Monthly Archives: March 2008

March 25, 2008

Nasdaq Revises Its SPAC Listing Proposal

Last week, the Nasdaq revised its proposed rule change regarding SPACs that it originally filed a few weeks ago. Under the revised proposal, SPACs would not be required to use cash in completing a qualifying business combination as was originally required in Nasdaq’s proposal.

Bear Stearns Fairness Opinions Under Attack

There are enough issues under the Bear Stearns-JPMorgan Chase deal to fill a blog on a full-time basis. Here is some commentary on fairness opinions from an article in today’s WSJ:

On March 16, the Wall Street merger experts at Lazard Ltd. gave Bear Stearns Cos. directors a written assurance that $2 a share was a fair price for the company, which was then teetering on the brink of bankruptcy.

Eight days later, Monday, the same bankers at Lazard told the same Bear Stearns board that $10 a share — five times as much — also was fair. Both bids came from J.P. Morgan Chase & Co. with backing from the Federal Reserve.

Critics of such “fairness opinion” letters, commonly used to justify prices for acquisitions of public companies, jumped on the first Lazard letter as evidence that such opinions give shareholders little protection against low-ball bids.

Just a ‘Rubber Stamp’?

Israel Shaked, a finance professor at the Boston University School of Management, says he believes “the opinion and process in general are nothing more than a rubber stamp on the transaction.” Financial advisers such as Lazard, Mr. Shaked added, are motivated to encourage such sales because they are usually paid contingency fees based on their completions. In this case, Lazard not only issued a fairness opinion, it acted as Bear’s main adviser.

The Friday before J.P. Morgan struck its $2-a-share acquisition, Bear’s stock was trading at $30, and many Bear shareholders and employees were outraged at the deal price. The shares closed Monday at $11.25, up $5.29 in 4 p.m. New York Stock Exchange composite trading.

“Ten is fairer than two,” quipped Peter J. Solomon, who leads independent banking concern Peter J. Solomon Co. He said the difference in prices suggested “there may have been value they didn’t perceive” in ratifying the $2 level.

One reason for the difference, he added, was that the “hysteria” surrounding the initial deal dissipated after the Morgan-Fed rescue when the financial-system contagion didn’t spread after the Fed allowed Wall Street firms to borrow at its discount window — an option Bear didn’t have.

Defending Lazard

Other people involved in or close to the Bear talks defended Lazard’s role in endorsing the first bid. One noted that the choice presented to Bear’s board and advisers March 16 was “either $2 or zero,” with bankruptcy the only evident alternative.

As Gary Parr, the top financial-institutions banker at Lazard, discussed the proposed $2 price with Bear’s board March 16, the Bear side faced a choice, according to people close to the Bear side. One was “a run on the bank” and the “chaos and confusion” of bankruptcy, in which shareholders might get nothing, the same people said. The alternative was a government-backed bid that “preserved” the Bear franchise, giving shareholders a chance to get more by voting down the deal.

There is no regulatory requirement that directors who oversee the sales of public companies get a “fairness opinion,” takeover experts say. But the practice became commonplace after a Delaware court, which is influential because so many companies are based in that state, ruled in 1985 that Trans Union Corp. directors should have done more homework on valuation before approving that company’s sale.

Morton Pierce, chairman of the mergers-and-acquisitions practice at Dewey & LeBoeuf LLP, whose firm specializes in helping investment banks prepare fairness opinions, defended the Lazard letter. “If, in fact, the company is on the verge of bankruptcy, it’s not hard to see how someone could come up with a fairness opinion at $2,” Mr. Pierce said.

In a March 20 filing outlining the March 16 merger agreement, Bear Stearns described the Lazard letter without releasing its full contents. All it said was, “The board of directors of [Bear Stearns] has received the opinion of Lazard Freres & Co., LLC, to the effect that, as of the date hereof, and based upon and subject to the factors and assumptions set forth therein, the merger consideration is fair from a financial point of view to the holders of company common stock.”

Fairness opinions typically use valuation metrics such as the company’s expected future cash flow, recent sales of comparable companies as multiples of their profits, cash flow or revenues, and premiums paid over the market price for similar companies. Most Wall Street firms, including Lazard, have “fairness committees” that oversee such work.

