M & A Law Prof Blog

Topps's Car Wreck

Earlier this week Upper Deck withdrew in a huff its competing tender offer for Topps leaving Topps with only a heavily criticized merger agreement with Michael Eisner's Tornante and MDP.  I'll write more tomorrow and in-depth on the upcoming Topps shareholder vote on that transaction and the current shareholder opposition.  But for now, I thought I would share this amazing letter Topps filed this morning.  It's long for a blog post, but I'm going to put most of it up since it is really one of those you have to read (at least for those people who slow down to watch car crashes).  I'll also post tomorrow my thoughts on a potential lawsuit by Topps's and their chance at success under the Williams Act and other grounds.

Mr. Richard McWilliam, Chief Executive Officer, The Upper Deck Company

Dear Mr. McWilliam:

We are extremely disappointed for our stockholders that you withdrew your tender offer.

You have misled our Board, our stockholders, the Delaware court and the regulators.  As a result, our stock price has gyrated wildly based on your false and misleading statements to the public. 

Our Board and management team have been intensely focused on maximizing value and, notwithstanding your self-serving statements to the contrary, we did indeed hope to reach an agreement by which Topps stockholders would receive $10.75 per share.  While we negotiated in good faith and used our best efforts to arrive at a transaction with you, given the lame excuses you assert in your letter of August 21 for taking such action, we believe it is now apparent to everyone that your tender offer was illusory.  Your conduct has been shameful, indefensible and, in my judgment, manipulative.

Your claim that you could not continue to proceed with your tender offer and finalize a transaction because the due diligence issues could not be resolved is specious.  You should have read our letter of August 20 with greater care.  In that letter, I stated that the Board was prepared to respond to every diligence request prior to signing a merger agreement, including those received recently. 

So that there is no confusion, the letter, which was publicly filed, stated: "we have told you time and again (and reiterate again for the record) that once we conclude a consensual agreement with you (but prior to signing, of course), we will provide you with every missing piece of information you have requested.”

Notwithstanding your additional diligence requests, which we publicly confirmed we would satisfy, a cursory look at your specific requests demonstrates that they would not contain any information that was necessary for you to determine whether to proceed with your tender offer. . . . .   

Time and again, Topps provided Upper Deck with a clear roadmap to a definitive agreement.  Upper Deck never once indicated a strong desire to get a deal done, other than through its misleading communications to the public.  We were stunned that we didn’t hear from you immediately after the HSR waiting period expired.  Frankly, we had expected a call at midnight from your advisors suggesting a meeting within a day or so to get a deal done.  That call never came (not at midnight, not over the weekend nor even the following week).  Instead, our advisors had to reach out to yours to ask when and if we could discuss a merger agreement. 

The details of your neglect have already been stated in my last letter so I won’t repeat them again here, but the fact is Topps pushed and pushed and Upper Deck delayed and delayed.  Never once did Upper Deck request a meeting to discuss any outstanding business issues.  Never once did Upper Deck offer to get in a room with business people and advisors to resolve differences.  Never once did you or your business people pick up the phone and call me or anyone else at Topps (other than in response to our calls to you).  All of the initiatives came from Topps - we had to send you drafts and then call or email repeatedly to get your advisors to focus.  We had to call and email to push the process forward.  We wrote letters to try to stimulate some kind of action on the part of Upper Deck.  All in all, no one could possibly believe that Upper Deck’s behavior resembled the behavior of a motivated buyer. 

All a legitimate buyer would have needed to do was to complete the tender on the terms you stated - buy whatever shares were tendered and then deal with the back-end either through a short-form or long-form merger.  You had the requisite regulatory approvals and claimed to have all of the financing.  All of the so-called conditions to your offer were, in fact, wholly within your control when you terminated your offer.  In any case, if Upper Deck had followed through on its tender offer, it could have acquired a majority of the shares in short order (and, we suspect, would have received overwhelming support for the offer from the stockholders), obtained control of the Board immediately and thereby thwarted any further efforts by any third party to acquire control of Topps or the Board.  That’s what a real buyer would have done.

Furthermore, given your lack of experience in the confectionery business, we find it more than curious that during the 5½ months since you have had access to our data room, you only performed a limited review of the hundreds of documents made available on Topps Confectionery, had no follow-up questions on the business, did not ask to speak with the supplier that manufactures most of our confectionery products and did not ask to speak with management to get clarity on the recent softening in performance.  We believe that any buyer would want to assess the value of Topps’ Confectionery business regardless of their plans for the business.  Topps Confectionery represents approximately half of the Company’s revenues and earnings and is the division that faces the most challenging strategic and financial conditions going forward. 

