Despite the Fed’s reduction in interest rates last week, a number of deals are in trouble and have produced some interesting developments and disclosures. As a result, caselaw regarding MAC clauses and other merger provisions will likely be fleshed out over the next year (remember the September-October issue of the Deal Lawyers print newsletter opens with a related piece: “The ‘Downturn’ Roadmap: Parsing the Shift in Deal Terms”).
Here are some of the notable developments and disclosures:
1. Harman International’s Form 8-K – According to this article, late Friday, Goldman Sachs and Kohlberg Kravis Roberts scuttled their pending $8 billion buyout of Harman International after discovering details about Harman that raised concerns about its business. You may recall that this deal was one of the first to introduce “stub equity.”
2. Genesco’s Form 8-K (filed 9/20/07) – As noted in this article, Genesco is suing to force Finish Line and UBS to complete the deal it made to buy Genesco (here is the Form 8-K regarding the lawsuit filed Friday).
3. Reddy Ice Holding’s Proxy Statement (filed 9/12/07) – As noted in this article, Morgan Stanley, the deal’s solo underwriting bank, claimed in late August that the financing agreements had been breached and said that it was “reserving its rights.” According to the proxy, Morgan Stanley argued that GSO Capital Partners, the buyout’s equity sponsor, and a special committee altered some dates in the original deal agreement and, specifically, stretched out the debt marketing period without Morgan Stanley’s consent. Morgan Stanley insisted that GSO had breached the debt financing contract by doing that.
– The “Downturn” Roadmap: Parsing the Shift in Deal Terms
– The “Downturn” Roadmap: A European Perspective
– What Does “Material” Mean?
– Four Things Buyers Need to Know About Successor Liability
– Some Thoughts on Appraisal Under Delaware Law
– The SEC Staff’s Comment Letters: Termination and Change-in-Control Arrangements
That there is much trouble in the private equity market is clear and well-documented. No credit available for signed deals. Private equity partners suing each other. Shareholders suing funds. The troubles will likely continue for some time.
On Sunday, the NY Times ran this column with some interesting remarks from Michael Jensen, professor emeritus at the Harvard Business School, leading scholar in finance and management, and the man whom many consider to be the intellectual father of private equity. Here is an excerpt:
“We are going to see bad deals that have been done that are not publicly known as bad deals yet, we will have scandals, reputations will decline and people are going to be left with a bad taste in their mouths,” Mr. Jensen said in an interview last week. “The whole sector will decline.”
Mr. Jensen was elaborating on the trenchant comments he made last month in a forum on private equity convened by the Academy of Management. There, he excoriated private equity titans who sell stock in their companies to the public — a non sequitur in both language and economics, he said — and warned that industry “innovations,” like deal fees that encourage private equity managers to overpay for companies, will destroy value at these firms, not create it.
He also said that private equity managers who sell overvalued company shares to the public, whether in their own entities or in businesses they have bought and are repeddling, are breaching their duties to those buying the stocks.
“The owners who are selling the equity are in effect giving their word to the market that the equity is really worth what it is being priced at,” he said. “But the attitude on Wall Street is that there is no responsibility to the buyers of the equity on the part of the managers who are doing the selling. And that’s a recipe for nonworkability and value destruction.”
In this podcast, Joel Lessem, the CEO of Firmex, explains how deal rooms are evolving, including:
– How are your deal rooms different from your competitors?
– How do you see the use of deal rooms evolving?
– What are some surprising ways that deal rooms are being used?
Board Committee Can Reschedule Merger Vote, SEC Unwritten Policy Noted
From Jim Hamilton’s World of Securities Regulation Blog: The Delaware Chancery court has ruled that a special committee of independent directors can reschedule an imminent meeting of stockholders to consider an all cash, all shares offer from a third-party acquirer when they believe that the merger is in the best interests of the stockholders and know that if the meeting proceeds the stockholders will vote down the merger and the acquiror will irrevocably walk away from the deal and the company’s stock price will plummet.
The special committee also wanted more time to provide information to the stockholders before their vote on the merger. Finally, the meeting was rescheduled within a reasonable time period and the committee did not preclude or coerce the stockholders from freely voting on the merger. (Mercier v. Inter-Tel Inc., Del. Chancery Court, Aug 14, 2007, CA No. 2226).
In finding that the committee acted in good faith, Vice Chancellor Strine found no evidence that it failed to explore the possibility of a more valuable alternative takeover bid from interested parties. By contrast, it appears that the special committee diligently responded to all interested parties and tried to facilitate attractive bids.
Thus, the court rejected a request for a preliminary injunction based on the argument that the directors had no discretion as fiduciaries to reschedule a vote once a stockholder meeting is imminent and they know that the vote would not go their way if it was held as originally scheduled.
In an interesting aspect of the ruling, the court noted that the proxy materials also indicated that the stockholders would vote on a second ballot item, which involved a proposal to adjourn the special meeting to solicit additional proxies if there were not sufficient votes in favor of the adoption of the merger. Apparently, the second ballot item was included as a result of a general practice of the SEC that encourages issuers to seek stockholder pre-approval for an adjournment. Here, the court cited an SEC roundtable discussion on the proxy rules and state corporation laws held on May 7, 2007 discussing the fact that the SEC has some unwritten policies regarding shareholder voting on adjournments of meetings.