Caveats Galore

Some takeover experts believe the first Lazard fairness letter had more than the usual disclaimers and caveats about its limitations due to the fast-moving three-day sale process. The talks were conducted with a goal of concluding before stock markets opened March 17, to avoid the risk that a meltdown at Bear would spread, endangering the entire financial system.

Even some Wall Street takeover practitioners sometimes portray fairness opinions as a cookie-cutter proposition. Marc Wolinsky, a partner at Wachtell Lipton Rosen & Katz, which advised J.P. Morgan on the Bear deal, last year jokingly compared them with the Peanuts comic strip. It’s “Lucy sitting in the box,” he said, “Fairness Opinions: 5 cents.”

March 17, 2008

German Federal Cartel Office Orders the Unwinding of an Acquisition

From Sullivan & Cromwell: “On February 28th, the German Federal Cartel Office prohibited the acquisition of a 13.75% shareholding in Norddeutsche Affinerie AG by A-TEC Industries AG. Despite falling short of an acquisition of control, the Federal Cartel Office found the transaction to be notifiable in Germany for merger review because it gave A-TEC Industries AG so-called “competitively significant influence” over Norddeutsche Affinerie AG.

The Federal Cartel Office found the combination of the two companies to be restrictive of competition. Consequently, the Federal Cartel Office prohibited the transaction and, as it had already been closed, ordered its unwinding. This case is a reminder that the Federal Cartel Office can assert jurisdiction over relatively small minority shareholdings on the basis of the concept of “competitively significant influence.” Learn more from this memo in our “Antitrust” Practice Area.

March 14, 2008

Goldman Sachs to Try New Brand of SPACs

The WSJ reports that Goldman Sachs will finally enter the roaring SPACs field – but will do so that is more “shareholder friendly.” Check out this DealBook article – as well as the WSJ article. Here is an excerpt from the WSJ piece:

“But one characteristic of most SPACs is that the management teams invest a chunk of their own money in the empty shell, which they risk forfeiting if a deal doesn’t materialize, in exchange for a 20% stake in any company they do buy. In past discussions about SPACs, Goldman has asserted that the typical 20% stake appeared too generous for the amount of money management was putting at risk, and would be too dilutive for other shareholders once a deal was sealed.

According to the new structure Goldman is proposing, management will receive a stake of 10% or less in any company their SPAC successfully acquires, or about half the standard rate that most SPACs have.”

March 13, 2008

March-April Issue: Deal Lawyers Print Newsletter

This March-April issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:

– 2008: The Year of the Activist Hedge Fund
– How to Settle Insurgencies and Secure Stockholder Votes Without Creating New Exposures
– Engagement Letters: Their Role in Limiting Investment Banker Liability
– The Obligations of Financial Advisors – New Decision Upholds Contractual and Other Limitations
– Buyers Beware: Tennessee Chancery Court Tries to Get Genesco to The Finish Line
– Items to Consider When Negotiating a MAC Claim

Try a 2008 no-risk trial to get a non-blurred version of this issue for free.

March 11, 2008

NYSE Files Proposal to Allow the Listing of SPACs

From Davis Polk: “Following a similar move by the Nasdaq Stock Market last week, the NYSE has filed a proposed rule change with the Securities and Exchange Commission that contains a new listing standard specifically for special purpose acquisition companies, commonly referred to as “SPACs.” SPACs are companies with little or no operations that conduct a public offering with the intention of using the proceeds to acquire or merge with an operating company. Until now, the American Stock Exchange has been the only national securities exchange to list SPACs.

The NYSE’s current financial listing standards for operating companies require some period of operations prior to listing. Because SPACs have no operating history, they do not qualify for listing under the NYSE’s current standards. Under the proposed new standard, a SPAC seeking to list would need to demonstrate a total market value of at least $250 million and a market value of publicly held shares of at least $200 million (excluding shares held by directors, officers or their immediate families and other concentrated holdings of 10% or more). In addition, SPACs would have to meet the same distribution criteria applicable to all other IPOs. All of the NYSE’s corporate governance requirements applicable to operating companies would apply to SPACs.

The proposed rule establishes a number of requirements applicable only to SPACs, including:

– a minimum of 90% of the IPO proceeds, together with the proceeds of any other concurrent sales of equity securities, must be placed in a trust account;

– the SPAC’s business combination must be with one or more businesses or assets with a fair market value equal to at least 80% of the net assets held in trust (however, unlike the rule proposed by Nasdaq, there is no requirement that 80% of the consideration for the initial business combination be in cash); and

– the business combination must be consummated within three years.

