In our “Conference Notes” Practice Area, we have posted notes from the “Public Company M&A Developments” panel held at the recent PLI Securities Law Institute. Panelists included:
– Brian Breheny, Chief, Office of Mergers and Acquisitions, SEC’s Division of Corporation Finance
– John Finley, Partner, Simpson Thacher & Bartlett LLP
– Gregory Varallo, Partner, Richards Layton & Finger, PA
– Patricia Vlahakis, Partner, Wachtell, Lipton, Rosen & Katz
Inside Private Equity: Why Funds are Doing the Going Private Deals
Over the holidays, I read this interesting Fortune article about the mindset and strategies involved with private equity funds doing deals. Below is an excerpt from the article:
“Yet there is another side to this story. The little-discussed heart of the matter: There are management strategies and techniques that enable PE-owned firms to produce stunning results that others can’t match. These successful practices have long seemed shrouded by the “private” in private equity. But they needn’t be.
Look inside the companies owned by major private-equity firms, talk to the executives who run them, and you’ll find a distinctive way of managing that’s sharply different from what goes on in most publicly traded companies or most private companies under conventional ownership. Investigation shows why privately held firms – at least if they’re owned by one of the major buyout shops – have important advantages over competitors, and why they’re regrading the playing field in several industries. Many of the lessons apply to virtually any organization.
The differences begin at the most fundamental level, with new objectives. Private-equity firms want to buy companies for their portfolio, fix them, grow them and sell them in three to five years. The eventual buyer could be another company in the portfolio company’s industry, another private-equity firm or the public, through an IPO. The holding period is occasionally less than a year or as long as ten years. But always the goal from day one is to sell the company at a profit.
Facing a goal like that changes a manager’s mindset – usually in positive ways. No longer seeing a corporate future that stretches indefinitely into the distance, executives realize that they gain nothing by resisting change: With the exit looming, driving change is their only hope.
‘Everybody in the company knows you’re on a sprint to do well,’ says von Krannichfeldt. ‘It’s not this mindset of working for a company that’s been there for 100 years and will continue for another 100 years. I find this much more intense than a public company.’
Pay is a whole different concept in PE-owned companies. Don’t come to play unless you’re prepared to put significant skin in the game. While public companies talk a lot about aligning executive pay with performance, they typically award stock options and restricted stock on top of already substantial pay packages, giving executives lots to gain but little to lose.
And in big companies those options reflect the fortunes of the overall corporation, not the specific business a manager is running. By contrast, private-equity firms make the game much more serious. Not only is a far larger share of executive pay tied to the performance of an executive’s business, but top managers may also be required to put a major chunk of their own money into the deal.”
After then talking about all the freedoms of the privately-held company, the article goes on to note: “If it all sounds too good to last, some people worry that it may be. Private equity has become so large, powerful and successful that some firms may be doing too much, too fast.”
Last week, a lawsuit – Murphy v. Kohlberg Kravis, 06-cv-13210, Southern District of New York (Manhattan) – was filed accusing a slew of buyout firms of rigging buyouts. We have posted a copy of the complaint in our “M&A Litigation” Portal – and this lawsuit is analyzed in this blog.
Below is an article from Bloomberg on the lawsuit:
Kohlberg Kravis Roberts & Co., Carlyle Group and most other major U.S. buyout firms were accused in a shareholder lawsuit of illegally conspiring to hold down the prices they paid when taking companies private.
The suit was filed in Manhattan federal court by investors who claim they were shortchanged because the firms restrained bidding for leveraged buyouts such as the $33 billion takeover of hospital chain HCA Inc., the largest LBO ever. It alleges the firms broke antitrust laws by forming “clubs” to make offers, sharing information and agreeing not to outbid each other.
“Investors in the target company are deprived of the full economic value of their holdings and `squeezed out’ at artificially low valuations,” says the suit, which seeks class- action status. Private-equity firms, which have announced a record $425 billion of LBOs this year, are already the target of a U.S. Justice Department investigation into possible antitrust behavior. They’ve also come under fire in Europe and the U.S. for burying the companies they buy in debt while recouping their costs with dividends.
The lawsuit, which seeks unspecified damages, resembles a pending antitrust case in Manhattan federal court. That one accuses 12 investment banks, including Goldman Sachs Group Inc. and Merrill Lynch & Co., of rigging initial public offerings of technology companies in the late 1990s. A federal appeals court last year ruled that the case, which alleges that the firms required investors who received IPO shares to buy additional stock in the after-market, can go forward. “This is a class action for people who were bought out,” said Fred Isquith, a lawyer at Wolf Haldenstein Adler Freeman & Herz in Manhattan, which brought the case.
