This recent blog from Steve Quinlivan addresses the wide-ranging impact that FASB’s new revenue recognition standard may have on M&A. Public companies will begin implementation of the new standard on January 1, 2018. For some companies, the new standard might not have a material impact on their financial statements – but that may not be the case for their deals.
The blog says that the transition to the new standard may affect everything from M&A valuation to due diligence to substantive deal terms. Here’s an excerpt on how working capital adjustment provisions may be influenced by the new standard:
A change in revenue recognition patterns will affect the calculation of a target’s working capital. The change will be most difficult to deal with when the working capital target is determined before adoption of the new standard with a true up occurring after the new standard has been adopted. Solutions will include calculating working capital using existing standards for the true up (or using the new standard for the determination of the target) but the level of effort will need to be a ssessed as it will vary amongst companies and the alternative calculations may not be feasible for some.
Working capital targets are often calculated using an average of working capital for the twelve preceding months. Thus for transactions documented after the new standard becomes effective, a method may need to be developed to account for differing accounting principles during the look back period.
The Delaware Supreme Court’s 2014 MFW decision laid out a route to business judgment review for controlling shareholder buyouts. That decision gave companies a choice – either implement MFW’s procedural protections or tough it out under the entire fairness standard of review.
This Ropes & Gray memo discusses that choice in light of Vice Chancellor Laster’s recent decision in the Clearwire appraisal case – and says that entire fairness isn’t always a show-stopper:
The burden of proving entire fairness and the perception of a significant risk of a negative outcome under an entire fairness review frequently results in deal participants allowing the fate of the transaction to be determined not only by a special committee, but, even more critically, by the majority of the minority stockholder vote. However, the recent Delaware Chancery Court decision in ACP Master, Ltd. v. Sprint Corp. / ACP Master, Ltd. v. Clearwire Corp. highlights that entire fairness may not be fatal, and that a finding of entire fairness may overcome earlier instances of conduct or process that may fall short or that otherwise had “flaws” and “blemishes.”
The memo addresses specific actions that controlling shareholder should take – or refrain from taking – in order to enhance a deal’s ability to survive entire fairness scrutiny.
This recent FTC blog provides a helpful walk-through of the HSR process, and addresses frequently asked questions about how the timing of HSR review could affect a pending deal. This excerpt talks about how long an HSR filing is valid in the event of a delay in closing:
Once a transaction receives early termination (ET) or the waiting period expires, the acquiring person has exactly one year from that date in which to cross the filed-for HSR threshold. The one-year period ends on the same date, one year later, regardless of whether it falls on a weekday, weekend or holiday. In addition, in the interest of ensuring that HSR filings reflect current information and intentions, the HSR Rules contain expiration dates. Here are the potential scenarios:
– If a Second Request was not issued, the filing will expire one year after the date on which ET was granted or the waiting period expired.
– If a Second Request was issued and the parties certified substantial compliance, the HSR filing will expire one year after the end of the extended waiting period that was triggered by the certification of substantial compliance.
– If a Second Request was issued but the parties never certified substantial compliance, the HSR filing will expire 18 months after the date on which the HSR filings were submitted to the agencies.
If the HSR notification expires and the filed-for threshold has not been crossed, the parties must submit a new HSR filing – including any new 4(c) and 4(d) documents – and will be subject to a new transaction number, new fee, and a new waiting period, if they wish to proceed with the transaction. As with waiting periods, timing agreements cannot toll the one-year or 18-month periods.
The blog also addresses questions on when the HSR waiting period will be deemed to commence, the length of the waiting period, the early termination process, the “withdraw and refile” procedure, & the second request process.
Yesterday, President Trump acted on the recommendation of CFIUS and issued an executive order blocking Canyon Bridge Capital Partners’ proposed $1.3 billion acquisition of Lattice Semiconductor. While Canyon Bridge is a US buyout fund, this Reuters article notes that it is partially funded by China’s central government & has indirect links to the country’s space program.
It’s been tough sledding for China-backed buyers of US semiconductor businesses in recent months – President Trump’s actions follow on the heels of President Obama’s decision to block another Chinese semiconductor deal last December. This Wilson Sonsini memo points out that these actions reflect bipartisan concerns about China’s investments in the sector:
The U.S. government has been expressing broad concerns with Chinese acquisitions of semiconductor companies for some time. As we noted in a previous WSGR Alert, President Obama’s Council of Advisors on Science and Technology (PCAST) released a public report in January 2017 entitled “Ensuring Long-Term U.S. Leadership in Semiconductors.” In an unusually direct statement, the PCAST stated that “Chinese industrial policies in [the semiconductor] sector…pose real threats to semiconductor innovation and U.S. national security. The report recommended heightened scrutiny of China-backed investments in the semiconductor industry.
Further, in November 2016, then-Commerce Secretary Penny Pritzker directly criticized China’s plans for the acquisition of semiconductor companies, stating that China’s “unprecedented state-driven interference would distort the market and undermine the innovation ecosystem” in the semiconductor industry. Additionally, the proposed acquisition of Lattice by Canyon Bridge faced significant bipartisan opposition from U.S. lawmakers shortly after it was announced. In December, 2016, over 20 members of Congress wrote a letter to the Treasury Secretary requesting that the transaction be blocked due to national security concerns.