Finally, on August 21, we filed a merger agreement, which we believed our Board was prepared to recommend, subject only to Topps’ obligations under the existing merger agreement with Tornante-MDP.  Incredibly, rather than contact us or our advisors to finalize a transaction that would benefit our stockholders, you withdrew your tender offer.  It appears that you were using your tender offer as a Trojan horse to gain access to our confidential information, disrupt our business and interfere with our pending merger transaction, the consummation of which could threaten the success of your business. 

We intend to hold Upper Deck fully responsible for the damages you have caused Topps and its stockholders, and hope that our stockholders, or representatives acting on their behalf, and appropriate regulators will do likewise.; We will now turn our attention to completing the Tornante – Madison Dearborn Partners transaction.

Sincerely,

Allan A. Feder

Lead Director

Mistakes M&A Lawyers Make

RARE Hospitality International, Inc. announced on Friday that it will be acquired by Darden Restaurants, Inc. for $38.15 per share in cash in a transaction valued at approximately $1.4 billion.  The acquisition will be effected via tender offer, showing yet again that the cash tender offer is reemerging as a transaction structure (see my post the Return of the Tender Offer).  Darden is financing the acquisition through cash and newly committed credit facilities.  And the deal is the latest in the super-hot M&A restaurant-chain deal sector.      

A perusal of the merger agreement shows a rather standard industry agreement.  RARE's main restaurant chain is LoneHorn Steakhouse, and so merger sub is called Surf & Turf Corp. -- the bounds of creativity in M&A.  There is a top-up which is also fast becoming a standard procedure in cash tender offers.  This top-up provision provides that so long as a majority of RARE’s shares are tendered in the offer, RARE will issue the remaining shares to put Darden over the 90% squeeze-out threshold.  RARE's stock issuance here cannot be more than 19.9% of the target's outstanding shares due to stock exchange rules, and cannot exceed the authorized number of outstanding shares in RARE’s certificate of incorporation. 

I looked for any new gloss on the Material Adverse Change clause to address current market conditions.  There was nothing that appeared to address the particular situation, although any non-disproportionate "increase in the price of beef" is a MAC-clause trigger; apropos for a steakhouse chain.  Finally, for those interested in topping Darden’s bid, the termination fee is $39.6 million.  If another bidder makes a superior proposal, then under Section 5.02(b) of the merger agreement, RARE cannot terminate the agreement "unless concurrently with such termination the Company pays to Parent the Termination Fee and the Expenses payable pursuant to Section 6.06(b)".  The only problem?  Expenses is used repeatedly throughout the Agreement as a defined term everywhere except 6.06(b) -- which makes no references to Expenses or even expenses.  In fact, it appears that nowhere does the agreement define Expenses.  Transaction expenses can sometimes be 1-2% of additional deal value, a significant amount that any subsequent bidder must account for.  So how much should a subsequent bidder budget here?  Or to rephrase, what expenses must RARE pay if a higher bid emerges?  And how can RARE terminate the deal to enter into an agreement with another bidder if RARE does not know which expenses it is so required to pay?  Darden may also want similar certainty as to its reimbursed expenses, if any, in such a paradigm.  Lots of questions in this ambiguity.  Not the biggest mistake in the world, but Wachtell, attorneys for the buyer, and Alston & Bird, attorneys for the seller, both have incentives to fix this one.

Midwest Chooses?

Midwest Air Group, owner of Midwest Airlines, yesterday announced that it had determined to pursue an all-cash offer from TPG Capital, L.P. to acquire all of the outstanding shares of Midwest for $16.00 per share in a transaction valued at about $424 million.  Midwest and TPG expect to execute an agreement by tomorrow, August 15.  Midwest did not disclose it at the time, but it subsequently was reported that Northwest Airlines would be an investor in this transaction with "no management role" in the operations of Midwest.  Miudwest's announcement comes on the heels of AirTran Holdings Inc.'s weekend disclosure that it had allowed its own "hostile" cash and stock offer valued at $15.75 a share to expire.

The market is still uncertain about the prospects of a completed deal.  On the announcement, Midwest's stock actually closed down 1.62% yesterday at $14 a share.  To understand why, one need only read this excerpt from a letter delivered yesterday to the Midwest board from its largest shareholder (8.8%) Pequot Capital:

We have significant concerns with this Board’s decision to pursue an all-cash proposal from a private equity firm and its consortium. We are not convinced that this taxable, all-cash indication of interest is superior to the enhanced cash and stock offer that you indicated was made by Airtran this past weekend. In addition, we fail to see how TPG and Northwest will be able to match the job creation and growth opportunities promised by Airtran for the benefit of Midwest’s employees, suppliers, customers and communities.

