This Harris Williams survey reports that interest in M&A among private companies continues to rise. The survey solicited input from more than 400 CEOs and senior business leaders of privately held, high growth companies. Here are some of the key findings:
– 95% of survey respondents are interested in M&A over the next three years – up from 81% in 2015.
– 65% said they were interested in acquiring other companies, compared to only 38% in 2015.
– 52% said they would consider selling and 36% would consider a merger.
The survey highlights one characteristic that distinguishes private companies from many of their public peers when it comes to M&A – the priority they place on the interests of their employees:
Whether it’s through selling their company or making an acquisition, a matter of great importance to entrepreneurs during a transaction is the effect on their employees. While receiving the best possible price was respondents’ first concern in a transaction, employee stability was a strong second. Indeed, the share of business owners who cite stability for their employees during a transaction as their top concern has increased almost five points over the past year, to 19%. A similar share (18%) reported that maintaining their company’s culture is a top concern.
The rising interest in M&A is driven in part by CEOs positive views about their own businesses – 83% said that they’re performing at or above budget, and 58% said that they intend to expand hiring during 2017.
For many deal makers, clearing HSR review is a milestone that means that the government has concluded that their deal doesn’t raise any antitrust issues. A recent DOJ lawsuit challenging Parker-Hannifin’s acquisition of Clarcor is a reminder that this isn’t necessarily the case.
The $4.3 billion deal cleared HSR review without a second request, and closed in February 2017. Post-closing customer complaints led the DOJ to open an investigation, and that culminated in the lawsuit. This Wachtell memo says that these post-closing challenges to HSR-reportable deals are extremely rare – and since the DOJ hasn’t called into question any aspect of the HSR filing, this one may be almost one of a kind:
The Parker-Hannifin suit is only the third such challenge brought by the federal antitrust agencies in the past 25 years, and the first in more than 15 years. In at least one of those cases, the FTC claimed the merging parties had also violated the HSR Act by failing to include required deal-related documents in their notifications that would have revealed the transaction’s anticompetitive effects. Significantly, the DOJ made no such a claim in last week’s complaint.
The combined companies have revenues of more than $12 billion. However, the business that prompted customer complaints & the DOJ’s action represents less than $20 million in revenue. The memo points out that the relatively small size of the business may have hindered the DOJ’s ability to detect the overlap during the HSR waiting period.
This excerpt from the memo provides an assessment of the key takeaways from the DOJ’s action:
The Parker-Hannifin complaint highlights the important distinction between an antitrust clearance process (such as the HSR Act’s notification and waiting regime) and an antitrust approval process (such as that of the European Commission and other foreign jurisdictions). While clearance under the HSR Act nearly always conveys the antitrust agencies’ intent not to challenge a deal, it does not immunize the transaction from further investigation or challenge. Because of this unique legal feature, merged companies’ post-closing conduct may attract the unwanted scrutiny of customers and the antitrust agencies.
Tune in tomorrow for the webcast – “Evolution of the SEC’s OMA” – to hear Michele Andersen, Associate Director of the SEC’s Division of Corporation Finance & Ted Yu, Chief of Corp Fin’s Office of Mergers & Acquisitions, Skadden’s Brian Breheny, Weil Gotshal’s Cathy Dixon, Alston & Bird’s Dennis Garris and Morgan Lewis’ David Sirignano in a discussion of how the Corp Fin’s Office of Mergers & Acquisitions has evolved over the years…
Last month, Pershing Square Capital asked ADP to use universal proxy cards in connection with their ongoing proxy contest. ADP rejected the request – which apparently came after it had already distributed proxy materials to its shareholders. This recent blog from Davis Polk’s Ning Chiu discusses the reasons for ADP’s decision. Here’s an excerpt:
Since universal proxy cards are not widely used by U.S. public companies and have never been used by a large-cap, broadly held company, the risk for shareholder confusion is great. While the SEC has proposed rules for universal proxy cards, the rules have not been adopted and no procedures have been enacted to govern a contest where shareholders vote using such a card.
Trying out a new process for a company with a significant retail investor base of approximately 310,000 individual shareholders is particularly risky, and the existing “street name” structure also may not support universal proxies at this time. In addition, both sides have already distributed proxy materials. The use of a universal proxy card would require sending out new replacement materials, the implementation of new mechanics for collection and educating shareholders on the changes in voting procedures.
ADP concluded that all of these issues could lead to a more disruptive and complicated process that confuses investors who well understand and have long exercised the existing voting structures for proxy contests, and could ultimately interfere with the conduct of a fair election.
Whenever Corp Fin’s Office of Mergers & Acquisitions posts a new no-action response, I take a gander to see if it’s new or unusual. Typically, they aren’t – and this new response to CBS falls within that category. It’s basically one of the formula pricing variety (albeit in the Reverse Morris Trust exchange offer context).
The Staff’s relief allows for the bidder/issuer to offer a number of shares in exchange based on the dollar amount of securities tendered – and relies on “formula pricing” mechanisms going back to the old Lazard Frères no-action letter from the 1980’s while utilizing the “pricing goes hard at least two days prior to expiration.”
So nothing surprising here, except the last paragraph in the no-action letter which states the Staff will no longer be issuing no-action letters for parts of this area. The global relief is somewhat narrow – it covers only Day 18 VWAP pricing in a RMT. So issuers can go on their own if they fit within the letter’s facts. Be careful – the request doesn’t expressly give global relief for Day 20 VWAP pricing, which has a few more conditions under Staff precedents.
