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.”