Midwest's behavior throughout this transaction has been problematical.  Their scorched earth policy has produced clear benefits -- Midwest's initial bid was $11.25, but their "just say no" policy to AirTran has highlighted the problems with anti-takeover devices and their potential use to favor suitors.  Midwest management may have succeeded in preserving their jobs with this gambit, but it may be to the detriment of its shareholders. 

It is also to the detriment of AirTran.  AirTran has now incurred significant transaction costs, including lost management time expended on this transaction, and, assuming the bidding is done, now has nothing to show for it:  TPG is a free-rider on AirTran's efforts.  Here, I must admit I am a bit puzzled as to why AirTran did not establish a toe-hold; that is a pre-offer purchase of Midwest shares.  If they had taken this route, AirTran would have paid for its expenses through its gain from this pre-announcement stock purchase.  But instead, AirTran purchased only a few hundred shares for proxy purposes.  This may have been due to regulatory reasons, but if not, it appears to be poor planning by AirTran.  And AirTran is not alone.  Toeholds are common in Europe (KKR recently used the strategy quite successfully in the Alliance Boots Plc transaction), but in the United States they are less utilized due to regulatory impediments such as HSR filings and waiting periods, Rule 14e-5 which prohibits purchases outside an offer post-announcement, and Schedule 13D ownership reporting requirements.  Consequently, one study has found that at least forty-seven percent of initial bidders in the United States have a zero equity position upon entrance into a contest for corporate control.  M&A lawyers may do well, though, to advise bidders to rethink this hesitancy.  For more on this issue, see my post, The Obsolescence of Rule 14e-5. 

Topps' Dilemma

Topps and Upper Deck exchanged a puzzling set of letters this week (see the Topps letter here, the Upper Deck letter here).  To get a gist of the discussion, here is an excerpt from the Topps letter:

When we hadn't heard from you by Monday morning, we sent you a revised draft of the merger agreement we had been negotiating with you over the past several weeks. The only substantive changes from the version we had nearly fully negotiated with you related to the mechanics of the two-step transaction (first step tender offer and second step merger). We believe that all of the other substantive provisions had been negotiated with you and your colleagues, including the representations, covenants and termination provisions. . . . . We were disappointed to hear that as of Tuesday afternoon, Upper Deck had not yet even reviewed the draft.

At least as troubling, we were shocked to hear on our call with you Tuesday that Upper Deck is expressing an unwillingness to proceed with its tender offer. This is the very form of transaction for which Upper Deck sought and obtained judicial relief, so it is startling at this point in the process to be told that Upper Deck's new preference is to terminate its offer and proceed with a one-step merger, knowing full well that would require several months, expose our stockholders to transaction risk during that time and, giving effect to the time value of money, reduce the value of the consideration received by our stockholders.

We are eager to find out if we can execute a transaction with your client, and are hopeful that we can do so. However, as we have told you on several occasions, Upper Deck's behavior has raised an increasing amount of skepticism among our directors as to whether Upper Deck truly intends to acquire Topps, or whether it is simply taking steps to interfere with the current transaction with Tornante-MDP and otherwise harm Topps' business.

Upper Deck responded by disputing Topps' assertions, maintaining that it had committed financing and stating that the reason it was not able to comment on Topps's merger agreement on Tuesday was because "Ms. Willner, who is co-counsel . . . . was out of the office on Tuesday."

This last Upper Deck comment is sure to bring a laugh to any M&A lawyer.  In this high pressure world, I've never heard of anyone using that excuse and actually meaning it.  As an M&A lawyer you are always available.  So, it's hard to know what is going on in Upper Deck's mind right now, but it appears to be stalling.  But for what purpose is unknown.  Perhaps it actually is unable to keep its financing in place or otherwise is pressing ahead to interfere with Topps' current bit to be acquired by the private equity firms The Tornante Company LLC and Madison Dearborn Partners, LLC.  But the latter explanation seems a bit far-fetched -- Upper Deck has spent a lot of time and money simply to interfere with a competitor's deal. 

Upper Deck's tender offer expires tonight at midnight.  If you look in the amended tender offer statement, there are sufficient conditions in Upper Deck's offer that are unsatisfied that it will be able to let the offer simply expire and walk.  If Upper Deck extends the offer, it will (to some extent) be an expression of its seriousness.  Still, in its letter, Upper Deck again requested  "due diligence materials (which have been repeatedly requested since at least April) so that Upper Deck may finalize its due diligence and analysis of Topps."  If Upper Deck is indeed serious, this deal still has a bit more to go  before an agreement can be reached.   But Upper Deck only has so much time:  the special meeting of Topps’ stockholders to consider and vote on the proposed merger agreement with the Tornante consortium is on August 30.

