares
- In addition, Cadbury Shareholders will be entitled to receive 10 pence per Cadbury share by way of a Special Dividend following the date on which the Final Offer becomes or is declared unconditional.
January 14, 2010
More on NACCO Industries from Davis Polk
Brian recently posted about the NACCO Industries case (here), As he reminds us:
NACCO reminds us that if you are going to terminate a merger agreement, you better comply with all its provisions. If you don't, if you perhaps willfully delay your notice to the buyer about a competing proposal, you might not be able to terminate without breaching. And, if you breach, your damages will be contract damages and not limited by the termination fee provision. Remember, you only get the benefit of the termination fee if you terminate in accordance with the terms of the agreement. Willfully breaching by not providing "prompt notice" potentially leaves a seller exposed for expectancy damages.
Davis Polk has just issued this client alert, drawing a few more lessons from the case. Here's a sample:
A recent Delaware Chancery Court decision raises the stakes for faulty compliance with Section 13(d) filings, holding that a jilted merger partner in a deal-jump situation may proceed with a common law fraud claim for damages against the topping bidder based on its misleading Schedule 13D disclosures. NACCO Industries, Inc. v. Applica Inc., No. 2541-VCL (Del. Ch. Dec 22, 2009). The decision, which holds that NACCO Industries may proceed with numerous claims arising out of its failed 2006 merger with Applica Incorporated, also serves as a cautionary reminder to both buyers and sellers that failure to comply with a "no-shop" provision in a merger agreement not only exposes the target to damages for breach of contract, but in certain circumstances can also open the topping bidder to claims of tortious interference.
January 14, 2010 in Break Fees, Contracts, Corporate, Deals, Federal Securities Laws, Leveraged Buy-Outs, Merger Agreements, Mergers, Private Equity, Transactions | Permalink | Comments (1) | TrackBack
January 08, 2010
Acquisition Financing in 2010
Davis Polk has some thoughts based on trends from 2009. Here's the conclusion:
The fundamental tensions in acquisition financings have not changed: buyers and sellers desire deal certainty and unconditional loan commitments, and arrangers desire flexibility to ensure a successful syndication. In 2009, we saw a continuing evolution in the ways that market participants balanced these competing objectives in light of new market realities and reduced access to credit. [T]he "SunGard" limitations have survived but are more carefully negotiated for the individual transaction; and market MACs have not returned, but concerns about changes in market conditions have been addressed through expanded flex provisions. Some of the post-credit crunch technology is likely here to stay: base rate pricing will not be permitted to be less than LIBOR pricing; solvency conditions will continue to be more carefully scrutinized; and arrangers will continue to look for ways to reduce and quantify their exposure. As credit conditions continue to improve, one question will be to what extent buy-side loan market participants’ appetite for yield, and arrangers’ appetite for fees, will outweigh some of the current focus on structural issues. Evidence from late 2009 suggests that some "top of the market" features that were viewed as "off the table" in 2008 (covenant-lite, equity cures) may, under the right circumstances, be fair game for negotiation between borrowers/sponsors and arrangers in 2010. And finding the right balance with respect to 2009 developments such as enhanced market flex and pre-closing securities demands will likely occupy a significant amount of participants’ time and energy. It promises to be an interesting year for arrangers and sponsors alike. Read the whole thing here. MAW
The fundamental tensions in acquisition financings have not changed: buyers and sellers desire deal certainty and unconditional loan commitments, and arrangers desire flexibility to ensure a successful syndication. In 2009, we saw a continuing evolution in the ways that market participants balanced these competing objectives in light of new market realities and reduced access to credit. [T]he "SunGard" limitations have survived but are more carefully negotiated for the individual transaction; and market MACs have not returned, but concerns about changes in market conditions have been addressed through expanded flex provisions. Some of the post-credit crunch technology is likely here to stay: base rate pricing will not be permitted to be less than LIBOR pricing; solvency conditions will continue to be more carefully scrutinized; and arrangers will continue to look for ways to reduce and quantify their exposure. As credit conditions continue to improve, one question will be to what extent buy-side loan market participants’ appetite for yield, and arrangers’ appetite for fees, will outweigh some of the current focus on structural issues. Evidence from late 2009 suggests that some "top of the market" features that were viewed as "off the table" in 2008 (covenant-lite, equity cures) may, under the right circumstances, be fair game for negotiation between borrowers/sponsors and arrangers in 2010. And finding the right balance with respect to 2009 developments such as enhanced market flex and pre-closing securities demands will likely occupy a significant amount of participants’ time and energy. It promises to be an interesting year for arrangers and sponsors alike.
Read the whole thing 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)