The NYSE would have significant discretion under the proposed rule. The NYSE indicates in the rule filing that it intends to consider proposed SPAC listings on a case-by-case basis and does not necessarily intend to list every SPAC that meets the minimum requirements for listing. In addition, after shareholder approval of a business combination, the NYSE will assess the continued listing of the SPAC and will have the discretion to delist the SPAC prior to consummation of the business combination. Upon consummation of the business combination, the NYSE will consider whether the transaction constitutes an acquisition of the SPAC by an unlisted company (a “back door listing”), and if so, the resulting company must meet the standards for original listing or be delisted.

The NYSE proposal is subject to publication and approval by the SEC.”

March 10, 2008

The New Business Combination Accounting

As I learn more about the impact the FASB’s new business combination rules on deals, I truly believe that this is the “sleeper” of the year. Did you know that lawyers won’t be able to capitalize their fees in deals anymore (and what that means for documentation of hours billed)? Learn more during tomorrow’s webcast – “The New Business Combination Accounting” – and hear from these experts:

– John Formica, Partner, PricewaterhouseCoopers LLP in the National Professional Services Group
– Michael Holliday, Securities Counsel (retired), Lucent Technologies
– Brenna Wist, Partner, KPMG in National Department of Professional Practice

Course Materials Now Available: For the webcast, please print out these course materials in advance.

March 5, 2008

Genesco Delays Trial Ahead of (Costly) Settlement

Below is an article that recently ran in the NY Time’s DealBook (here is the Genesco press release):

Genesco and Finish Line appear to have reached an armistice in their battle over a failed $1.5 billion deal. But the news propelled Genesco’s stock down drastically, while it lifted Finish Line’s by just as much.

The two shoe retailers said on Monday that they are working on a settlement in which Genesco would drop its lawsuit against Finish Line and its financing bank, UBS. In return, the latter two would pay Genesco, which owns the Journeys chain and the Johnston & Murphy brand of shoes, $175 million in cash and 12 percent of Finish Line’s outstanding stock. The announcement also led to a one-day postponement of a trial in Manhattan federal district court.

Shares in Genesco plunged more than 20 percent in mid-afternoon trading Monday, to $23.94. Finish Line’s stock jumped 32.5 percent to $3.75 a share after spiking even higher earlier in the day.

If the two companies agree to the settlement — the boards of both are meeting separately on Monday to vote on the proposal — it will end one of the most acrimonious deal fights still outstanding today.

The deal was one of several to collapse amid the crumbling of the credit markets last summer, as Finish Line tried to back out of a deal it struck last June. But it was notable because nearly every other deal that has collapsed has been a private equity transaction. Finish Line, on the other hand, is a corporate buyer, albeit one dependent on the same cheap debt as most private equity firms. (It is also nearly a fifth of the size of Genesco.)

Genesco’s spat with Finish Line was also notable for its complexity: It involved courts in two different states and drew in the bank financing the deal as well as the buyer and the seller.

Finish Line has argued that Genesco failed to provide certain necessary financial statements, allowing it to walk away. Genesco sued in a Tennessee court late last year, and a judge in that case ruled in its favor.

UBS, meanwhile, has argued that a combined Finish Line-Genesco would be insolvent and urged the dissolution of the proposed merger. It sued in Manhattan federal court to prevent the deal from bring competed.

Genesco has argued that a $4 million loss in its second quarter was not a material event, meaning that it would potentially be grounds to dissolve the deal. Instead, Genesco pointed to similar slides in its industry, including at Finish Line.

MAC Clauses: All the Rage

We have posted the transcript from our recent webcast: “MAC Clauses: All the Rage.”

March 3, 2008

Turning Around Troubled Companies

Jim Thornton, CEO of Provo Craft and Novelty, saved this company from bankruptcy by growing revenue to $200 million, a 38% increase in two years with an improvement of 227% in EBITDA. For example, he turned over the entire original management team and took over the roles of CEO, CFO and COO personally, until he discovered the company’s bugs. He then personally recruited five Fortune 50 executives to come to come join the company.

In this podcast, Jim provides some insight into how to handle turning around a company, including:

– How is your turnaround style unique?
– What do you find to be the greatest challenges in a typical turnaround situation?
– What are your feelings about incumbent managers who seek retention bonuses after they have caused a company to become troubled?