Final Note:  Upper Deck may also be able to terminate its tender offer at any time.  The key is whether the Williams Act tender offer rules prohibit this practice.  The one court to consider this issue held that shareholders could not state a claim under the antifraud provisions of the Williams Act for a bidder's early, intentional termination of a tender offer because "[w]here, as here, the tender offer was not completed, plaintiffs have not alleged that the misrepresentations affected their decision to tender, they have not claimed reliance, [and] plaintiffs have failed to state a cause of action under § 14(e)."  P. Schoenfeld Asset Management LLC v. Cendant Corp., 47 F.Supp.2d 546, 561 (D.N.J. 1999) vacated and remanded on other grounds Semerenko v. Cendant Corp., 223 F.3d 165 (3rd Cir. 2000).  But, whether other courts would go so far in the face of an intentional withdrawal by a bidder is unclear.  This is particualrly true if the bidder lacked an intent to complete the tender offer from the beginning. 

The Return of the Tender Offer (Redux)

Three weeks ago I penned a post on the The Return of the Tender Offer.  Yesterday, Theodore Mirvis a partner at Wachtell, Lipton, Rosen & Katz posted to the Harvard Corporate Governance Blog a memorandum issued by Wachtell last week on the same subject.  It is worth a read for those wanting a highlight of the benefits tender offers provide over mergers.  And nice to know we are in agreement on the return of the beloved '80s structure, particularly since I was a week or two ahead of those super-fast Wachtell lawyers. 

RBS Et Al. Stays The Course

Fortis, RBS and Santander announced today that they intend to proceed with their proposed offer for ABN AMRO. The consortium left the consideration per ABN AMRO share being offered unchanged at €38.40 but raised the cash component to approximately 93% (€35.60 in cash plus 0.296 New RBS Shares for each ABN AMRO share).  The offer values the equity of ABN AMRO at €71.1 billion or $98.03 billion.

The prior bid has been 79% cash. It was also conditioned upon a shareholder vote with respect to the LaSalle Bank sale and withheld €1 a share to cover costs for litigation over ABN's LaSalle bank unit.  This condition and the withholding have been dropped in this bid in the wake of the Dutch court ruling upholding the sale of LaSalle Bank to Bank of America.  Instead, RBS issued a press release today stating that the net cash received from the LaSalle sale will go to RBS.  The new RBS consortium offer puts significant pressure on Barclays to raise its competing all-share bid which currently values ABN AMRO at about €65 billion.

ABN AMRO's securities are registered with the SEC and it has greater than 10% of its shareholders resident in the United States disqualifying the RBS-led group from using the SEC's cross-border exemptions.  Accordingly, there will be two offers made by the RBS consortium:  one to U.S. shareholders and ADS holders wherever located governed by U.S. rules and one to all other shareholders governed by Dutch rules.  In connection with the U.S. bid, RBS will need to prepare and file with the SEC a registration statement on Form F-4.  However, unless ABN AMRO cooperates, the RBS consortium will not need to include in the F-4 the usually required U.S. GAAP pro forma financial information for the combination.  This omission is permitted by Rule 409 of the Securities Act since the information is reasonably unavailable (usually required ABN AMRO auditor consents can also be omitted under Rule 437).  And it is a way for hostile bidders in cross-border transactions to gain timing parity by having to avoiding the time-consuming process of preparing this financial information.   

Biomet Tender Offer Succeeds

The tender offer for Biomet closed last night at midnight.  According to the acquiring private equity consortium press release, 82.85% of Biomet’s outstanding shares were tendered in the offer.  The deal had had a 75% minimum tender condition due to the vagaries of Indiana law where Biomet is organized and which requires a 75% vote to approve a merger.  The Biomet merger agreement had a top-up option -- a provision which permits the consortium to now purchase, at a price per share equal to the offer price, a number of newly issued shares that will constitute 90.0005% of the total shares then outstanding.  Accordingly, the acquiring group will exercise this option to bring their holdings up to 90% of the company and initiate a short-form merger under Indiana law.  This will spare the consortium the shareholder vote and proxy requirements of a long-form merger permitting the deal to close today rather than in another month or two.  Practitioners should take note. 

The Return of the Tender Offer

The tender offer is starting to make a come-back.  According to MergerMetrics.com, in the first five months of 2007, 15.5 percent of negotiated transactions were accomplished through tender offers.  While that is a low figure, it is more than three times higher than in the same period last year. 

The tender offer is likely reemerging due to the SEC's amendments to the best price rules which took effect on December 8, 2006.  These amendments clarified that the best-price rule does not  cover employee compensation, severance or other employee benefit arrangements.   Previously, there was a circuit-split on this issue, and many bidders preferred merger transactions in order to avoid litigation and potential liability over the issue. 