This is clearly a sign that Corp Fin is looking to get out of the business of issuing timing-consuming no-action letters in situations where there is a well-trodden path of letters…
Speaking of the Staff, don’t forget to tune in next Wednesday, October 11th for the webcast – “Evolution of the SEC’s OMA” – to hear current & former Chiefs of the SEC’s “Office of Mergers & Acquisitions” discuss what that job is all about. Join Corp Fin’s Michele Anderson and Ted Yu, as well as Skadden’s Brian Breheny, Weil Gotshal’s Cathy Dixon, Alston & Bird’s Dennis Garris and Morgan Lewis’ David Sirignano. This is a unique event!
Call me a “Luddite” if you want, but I’m uncomfortable with the idea that my toaster may be telling Google or Vladimir Putin about my Pop-Tart preferences. Despite my reservations, the market for Internet-connected devices – the “Internet of Things” (IoT) – is growing rapidly. However, the security & privacy risks of these IoT devices are significant, and those risks are beginning to attract significant attention from state & federal lawmakers.
This Shearman & Sterling memo discusses the explosive growth in the IoT market & developments on the legislative front. It also highlights key considerations & best practices for evaluating the privacy & security risks of IoT investments. Specific issues that an investor should consider when conducting due diligence on a potential acquisition target include:
– Do the target’s devices incorporate “reasonable security features?”
– How much and what types of data are collected by the target’s devices?
– Do the target’s devices provide reasonable notice to the consumer about the data being collected?
– Is the data collected by the target’s devices shared with any third parties?
The memo goes on to detail best practices in dealing with each of these specific issues that should be factored in to a buyer’s due diligence assessment.
About this time last year, I blogged about activists’ use of “placeholder” nominees as an end-run around nomination deadlines in advance notice bylaws. The tactic gained notoriety in 2016, when activist hedge fund Corvex Management used it in a proxy contest involving The Williams Companies.
This Skadden memo says that since that time, more than 50 public companies – including 19 in the S&P 500 – have amended their bylaws to address the potential for a “placeholder slate” of directors. Here’s an excerpt that addresses the features of those bylaws:
By our count, in the past year, 54 companies have amended their bylaws in the wake of the threatened Corvex-Williams proxy fight, including Williams itself. Our survey of the market shows:
– With minor variations, the language used in the amended bylaws is mostly standard: A director nominee must provide a written representation that he or she “intends to serve” as a director.
– The majority of the amendments (45) specify that the individual must intend to remain a director for the “full” or “entire” term, and two companies add that the director must intend to serve until a successor is elected and/or deemed qualified.
– 17 companies explicitly state that the nominee must “currently” intend to serve a full term (i.e., at the time of nomination); the remaining bylaws do not specify a particular time frame during which the intention must exist.
– One company’s bylaws take the intent-to-serve requirement a step further by requiring that it be “genuine.”
– Only a minority of companies make clear that the qualification applies to all directors and not just stockholder nominees.
The memo points out that neither the use of placeholder nominees nor these “intent-to-serve” bylaws has yet been tested in court. It reviews applicable provisions of Delaware law relating to director qualifications & says that case law would suggest that director qualifications that apply equally to all director nominees are more defensible than those aimed solely at shareholder nominees.
ISS policies generally frown on the board’s unilateral adoption of restrictive director qualification bylaws – but the memo says that ISS has not yet adjusted its corporate scorecard for these “intent-to-serve” bylaws or even addressed them publicly.
Whether staggered boards are good or bad for shareholder value has been hotly debated in corporate governance circles for a long time. Now, a new study claims to have settled the debate. Here’s an excerpt from the abstract:
We address the heated debate over the staggered board. One theory claims that a staggered board facilitates entrenchment of inefficient management and thus harms corporate value. Consequently, some institutional investors and shareholder rights advocates have argued for the elimination of the staggered board. The opposite theory is that staggered boards are value enhancing since they enable the board to focus on long-term goals. Both theories are supported by prior and conflicting studies and theoretical law review articles.
We show that neither theory has empirical support and on average, a staggered board has no significant effect on firm value. Prior studies did not include important explanatory variables in their analysis or account for the changing nature of the firm over time. When we correct for these issues in a sample of up to 2,961 firms from 1990 to 2013 we find that the effect of a staggered board on firm value becomes statistically insignificant after controlling for variables that affect both value and the incidence of a staggered board.
Well, I’m glad that’s settled. Of course, it’s probably fair to say that this one’s already been settled on the battlefield – 90% of S&P 500 and 65% of S&P 1500 companies have eliminated staggered boards.
Most public companies have a fair share of busy executives from other businesses on their boards. This Norton Rose Fulbright blog cites a recent study by Arizona State’s Luke Stein & Hong Zhao addressing a downside of having busy execs on a corporate board – the problem of distracted directors.
The study said that distracted directors were less effective in their advisory and monitoring roles – and that distraction concerns were most significant when their primary employer was performing poorly. It turns out that distracted directors are a particular problem for M&A:
Of particular interest is the impact that distracted directors may have on a company’s acquisition decisions. Directors often take on an advisory role when selecting and negotiating mergers and acquisitions. When directors are not actively engaged in the process as a result of outside obligations, Stein and Zhao found there to be lower returns around the announcement of acquisitions. When directors with M&A experience in particular were distracted during this period – those who the company would presumably turn to for valuable advice – the returns were significantly lower.
The study’s authors suggest that the answer to the distracted director problem is larger boards comprised of directors from more diverse industries.