April 4, 2008

News from the Tulane Institute

The annual Tulane University Corporate Law Institute is always a big M&A Conference. I’m not there myself this year, but the NY Times’ DealBook is carrying regular coverage of the proceedings. Great stuff! And here are “10 Questions” that Prof. Steven Davidoff hopes are addressed at the Institute.

Below are some more traditional news reports about its happenings:

1. “Strine Warns Companies: Don’t Document Your Idiocy” – from Friday’s WSJ Deal Journal

Delaware is an unlikely center of the deal-making world. When M&A gets ugly, sellers and buyers often head to Delaware to fight over the terms of their contract. What should companies do?

First, the Delaware Developments Panel at the Tulane University Corporate Law Institute encouraged companies to write down everything about their presale negotiations: who said what, and when, and to whom, and the various issues that were discussed. Human memory being what it is, this will be helpful come deposition time. It is the kind of advice you might expect from a group of uberlawyers, just as you would expect them to tell companies to keep their special committees in the loop on absolutely everything. Special committees typically are formed to create an objective way to evaluate merger offers.

But on the six-man panel is the consistently quotable Delaware Vice Chancellor Leo E. Strine Jr.–clad, we note, in unthreatening earth tones and the only one not wearing a tie. He warned people not to get carried away with taking precise notes. In fact, he questioned whether it is always helpful when a case gets to Delaware court. For one thing, people often recount conversations inaccurately and put assumptions into the mouths of the speakers. For another, he says, it is possible people will shoot themselves in the foot without knowing it. “If they are idiots and you’re documenting their idiocy, that’s not really helpful,” Strine said.

The panel also discussed stock options. Backdating, you might be interested to know, is still bad. Spring-loading options (when companies wait to issue the stock grants before good news, thus boosting the price)? Also bad. When in Delaware, Just Say No!

2. “The Fine Art of Deal-Making Gathers Dust” – from Wednesday’s NY Times

The market for mergers and acquisitions is in the doldrums. And according to many deal professionals, that won’t change anytime soon. About $861 billion worth of deals worldwide were struck in the quarter that ended Monday, according to data from Dealogic. Representing a 22 percent plunge from the same time a year ago, it presages a slow year for mergers practitioners — and some bankers are writing off 2008 completely.

“I’m taking the rest of the year off,” one senior banker said with a chuckle. “Call me in 2009.” The low volume is a strong reminder of the new world for mergers and acquisitions, one battered by the stormy credit markets that have spread from subprime mortgages to all parts of the economy.

It is also a sharp reversal from the two-year boom that ended last summer, one that saw increasingly bigger deals by private equity firms. For the first quarter of 2008, 34 percent of announced deals were valued between $100 million and $1 billion, with nearly all of that from corporate buyers, according to Dealogic.

All this is contributing to a pessimism shared by most of Wall Street’s top deal-makers, according to a new poll by the Brunswick Group, a corporate communications firm. The biggest question among them is how long the bad times will last, in a period when the markets are gyrating daily.

“It’s very hard to make deals when no one can value their stock,” said James C. Woolery, a partner at Cravath Swaine & Moore, the law firm. “People are still feeling for the bottom.”

The full results of Brunswick’s poll are to be released on Thursday at the annual mergers and acquisitions conference at Tulane University’s law school, considered the pre-eminent gathering of practitioners in the industry. Among the attendees are Joseph R. Perella of Perella Weinberg Partners, a boutique investment bank, and Martin Lipton of the law firm Wachtell, Lipton, Rosen & Katz.

According to the poll, which surveyed 30 of the scheduled speakers at the Tulane conference, 52 percent of the respondents believe that the market for deal-making is at least a year to 18 months from returning, although they said they still thought the economy remained sound.

Another 42 percent were more pessimistic, predicting a recession. For this group, the mergers practice will not return to its dizzying 2007 highs for at least five years.

Some optimists remain, however: 7 percent of respondents said that the current malaise was “a short-term blip.”

“The market is obviously volatile, but the smart strategic buyers are definitely looking,” said Boon Sim, head of Credit Suisse’s mergers and acquisitions practice in the Americas. “They are dipping their toes into the pool.”

Mr. Sim said he expected deal-making to return by the middle of next year. But, he said, “I may be more optimistic than most.”

A vast majority — 87 percent — of respondents agree that private equity firms will remain mostly sidelined in this new phase of deal-making. The cheap debt that powered the last boom disappeared quickly last summer, depriving buyout firms of their main source of financing.

According to Dealogic, the volume of leveraged buyouts for the first quarter dropped 65 percent to $63.7 billion from the same time a year ago. Just 15 private equity deals worth more than $1 billion were announced, compared with 37 in the first quarter last year.

About 71 percent of the advisers that were polled said they were more reluctant to counsel public companies to sell themselves to buyout firms. Among the biggest deal stories of the year are the hostile bids by Microsoft for Yahoo and Electronic Arts for Take-Two Interactive, a game maker. (That is leaving aside the fire sale of Bear Stearns to JPMorgan Chase.)

Not all advisers believe private equity firms will stand around with their hands in their pockets. As the prices of companies fall, spurred partly by the disappearance of the bidding wars of 2006 and 2007, private equity firms may reap bigger returns on smaller deals, said Douglas L. Braunstein, the head of JPMorgan’s investment banking in the Americas.

But the shakiness of private equity firms’ financing also reveals another concern among deal-makers. Sixty-two percent of the respondents to the Brunswick poll said that reverse termination fees, payments that buyers can use to walk away from deals, will be tightened or amended over the next year.