But the 15% figure is still a low one.  Perhaps one reason why is the increasing use of go-shops in private equity deals.  In cash deals, tender offers have a timing advantage over mergers.  Tender offers can be consummated in 20 business days from the date of commencement compared to 2-3 months for a merger.  However, if a go-shop is utilized the timing advantage of a tender offer is lost due to the need for the 45-60 day go-shop period.  Accordingly, in this case a merger is likely a preferable option because it assures that minority shareholders can be entirely squeezed out in the merger provided the necessary number of shareholders (typically 50%) approve the merger.  This compares to a tender offer, where if 90% of shareholders do not tender the squeeze-out threshold is not reached, and a back-end merger must still take place making the process longer than a single-step merger.

To address this last issue, transaction participants are adding top-up provisions to tender offers.  A top-up provision provides that so long as x% of shareholders tender in the offer, the target will issue the remaining shares to put the acquirer over the 90% threshold.  The minimum number of shares triggering the top-up varies but the target share issuance can be no more than 19.9% of the target's outstanding shares due to stock exchange rules.  And according to MergerMetrics.com, in 2007 more than two-thirds of negotiated tender offers included a top-up agreement, up from 55.6 percent in 2006 and more than double the number in 2005 and 2004.

Expect the number of cash tender offers to increase as practitioners again become re accustomed to the structure.  Also expect exchange offers to reappear.  The SEC took steps in the 1999 M&A Release to put stock and cash tender offers on parity by permitting pre-effective commencement of exchange offers.  But despite expectations of its widespread use, the exchange offer never caught on in friendly transactions.  This was likely due to the same reasons for the decline in cash tender offers (exchange offers are also a terrible amount of work in a very compressed time for M&A lawyers).  But with the new SEC rules, this transaction structure is one worth exploring for acquirers who want to quickly consummate friendly stock transactions.   

Danone Intends to Bid for Numico

Groupe Danone S.A. yesterday announced its intentions to make a € 55.00 in cash per ordinary share bid for all of the outstanding shares of Royal Numico N.V., a Dutch company listed on Euronext Amsterdam.  The Supervisory Board and Executive Board of Numico also announced that it would unanimously recommend that Numico shareholders accept the offer.  The price values baby-food maker Numico at $16.8 billion dollars, and is a 44% premium to Numico's average closing price over the last three months. 

Analysts were highly critical of the price being paid by Danone.  “This is the most expensive large-cap deal in the global consumer space ever,” stated Andrew Wood, an analyst at Sanford C. Bernstein in New York.  And many are speculating that the price and large acquisition are an anti-takeover maneuver by Danone to discourage takeover bids. “This is a defensive operation for Danone,” said Chicuong Dang, an analyst at Richelieu Finance. “They are making themselves bigger and less attractive to bidders such as PepsiCo or Coca-Cola.”  (quotes as reported by Bloomberg).

Danone and Numico have yet to reach a definitive agreement on the making of the offer.  But the parties announced that the offer is expected to commence in August 2007 and would be subject to at least 66 2/3% minimum condition.  Interestingly, Numico has agreed to restrictions on its ability to initiate or encourage discussions with third parties in respect of any proposal that may form an alternative to the Offer.  And Danone is entitled to a break fee of EUR 50 million in the event (i) the Numico Boards withdraw their recommendation; or (ii) an unsolicited offer is declared unconditional.  Though the break-fee is small, these are American style transaction defense provisions that you do not normally see in Dutch deals.  But the Dutch government has opted out of the 13th EU Company Law Directive on public takeovers to permit Dutch companies to utilize lock-ups of this nature.  As takeover activity increases in the Netherlands, expect Dutch companies to further utilize American-style transaction defenses. 

The Obsolescence of Rule 14e-5

One of the frustrations often expressed with the 1968 Williams Act governing tender offers is that many of its provisions and the SEC rules thereunder no longer make sense.  I'm currently finishing up an article on this topic entitled The Failure of Federal Takeover Regulation (read a draft here).  When it is finally published, I intend to post a longer series concerning the issues and problems with current federal takeover law.  But for today, I would like to talk about the obsolescence of one particular rule:  Rule 14e-5.   

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.  They were yet another coercive and abusive tactic whereby the bidder could obtain control through purchases without the tender offer, thereby exerting pressure on stockholders to tender before the bidder terminated or completed its offer on the basis of these purchases. This is not feasible today.  Poison pills and second and later generation state takeover statutes act to restrict these purchases to threshold non-controlling levels without target approval.  In the wake of these developments, the original reasons underlying the promulgation of Rule 10b-13 no longer exist.