As we’ve previously blogged, CFIUS review sometimes results in decisions by the parties to abandon their deals – but the decision to block the Lattice Semiconductor deal marks only the 4th time that an American president has blocked an acquisition on national security grounds.
Unprecedented levels of shareholder activism in recent years have resulted in significant changes to the composition of many public company boards. This recent IRRC study looked at the impact that activism has had on board demographics among S&P 1500 companies. Here are some of the key findings:
– Activism drives down director ages. Dissident nominees & directors appointed via settlements were younger, on average, than board appointees in connection with shareholder activism.
– Dissident directors & board appointees were general younger than their counterparts across the broader S&P 1500 index.
– While dissident directors generally reflected a wider range of ages, insurgent investors & incumbent boards both favored individuals in their 50s when picking candidates – a preference that was shared by the broader S&P 1500 index.
– Activism does not promote gender diversity. Less than 10% of the directors of companies included in the study were women. The rate at which women were selected as dissident nominees or board appointees in contested situations increased over the course of the study, but it trailed the rate of increase among the S&P 1500.
– Activism does not promote racial or ethnic diversity. Less than 5% of directors at companies in the study were ethnically or racially diverse. This also trailed the broader S&P 1500 universe.
– Activism boosts boardroom independence. Directors at companies in the study were generally more independent than their counterparts at other S&P 1500 companies. Dissident nominees and board appointees were likely to be more independent than directors appointed unilaterally by the board in response to activism.
The study also found that prior board experience wasn’t a prerequisite for dissident nominees – only about half were members of other boards. Interestingly, the study did find a number of overboarded “usual suspects” showing up repeatedly on dissident slates – raising questions about their independence from their activist sponsors. Financial professionals & corporate executives accounted for the bulk of board nominees or appointees in activist situations.
Intralinks’ annual “M&A Leaks Report” makes for interesting reading – it analyzes deal leaks over the period from 2009-2016, and breaks them down by world region, country & business sector. The report also looks into the effect of leaks on the premiums paid, emergence of rival bidders & time to closing.
This recent blog scopes out the report’s conclusions on which business sectors’ deals leaked most frequently. In 2016, consumer deals were the leakiest (16%), with retail deals (12%) & real estate deals (9%) following behind. Real estate deals were the leakiest during the prior two years, and have the highest overall rate of leaks over the eight years covered by the report. The healthcare (5%), energy & power (5%) and industrials (7%) sectors were the most tight-lipped last year.
This blog excerpt speculates on what may account for the differences between the various sectors when it comes to leaks:
– Sellers/targets in sectors which have a lot of M&A activity with significant competition for assets may be using deal leaks as a strategic tool to try to flush out the “optimal” acquirer, i.e., the one who has the greatest synergies with the target and who can therefore pay the highest price, hence the higher target takeover premiums in leaked deals. This conclusion is borne out by data from Thomson Reuters on target valuations. According to Thomson Reuters, over the past nine years the Real Estate sector has the highest average target EV/EBITDA exit ratio, at 18.1x.
– Sellers/targets in sectors which traditionally have lower valuation multiples may also be more tempted to use deals leaks to try to increase the valuations for their deals. According to the Thomson Reuters data, the Industrials and Materials sectors, which have among the lowest average target EV/EBITDA exit ratios over the past nine years, are the number three and number four ranked sectors for deal leaks over the same period.
The report also found that leaked deals have significantly higher premiums & a higher rate of rival bids in comparison to non-leaked deals.
ISS announced yesterday that it’s changing hands – for the fifth time in 15 years or so. Genstar Capital, a San Francisco-based private equity firm, is buying the company from the previous PE owner – Vestar Capital Partners – for $720 million.
The ISS press release gives a few details on expected timing & transition plans:
The transaction is expected to close by early fourth quarter, subject to customary closing conditions.
ISS will continue to operate independently once the transaction is completed and the current ISS executive leadership team will remain in place.
Based on the press release, Genstar has some experience in backing service providers in the financial services sector – and plans to continue ISS’s strategic infrastructure & ESG initiatives.
This September-October issue of the Deal Lawyers print newsletter has been posted – & also sent to the printers – and includes articles on:
– Revenue Recognition Representations: Impact of FASB’s New Standard
– Tilting the “Proxy Contest” Playing Field: The Latest Tactic
– Dissident’s Disclosure Lawsuit Leads to ISS Recommendation Change
– DFC Global: A Few Observations from Delaware
– 29 Tips for Young Deal Lawyers
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Companies employ a variety of strategies in response to shareholder activism, but this “Institutional Investor” article says that, according to a new study, withholding negative forecasts & managing earnings sometimes play a part. Here’s an excerpt:
When activist hedge funds intervene at portfolio companies, company managers often take defensive action.
Managers at these firms are likely to strategically change voluntary disclosure practices and earnings management strategies in order to protect against heightened career and reputational risks, according to forthcoming research in academic journal Management Science.
The study’s authors said companies embroiled in these types of battles become more likely to withhold bad news and use earnings management techniques to inflate their reported performance. The research was based on a study of 510 companies targeted by 191 activist hedge funds, using data from U.S. regulatory financings and management earnings forecasts.
The study found that the practice of withholding bad news was more pronounced when hedge fund activists posed greater threats to management & where their interventions were short-term in nature.