Here are some interesting thoughts from Kevin Miller of Alston & Bird related to this blog about a recent WSJ article entitled “Shortcomings of Valuation Opinion in Great Wolf Buyout”:
1. Myth: Fairness Opinions are Valuations
Reality: The financial analyses underlying fairness opinions are not valuations or appraisals, they are merely financial analyses performed by a financial advisor to assess whether it is appropriate to render a fairness opinion. Financial advisors are not engaged to provide valuations and the financial analyses they perform often result in divergent implied valuation reference ranges, not all of which may individually appear to be supportive of the proposed purchase price. However, viewed in their entirety, with different subjective emphases placed on the various analyses based on the financial advisor’s experience and judgment, the financial analyses may be viewed as supporting a fairness conclusion. How do we know that the financial analyses performed by a financial advisor are not valuations or appraisals? Because the opinion and the associated proxy disclosure are unambiguous on that point:
“Any estimates contained in these analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than as set forth below. In addition, analyses relating to the value of the businesses do not purport to be appraisals or to reflect the prices at which the businesses could actually be sold.”
2. Myth: LBO Analyses are Valuation Analyses
Reality: LBO analyses only reflect a private equity firm’s capacity to pay. In contrast to more traditional valuation analyses based on (i) a discounted cash flow analysis, (ii) selected company analyses and (iii) selected transaction analyses, an LBO analysis does not purport to provide any indication of the intrinsic or inherent value of a business but instead merely indicates the price that a private equity firm might be willing to pay based on several critical assumptions including, without limitation, (a) an assumed capital structure; (b) a PE firm’s cost of debt financing, (c) a PE firms cost of equity financing (often expressed as a hurdle rate of return below which the PE firm will generally not make an investment), (d) anticipated cost savings and synergies, and (d) a hypothetical exit multiple.
Financial advisors to the target will often be required to make guesses based on experience and professional judgment with respect to many of these and other assumptions and those guesses may not accurately reflect the private equity firm’s actual proposed capital structure, cost of debt or equity financing or anticipated cost savings and synergies, etc. Such analyses tend to be more useful as negotiating tools – do we think their bid reflects the most they may be willing to pay? – and not as an indication of intrinsic or inherent value. Private equity firms are not always the best buyers and the price they are willing to pay may not fully reflect the intrinsic or inherent value of a business. Among other things, many financial advisors keep reference ranges generated by an LBO analysis off their football fields or otherwise distinguish them from the other more traditional types of financial analyses used to support the rendering of a fairness opinion.
3. Myth: If a Buyer is willing to pay a lot more than the ranges of values indicated by the seller’s financial advisor’s analyses, then the Seller’s financial advisor got it wrong
Reality: Though not relevant to the Great Wolf transaction, sellside financial advisors in a cash transaction do not generally include the potential cost savings and synergies a buyer expects to achieve as a result of the merger in the financial analyses performed to support the rendering of a fairness opinion. Those cost savings and synergies are generally treated as an asset of the buyer and consequently not something that should be taken into account in assessing the fairness of a proposed purchase price to the seller. That can lead to anomalous results as was seen in the 3Par transaction where two bidders, both of which could achieve substantial synergies made bids substantially in excess of the ranges of values indicated by the financial analyses performed by the seller’s financial advisor.
The magnitude of the bids did not indicate that the seller’s financial advisor got it wrong but merely that the competing bidders were willing to share a portion of their potential synergies with the target’s stockholders. The ability of a seller’s board to extract a significant portion of a buyer’s expected synergies in a competitive bidding process is another reason that advisors will often caution a board that merely because a price is fair, doesn’t mean it should be accepted.
Here’s news culled from this Richards Layton memo: In Martin Marietta Materials, Inc. v. Vulcan Materials Co., C.A. 7102-CS (Del. Ch. May 4, 2012), the Court of Chancery upheld a pair of confidentiality agreements and temporarily enjoined Martin Marietta Materials from prosecuting a proxy contest and proceeding with a hostile bid for its industry rival Vulcan Materials Company.
For years, Vulcan had expressed interest in a friendly transaction with Martin Marietta. In the spring of 2010, the parties executed two stringent confidentiality agreements to enable their merger and antitrust discussions. Both parties were seeking to avoid being the target of an unsolicited offer by the other or by another buyer when they entered into the confidentiality agreements. Accordingly, the agreements protected from disclosure the companies’ confidential information as well as the fact that the parties had merger discussions.
After its economic position improved relative to Vulcan, Martin Marietta decided to make a hostile bid for Vulcan; it also launched a proxy contest designed to make Vulcan more receptive to its offer. The Court found that Martin Marietta used protected confidential material in making and launching its hostile bid and proxy contest.
The Court then construed the language of the confidentiality agreements to determine that Martin Marietta had breached those agreements by (1) using protected information in formulating a hostile bid, since the information was only to be used in an agreed-to business combination; (2) selectively disclosing protected information in one-sided securities filings related to its hostile bid, when such information was not disclosed in response to a third-party demand and when Martin Marietta failed to comply with the agreements’ notice and consent process; and (3) disclosing protected information in non-SEC communications in an effort to “sell” its hostile bid.