Moreover, Rule 14e-5, by its terms, acts to confine bidder purchases to periods prior to offer announcement.  However, a bidder’s capacity to make preannouncement acquisitions has been adversely effected by a number of subsequent changes in the takeover code, such as the Hart-Scott-Rodino waiting and review period requirements.  These have combined to chill a bidder’s ability to make preannouncement acquisitions or forthrightly precluded such purchases.  Consequently, one study has recently reported that at least forty-seven percent of initial bidders have a zero equity position upon entrance into a contest for corporate control.

A bidder’s preannouncement purchase of a stake in the target, known as a toehold, can be beneficial. The toehold purchase defrays bidder costs, incentivizes the bidder to complete the takeover, and reduces free-rider and information asymmetry problems.  This can lead to higher and more frequent bids.  Meanwhile, market purchases amidst a tender offer can provide similar benefits while providing market liquidity and confidence for arbitrageurs to fully act in the market. 

Since the initial premise for this rule is no longer valid and recent research supports encouragement of these purchases, the SEC should accordingly consider loosening restrictions on bidder toeholds and postannouncement purchases.  Bidder toeholds and off-market purchases, however, do have a potentially corrosive effect if the stake is significant.  To dampen this possibility, a relaxation of these purchase rules could be combined with provisions similar to those in the U.K. Takeover Code which permit pre- and post-announcement purchases but require the bidder to pay for a set period thereafter no less than that price paid for all subsequently acquired shares.  Alternatively, the SEC could wholly deregulate and leave the possibility or actuality of bidder toeholds and  postannouncement purchases to be regulated by targets through a low-threshold poison pill or other takeover defenses as well as through bargaining with potential bidders.

Finally, Rule 14e-5 has never applied to bar purchases while a merger transaction is pending. Presumably, this path dependency was set in 1969 because a bidder in a merger situation requires acquiree agreement; the acquiree can therefore contractually respond to and regulate this conduct. But whatever the reason, today a bidder who runs a proxy contest without a tender offer is permitted postannouncement purchases during the contest. Unsolicited bidders will therefore initially characterize their offers as mergers in order to leave the option of such purchases. The result is preferential bias towards mergers over tender offers, discrimination which no longer seems sensical in a world where a takeover transaction will not succeed unless the original or replaced acquiree board agrees to it. Any prohibition on outside purchases should apply to both merger and tender offer structures or to neither.

More on Biomet's Tender Offer

Following up on my post yesterday on the Biomet deal and its structural switch from a merger to a tender offer, Dealbook today notes another added benefit:

The use of a tender offer also removes from the equation proxy advisory firms such as Institutional Shareholders Services, which criticized the earlier offer. The recommendations of such firms hold great sway over institutional investors.  An I.S.S. spokeswoman told DealBook that the firm generally did not issue recommendations in tender offers, though it would provide an analysis for its clients.

Private equity buyers making controversially low offers take note. 

The New York Times also makes the point that tenders offers are now a more palatable structure for private equity buyers since the SEC adopted a safe-harbor for employee compensation from the all-holders best price rule.  Tender offers permit quicker deal consummation; a tender offer can be completed in twenty business days as opposed to two-three months for a merger.  The Times is right, but you haven't seen, and likely won't see, more tender offers in private equity deals because of the pervasive use of go-shops in these transactions and the extra time they require anyway, making a merger a preferred option.   

Also, Biomet has filed its revised agreement for the transaction.  In the agreement, the minimum condition for the offer is set at 75% of the outstanding shares or that:

number of Shares that is not less than the number of such Shares . . . . that, when added to the number of Shares beneficially owned . . . . by Parent, any of its equity owners or any of their respective Affiliates, and any Person that is party to a voting agreement with Parent or Purchaser obligating such Person to vote in favor of Merger . . . . represents at least 75% of the total number of Shares outstanding immediately prior to the expiration of the Offer.   

So, it appears that Biomet did not effectively lower the minimum condition to approve the transaction by changing its structure.  Good for them.

Biomet's Tender Offer

Biomet, Inc., the orthopedic company, announced today that it had agreed to an increased offer from a private equity consortium to acquire Biomet for $46.00 per share in cash, for an equity value of $11.4 billion.  The increase comes on the heels of a recommendation by Institutional Shareholder Services that Biomet shareholders vote against the transaction.  ISS based this recommendation on that fact that "[a]lthough the deal terms appear fair as of the time of the deal's announcement in December, the rally of the peer group" and Biomet's main joint reconstruction business "imply that there is little takeover premium in the [previous] $44 offer price." (For more on this recommendation, see my previous blog post ISS Recommends Against Biomet Deal)

In connection with the increase, Biomet also revised the structure of the acquisition from a merger to a tender offer.  The amended merger agreement now requires the consortium – which includes affiliates of the Blackstone Group, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts & Co. and TPG – to commence a tender offer on or before June 14, 2007, to acquire all of the outstanding shares of Biomet’s common stock.  Biomet previously planned to have a shareholders meeting to vote on the merger agreement on June 8, 2007.  That meeting is now canceled.    