U.S. District Judge Louis Stanton in New York will determine whether to grant the suit class-action status. The complaint seeks to represent tens of thousands of shareholders in dozens of LBOs. Since the lawsuit alleges violations of federal antitrust laws, plaintiffs would be able to recover triple damages if they win. The other firms named as defendants in the complaint are Clayton, Dubilier & Rice Inc., Silver Lake Partners, Blackstone Group, Bain Capital LLC, Thomas H. Lee Partners LP, Texas Pacific Group, Madison Dearborn Partners LLC, Apollo Management LP, Providence Equity Partners Inc., Merrill Lynch & Co. and Warburg Pincus LLC.
The only top-tier U.S. buyout firms missing from the suit are Cerberus Capital Management LP and Fortress Investment Group LLC. Other than Merrill Lynch, the suit doesn’t include the private-equity units of the largest investment banks. Officials for the defendants either declined to comment or didn’t immediately return phone calls seeking comment.
According to the suit, the named plaintiffs – L.A. Murphy, Marvin Sternhell and Henoch Kaiman — were investors in three companies: HCA, Univision Communications Inc. and Harrah’s Entertainment Inc. The suit says the investors would have gotten more for their shares if there had been “free and open competition” among the firms bidding for the companies.
Instead, the firms conspired to “artificially fix, maintain or stabilize” buyout prices. The 20-page complaint doesn’t provide any details on how the firms allegedly fixed prices. Private-equity firms use a combination of equity and debt for takeovers and seek to cuts cost, improve cash flows and invest in technology to bolster the long-term prospects of their investments before selling them after three to five years.
On July 24, a group including KKR and Merrill Lynch, both based in New York, and Bain Capital of Boston agreed to buy HCA. The firms were joined by Thomas F. Frist Jr., a co-founder of the Nashville-based company. The price, equal to $51 a share, was 6.5 percent more than HCA’s closing price on the previous trading day.
Univision on June 27 accepted an offer of $12.3 billion, or $36.25 a share, from a buyout group that included Chicago-based Madison Dearborn; Providence Equity of Providence, Rhode Island; Texas Pacific Group, which is based in Fort Worth, Texas; Boston- based Thomas H. Lee Partners; and billionaire investor Haim Saban. The purchase price was lower than the $40 a share that the Los Angeles-based company had originally sought before three buyout firms dropped out of a rival bidding group led by Spanish broadcaster Grupo Televisa SA. Blackstone and KKR, both based in New York, and Washington-based Carlyle pulled out amid disagreements over how much to offer.
Harrah’s Entertainment is weighing a buyout offer of $15.5 billion, or $83.50 a share, from New York-based Apollo Management and Texas Pacific Group after rejecting an earlier $81-a-share offer from the two LBO firms. The new offer is 11 percent higher than Harrah’s share price of $75.11 at 1:36 p.m. in New York Stock Exchange composite trading.
In this no-action letter, the SEC Staff granted relief in connection with Bayer’s tender offer for Schering to permit the bidder to provide for a two-month subsequent offering period. SEC rules limit the subsequent offering period to 20 business days. This relief was granted to avoid a conflict with German law which permits a longer period. The SEC also granted relief allowing the bidder to adjust the consideration offered (during both the initial offering period as well as the subsequent offering period) in order to take into account any statutory interest as well as the payment of any guaranteed dividends payable pursuant to the terms of the agreement between the parties and German law. So rather unique fact pattern – but you are not going to see this come up every day…
Here is a blurb from Saturday’s WSJ: “It’s no longer sufficient for corporate chieftains heading into battle to employ an army of mercenaries — now many of them need more than that. Half of all companies have hired more than one banking adviser when doing deals this year. That’s the most to date. But while it may be good news for bankers worried about full employment, companies aren’t necessarily doubling their fees.
During the most recent mergers-and-acquisitions boom, only about a third of companies used multiple advisers on deals, according to Dealogic, which compiles corporate-finance data. One explanation for this is that the 2001 stock-market implosion exposed much of the previous decade’s deal-doing as misguided. Combined with the post-Enron scandals, that propelled directors to take on extra outside help, not least out of fear of their legal liabilities.
This trend plays well with the boutique investment banks whose senior rainmakers are marketing themselves as consiglieri proffering counsel directly to executives without armies of bankers behind them. Indeed, boutiques such as Evercore and Greenhill have taken a quarter more of advisory fees this year than they did in the past year.
And with only half of all deals using more than one adviser, there’s ample room to grow. That’s a great opportunity for new shops such as Joe Perella’s boutique, even if it means dividing an only slightly bigger pie among many more hungry mouths.”