A lot of deal lawyers are worried about the recent 5th Circuit case – Halliburton Benefits Committee v. Graves – which allowed retirees to pursue the buyer as a result of a standard employments benefits provision of a merger agreement (even though the agreement had specific “no third party beneficiary” language). We have posted a copy of the opinion in our “M&A Litigation” Portal.

It will be interesting to see if lawyers try to significantly cut back the scope of traditional covenants due to a concern that possibly thousands of employees might now have standing to sue over language interpretations. Thanks to Julie Jones of Ropes & Gray for the heads up and her wisdom!

Last week, the NASD proposed amendments to NASD Rule 2720 that would significantly amend the application of the rule to public offerings in which a participating broker/dealer has a conflict of interest. The more significant proposals are:

– exempt from the filing requirements and the qualified independent underwriter (QIU) requirements of Rule 2720 public offerings with a book-running lead manager or dealer/manager that does not have a conflict of interest and that can meet the disciplinary history requirements for a QIU and public offerings of investment-grade rated debt and securities that have a bona fide public market

– change the definition of “conflict of interest” so that the Rule covers public offerings in which at least five percent of the offering proceeds are directed to a participating member or its affiliates and eliminates ownership of subordinated debt as a basis for a conflict of interest

– modify the Rule’s disclosure requirements so that more information relating to conflicts of interest is prominently disclosed in offering documents

– amend the Rule’s provisions regarding the use of a QIU to focus on the QIU’s due diligence responsibilities and eliminate the requirement that the QIU render a pricing opinion

– amend the QIU qualification requirements to focus on the experience of the firm rather than its board of directors, prohibit a member that would receive more than five percent of the proceeds of an offering from acting as a QIU, and lengthen from five to ten years the amount of time that a person involved in due diligence in a supervisory capacity must have a clean disciplinary history

– eliminate provisions in the Rule that do not apply to public offerings and instead address an issuer’s corporate governance responsibilities

– eliminate a provision that applies certain disclosure requirements to intrastate offerings

Comments are due by October 30th…

From a recent Wachtell Lipton memo: “We have been saying for some time, most recently in our memo from last August, that REITs are not takeover proof, myth and legend notwithstanding. The closing yesterday of Public Storage’s successful takeover of Shurgard makes the case more eloquently – and decisively – and should finally put to rest any lingering misconceptions about whether it is possible to acquire a REIT on an unsolicited basis.

Public Storage had privately approached Shurgard several times to discuss a potential business combination and was repeatedly rebuffed. Most recently, in July 2005, Public Storage proposed a stock-for-stock combination at a significant premium to market prices. Although this proposal was also quickly rejected as inadequate by the Shurgard board, Public Storage did not back down. Public Storage made its proposal public, and pressed its case to the Shurgard shareholders through one-on-one meetings and through press releases and public statements. Ultimately, the resulting shareholder pressure and compelling logic of the combination led the Shurgard board to announce that it was exploring strategic alternatives. In the end, Shurgard’s exploration process culminated in a merger with Public Storage, which valued Shurgard at about $5.5 billion. The transaction provided Shurgard shareholders a 39% premium to Shurgard’s undisturbed stock price plus the opportunity to benefit from the upside potential of the combined company.

The Public Storage/Shurgard transaction is indicative of larger trends in the REIT market. The extraordinary liquidity in the real estate capital markets, combined with the differential between private and public market values and the low interest rate environment, among other factors, have brought an increase in the frequency and seriousness of unsolicited proposals, hedge fund activity, private equity club deals for large targets, and topping bids after announced deals. The attempts to derail the sale of Town & Country, even though unsuccessful, illustrated that even REITs that are committed to announced transactions are not immune to takeover attempts. REITs are increasingly being subjected to the same dynamics and pressures that exist in the broader market for corporate control.

REIT management and boards of directors are well advised to study the market environment in which they now operate, to engage in advance planning and takeover preparedness reviews in order to be able to respond rapidly and appropriately as circumstances may dictate, and to pay careful attention to deal protection measures in friendly transactions.”

The Fall 2006 issue of Directors & Board’s Boardroom Briefing focuses on M&A issues for directors. The Fall issue includes analysis of the survey query: “On balance, mergers and acquisitions destroy more value than they create. Do you agree or disagree?” The survey results were:

– Strongly agree: 23.1%
– Agree somewhat: 38.5%
– Disagree somewhat: 30.8%
– Strongly disagree: 7.7%

Here are some comments from survey respondents:

“We tend to make judgments about what is visible to us. All we read about are the unsuccessful mergers, so common wisdom is that they destroy value more often then they create value. So, while I believe that mergers destroy value, I recognize the limitations of not approaching the question from an empirical point of view.”

“Surprisingly, the skills to successfully integrate a target are not in the toolbox of most acquiring companies. Having participated in multiple value-creating acquisitions, it’s much like war and a simple process:
1. Control the lines of communication and explain objectives, strategy and how missions are run in your army.
2. Move quickly on personnel decisions, benefits alignment, and culture.
3. Honorably discharge dissenters.
4. Insure early victories and wave the flag.”

“While the new combined assets may be more competitive, the time and energy required to manage a successful transition takes energy away from core businesses. Rarely are the expected synergies able to overcome the premium paid in a takeover.”

“The research shows that it is the rare company that creates sustainable economic value as a result of M&A activity. Successful integration and growth seems to elude most companies.

“Good managements often do great long-term deals that do not look too good in the short term. Since the Street is overly focused on short-term results, the impression we often get is of value destruction. Often this is due to failure to take a legitimate long-term view.”

“I personally have never been with a company that made an acquisition be non-accretive, but some have been marginal. I have also gone into companies where previous acquisitions had proved to be a horrible mistake and had to be closed down or sold. It depends on how well the target fits into the strategic goals, the quality of the due diligence, and the attention paid to the integration process.”

“Sadly, from my observations over 25 years as both a senior executive and consultant, it’s probably true that M&A destroys more value than it creates. The rosy growth and synergy forecasts managements use to justify their winning bids in an increasingly competitive M&A market are rarely met. More often than not, the only real winners in a transaction are the sellers  who’ve enjoyed a unjustified transfer of wealth/value from the buyers, something the buyers discover (if they are objective enough do a post-mortem) only after struggling mightily, yet failing to deliver, against forecasts they had little confidence in to begin with.”

“The central problem is that mergers and acquisitions today are primarily pushed for the wrong reasons and by the wrong people, usually in their own interests, and against those of the companies and their internal and external constituents.”

“Investment bankers tend to oversell the benefits in a search for fees.”

“A large percentage of M&A transactions are effected to acquire a skill set not possessed by the acquirer  better managers, sales, distribution. Those are never more effective than organic growth. Another large percentage is for product extension, and the acquirer generally doesn’t understand the profitability (or not) of the acquired business. KPMG’s study indicated that 80% of M&A transactions destroyed value  I think the percentage is coming down, but it’s still more than half.”