Per the Biomet Certificate of Incorporation, a merger must be approved by at least 75% of Biomet’s common shares.  Since the vote is based on the number of common shares outstanding rather than the number of votes cast, this would have meant that any failure to vote and broker non-votes would effectively have been votes against the transaction. 

In converting to a tender offer structure Biomet has fiddled with the minimum condition.  According to Biomet: 

Completion of the tender offer is subject to the condition that at least 75% of the Biomet common shares have been tendered in the offer – the same percentage approval requirement as with the previous merger structure. The amended merger agreement permits the investor group to revise the condition regarding minimum acceptance of the tender offer to decrease the minimum acceptance threshold to a number that, together with shares whose holders have agreed to vote to approve the second-step merger, represents at least 75% of the Biomet common shares.

The second sentence is a bit unclear to me and Biomet has yet to file the amended agreement.  But it likely means that the private equity group and Biomet agreed to the provision in order to obtain agreements to vote from management in connection with the tender offer.  If this is the intention, I'm still not sure why there was a need to convert to a tender offer -- the transaction could have closed quicker had Biomet simply postponed or adjourned the shareholder meeting and management could have also voted for the transaction then.  But my hunch is that in this language there is an effective lowering of the required shareholder approvals.  I'll have more once the amended agreement is actually filed. 

Note to Biomet shareholders: there are no dissenter's rights available under Indiana law for this transaction (a different result than in Delaware; Biomet is organized under the laws of Indiana).   

The RBS Consortium's Offer for ABN Amro

The Royal Bank of Scotland Group plc, Fortis and Santander today announced the terms of their proposed €71.1 billion offer for ABN Amro.  If completed, it would be the largest financial services deal in history.  According to the consortium, its bid is at a 13.7% premium to the competing €64 billion bid from Britain's Barclays plc supported by ABN Amro. The consortium is offering €38.40 per ABN share comprising 79% cash with the remainder consisting of new RBS shares.  But the group will also hold back €1 a share in cash (or $2.5 billion) as a reserve against litigation costs and damages that might arise from the Bank of America's lawsuit against ABN Amro to enforce the sale of LaSalle Bank to it.  In a just world this would be money that would come out of the pocket of ABN Amro CEO, Rijkman Groenink and the ABN Amro Supervisory Board for mucking up this sale process instead of their shareholders. 

The group detailed the financing arrangements for the bid, and also detailed their plans to break-up ABN Amro upon its acquisition:  RBS will acquire ABN Amro's Global Wholesale Businesses (including the Netherlands but excluding Brazil), LaSalle Bank and International Retail Businesses for a consideration of €27.2 billion. The full offer document can be accessed here.  The group will now proceed to have their required shareholder meetings and expect to commence the full offer in August of 2007. However, this is a pre-conditional offer -- certain conditions must be satisfied before the full offer can commence.  The most significant pre-condition is one requiring a favorable ruling on the currently pending litigation over the LaSalle matter.  It requires that:

The preliminary ruling of the Dutch Enterprise Chamber that the consummation of the Bank of America Agreement should be subject to ABN AMRO shareholder approval has been upheld or otherwise remains in force, whether or not pursuant to any decision of the Dutch Supreme Court, or of any other judicial body, and ABN AMRO shareholders have failed to approve the Bank of America Agreement by the requisite vote at the ABN AMRO EGM.

Thus, like many a U.S. takeover, the final disposition of ABN Amro will be decided by the courts.  The Dutch Supreme Court is expected to rule in July or August.  Until then, there will continue to be significant uncertainty in the market over the RBS-bid and the future of ABN Amro.   

NB.  The RBS group has also decided to take a different course in this offer document with respect to the acquisition of LaSalle Bank.  The consoritum offer itself, once it commences, is now conditioned upon "ABN AMRO shareholders hav[ing] failed to approve the Bank of America Agreement by the requisite vote at the ABN AMRO EGM convened for that purpose."  The group's previous offer was cross-conditional on ABN Amro reaching an agreement to sell LaSalle directly to RBS.  Now, it appears RBS is content to acquire only ABN Amro, and subsequently purchase LaSalle.   

Blackstone Agrees to Acquire Alliance Data

Alliance Data, the marketing services company, today announced an agreement to be acquired by Blackstone.  The transaction is valued at approximately $7.8 billion, and Blackstone will pay $81.75 per share in cash, an approximate 30 percent premium over Alliance Data's closing share price yesterday.  Blackstone's deal comes only one-day after the AFL-CIO sent a letter to the SEC attempting to halt Blackstone's initial public offering; looks like they are continuing on full speed ahead.   