The fact that, at the SEC’s prodding, the company included on its proxy ballot a proposal regarding whether or not to adjourn the special meeting if there were not sufficient votes to approve the merger, and that a majority of stockholders voted against an adjournment, did not put the special committee in a graceful position to seek to justify its actions in calling a time out on the merger vote. But as a formal matter, noted the court, the special meeting was not adjourned because it was never convened in the first place. Rather, the committee postponed the special meeting on the morning it was scheduled, and their legal authority to do so was unquestioned.
Apparently, the court’s cite to the SEC roundtable was to remarks by panelist James Hanks of the Venable firm, who expressed concern that there is a lot of confusion among the corporate bar and among state corporate lawyers on the SEC’s view of voting for adjournments of meetings. He noted that the SEC has some unwritten policies that some people know about and some people don’t know about. Adjournments are becoming an increasingly important thing in corporate governance, said Mr. Hanks, adjournments to win, adjournments for other purposes. If the SEC has a policy on adjournments or on the use of proxies to vote for adjournment, he urged that such policy be published in the usual way.
Thanks to Stephen Davis of Davis Global Investors for allowing us to blog this article from a recent issue of his “Global Proxy Watch“:
“Behind the scenes, the world’s two biggest proxy advisors are in a fit of restructuring that promises again to reshape the global governance industry and, possibly, ignite a regulatory backlash, GPW has learned. Among fast-paced developments:
Xinhua Finance (XF) has secretly decided to sell Glass Lewis (GL) just nine months after buying it for US$45 million. The move comes hard on the heels of the Shanghai-based firm’s own in-house governance scandal, which triggered a stock plunge and brand damage at XF, and key staff and client defections at GL (GPW XI-21, 22, 25, 27). CEO Fredy Bush has apparently hired a merchant banker to shop the proxy advisor, with eyes on a deal as early as next month. The frontrunning contender so far: none other than RiskMetrics (RM), owner of rival industry giant Institutional Shareholder Services (ISS). At least one other unidentified company is also mulling a bid, while a private equity firm has pushed Xinhua to sell it GL at about half the purchase price.
RiskMetrics has the cash and ISS the motive to take over GL. Ex-CEO John Connolly had made serial efforts to buy the four-year old competitor. But if ISS and GL now combine, the unit will dominate more than 80% of the market—gaining potential new pricing power and clout. Experts predict such a deal would likely draw scrutiny by securities regulators, antitrust authorities and politicians in North America, Europe and, possibly, Australia. They could join those in the market worried that a single US firm could hold a near monopoly in the highly sensitive business of advising how shareowners vote on everything from board elections to mergers and acquisitions worldwide.
Still, GL-ISS nuptials could boost proxy firms that remain—such as Proxy Governance and Egan-Jones in the US, and ECGS in Europe. Equally, a takeover could spur market interest in specialist stewardship firms such as F&C, Governance for Owners and Hermes EOS. They would all be trolling for fund clients bent on service alternatives to the industry leader.
RiskMetrics, meanwhile, is rumored to have taken another transformative step. Sources say it opened confidential talks with US Securities and Exchange Commission officials in advance of filing formal IPO documents that would allow it to launch as a publicly traded company. Perhaps in preparation, RM will inform clients Monday that, as part of internal integration, all its products will carry the RiskMetrics label as of Sept. 17. The move, in effect, demotes the 27-year old ISS brand. Governance services will now be marketed under the RiskMetrics name.
Expect an IPO to rekindle debate about whether public ownership—or another buyer—might affect the quality or content of RM advice. Last month the US Government Accountability Office (GAO) concluded in a report that “potential conflicts of interest can arise” at proxy firms, but that the SEC had “not identified any major violations.” It also asserted that it is relatively easy for rivals to enter the industry, so fears of ISS monopoly power are overblown. Some industry watchers dismissed the GAO report as superficial. But expect its findings to fortify defenders of any RM takeover of GL.”
Conducted by The Boston Consulting Group, one of the largest-ever M&A studies – “The Brave New World of M&A: How to Create Value from Mergers and Acquisitions” – identifies several trends that will continue to drive high deal flow, albeit at a reduced rate, through current volatility in the global financial markets. Believed to be the largest nonacademic study of its kind, the study is based on a detailed analysis of more than 4,000 completed deals between 1992 and 2006. (Hat tip to the Directors & Boards’e-briefing for the study findings below.)
The study also explodes a number of myths about mergers and acquisitions, including:
– Private Equity Is Winning by Paying Less – It’s commonly assumed that PE firms have gained an increasingly large share of the M&A market by using their huge reserves of capital to pay over the top for targets. But BCG’s analysis indicates that, on average, PE firms pay lower multiples and lower acquisition premiums than “strategic” buyers.
– Higher Acquisition Premiums Do Not Necessarily Destroy Value – Between 1992 and 2006, value-creating deals had a 21.7 percent premium, on average, compared with an 18.7 percent premium for non-value-creating transactions.
– Bigger Isn’t Necessarily Better – Deals over $1 billion destroy nearly twice as much value on a percentage basis as deals below $1 billion. And deals destroy progressively more value as the size of the target increases relative to the size of the acquirer.
– It Doesn’t Always Pay to Be Friendly – Hostile deals are viewed significantly more favorably by investors in today’s market than they were in the preceding wave of M&A (1997–2001).
– Cash Is King – Cash-only transactions have a much more positive impact on value than deals that rely on stock, a mix of stock and cash, or other payment contributions.