Alliance Data also filed the merger agreement today, an admirable two business days ahead of schedule.  A quick scan finds it to be a pretty clean deal.  No financing provision, a relatively reasonable $170 million termination fee, and no apparent management involvement.  The only question appears to be why, given that this is a cash deal, the parties structured it as a merger rather than a tender offer.  A merger takes two-three months to complete whereas a tender offer takes 20 business days from commencement complete.  In cash deals parties typically prefer the quicker route of a tender offer when they do not have regulatory or other conditions which may require more time to fulfill.  This is particularly true since the deal does not include a "go-shop", a provision which permits the target to undertake market solicitations for a higher offer for a limited period of time after the deal.  I am not  sure of the answer, but I would speculate that the extended provisions in the agreement concerning the marketing of the deal financing likely required more time than the 20 business days a tender offer would take, and so they defaulted into a merger.  Alterntaively, the extended period allowed by a merger here is intended to function as a limited "go-shop" permitting offers to be made without the solicitation aspect.  Please let me know if you have another explanation.

   

Alcan, Alcoa and the Pacman Defense

On Monday, an analyst at Prudential Equity Group, John Tumazos, sketched out the benefits of a reverse takeover by Alcan of Alcoa.  Alcoa has commenced an unsolicited offer to acquire Alcan in a transaction valued at $33 billion.  A reverse takeover, known as the pacman defense, whereby a target turns the tables on an acquirer and offers to acquire it instead, has not been used in the United States since the 1980s (most notably in the Bendix/Martin Marietta wars) [correction: a reader pointed out that in 2000 Chesapeake Corp. employed a successful pacman defense against Shorewood Corp.; details of that transaction are here).  As reported by DealBook, the analyst highlighted the political benefits of a reverse-takeover; it will increase business by relocating the combined company outside the United States thereby stemming anti-American sentiment against Alcoa in other countries and be more politically palatable to the Quebec authorities where Alcan is headquartered and based.  And so it goes . . . .

The analyst may have been a bit too hasty in his calculus as to the balance of local politics.  Aloca is organized under the laws of the state of Pennsylvania.  Pennsylvania has the strictest anti-takeover laws in the country, including a constituency statute, business combination statute, control share acquisition statute, fair price statute, and employee severance statute.  For a good description of the Pennsylvania law and each of these provisions, see the article by William G. Lawlor, Peter D. Cripps and Ian A. Hartmann of Dechert LLP, Doing Public Deals in Pennsylvania:  Minesweeper Required.  Alcoa had the option to opt-out of these anti-takeover provisions when they were first enacted in 1990, but chose not to.  The company also has in its Certificate of Incorporation an anti-greenmail provision.  Although Alcoa doesn't currently have a poison pill, it could adopt one if Alcan made an offer.  Pennsylvania courts, unlike courts in Delaware and New York, have allowed targets to utilize no-hand provision in these pills.  The Pennsylvania courts also haven't yet considered the validity of a dead hand provision.  Any pill adopted by Alcoa to fend off an Alcan bid would therefore also likely contain these powerful anti-takeover devices.  Moreover, the Pennsylvania state legislature has been more than willing to change its laws to help a Pennsylvania organized company fight off an unwanted suitor when its current laws appeared insufficiently protective (most recently it acted to protect Sovereign Bancorp). 

The effect of all of this would be to permit Alcoa to effectively undertake a "Just Say No" defense to any Alcan pacman bid.  And while shareholder pressure may, if Alcan's bid goes high enough, force the Alcoa board to accept an offer this will likely take time and more consideration than Alcan, which is slightly smaller than Alcoa, can offer.  And Alcoa, also has a staggered board making a proxy contest a multi-year affair (and still facing the problem of Pennsylvania's antitakeover laws making any proxy contest win moot).  Compare this with Quebec law which permits Alcan to keep its poison pill for only a short period of time and has similar time limitations on other explicit anti-takeover maneuvers (see my previous blog post on this here).  In light of the comparative advantage of Alcoa, a pacman would have a small chance of succeeding against any protracted resistance by Alcoa and before Alcoa could complete its offer for Alcan.

Addendum:  Shares of Pennsylvania companies which have not opted out of the Pennsylvania anti-takeover statutes have been found to trade at a discount to their market comparables.  For more on this point, see P.R. Chandy et al., The Shareholder Wealth Effects of the Pennsylvania Fourth Generation Anti-takeover Law, 32 Am. Bus. L. J. 399 (1995).