The Court held that, although the confidentiality agreements did not expressly include a standstill provision, Martin Marietta’s breaches entitled Vulcan to specific performance of the agreements and an injunction. The Court therefore enjoined Martin Marietta, for four months, from prosecuting a proxy contest, making an exchange or tender offer, or otherwise taking steps to acquire control of Vulcan’s shares or assets.
Tune in tomorrow for the webcast – “LLCs: Understanding Capital Account and Allocation Concepts for M&A” – to hear Tarik Haskins of Morris Nichols, Andy Immerman of Alston & Bird and Chris Rosselli of Alston & Bird explain the capital account and tax implications of how LLCs are being used in deals today. Here are Course Materials you should print in advance…
A while back, Nixon Peabody’s issued its “2011 MAC Survey,” which explores trends in the use of material adverse change clauses in M&A deals and reflects insight on a range of issues related to the allocation of risk between transacting parties in mergers and acquisitions.
John Grossbauer of Potter Anderson notes: Last Friday, Delaware Vice Chancellor Noble granted a motion to expedite a claim by Carl Icahn that the Board of Directors of Amylin Pharmaceuticals breached its fiduciary duties by not waiving an advance notice bylaw to permit stockholders to nominate candidates for election to the board following the Board’s rejection of an unsolicited offer by Bristol Myers. The Vice Chancellor found that Icahn had adequately alleged that the Board “radically changed its outlook for the Company” in a manner that potentially justified reopening the nomination process.
The decision is merely on a motion to expedite, which has a low standard whereby plaintiff need only articulate a “colorable claim” to succeed. Nevertheless, the opinion does suggest an interesting line of attack in instances where a board rejects a hostile bid (or makes some other major strategic decision) after the deadline for nominations has passed. The company’s announcement of a sales process could moot the case, as it appears Icahn may have gotten the result he wanted without running a slate.
The recovering, but still uncertain, economy and real estate markets have led to diverging opinions and concerns over the future value of a target’s assets which might otherwise prevent agreement on transaction pricing. As discussed in prior memos, contingent consideration structures have for years been used to bridge differences between buyers and sellers in uncertain times. With the burgeoning trend of increased M&A activity involving smaller banks, it is important to remember that these structures, while requiring careful thought, can be useful in both small and large deals alike to creatively address pricing challenges.
Capital Bank Financial Corp.’s recently announced agreement to acquire Southern Community Financial Corporation is the third transaction in the last 18 months in which that acquiror has utilized a contingent value right, or CVR, as a portion of the consideration. The CVR provides the opportunity for additional value to Southern Community shareholders if the portfolio performance exceeds a designated benchmark, while allowing Capital Bank to limit its exposure if performance should deteriorate. It has a value determined by the performance of Southern Community’s legacy loan and foreclosed asset portfolio at the end of a five-year period. Payments under the CVR may range from zero to $1.30 per share in addition to the primary merger consideration of $2.875 per share. Any payments would only be made at the end of the five-year measurement period. The CVR was structured so as not to require registration with the SEC, avoiding not only the cost of registration but also the ongoing reporting requirements. Consequently, the CVR is not transferable, does not grant any voting or dividend rights, bears no stated rate of interest, and will not be certificated.
The recent restructuring of BB&T’s agreement to acquire BankAtlantic from BankAtlantic Bancorp is a variation on this theme. Faced with the injunction obtained by the holding company TruPS investors to the original deal, the parties devised a creative structure to make it economically possible for BB&T to assume the TruPS. To compensate BB&T for doing so, the parties agreed that BankAtlantic Bancorp would capitalize, with assets to be retained by it under the original deal, a vehicle in which BB&T would have a 95% preferred interest. BankAtlantic Bancorp (and ultimately its shareholders) will retain a minority preferred interest in the vehicle, as well as the full residual interest. The risk BB&T is assuming is mitigated by careful diligence of the underlying assets as well as the structure of the asset vehicle, which provides BB&T with a preferred return, overcollateralization relative to the TruPS obligation and an additional guaranty from BankAtlantic Bancorp. The BankAtlantic Bancorp shareholders, like those in analogous deals with contingent consideration to target shareholders, retain in this structure significant upside potential from improving economic conditions post-closing, specifically those affecting legacy loan performance.
These transactions are but two recent examples of the art of the possible in bank M&A. Other transactions in recent years including a contingent consideration component include Capital Bank Financial Corp.’s controlling investments in Capital Bank Corporation and Green Bankshares, Inc. and Capital One Financial’s acquisition of Chevy Chase Bank. While often shareholders and other constituencies may prefer a fixed or certain consideration where possible, the two parties to a potential deal may have very different ideas of what that certain consideration should be. With industry conditions still recovering and potentially volatile in the coming months, contingent consideration terms may in some cases be the best way to bridge this gap and strike a deal.
Last week, in In re Answers Corp., Delaware Vice Chancellor Noble refused to dismiss a complaint challenging a merger plaintiffs alleged was entered into hurriedly before very positive results for the target were released that were anticipated to drive up the price of the target stock. VC Noble found the allegations against the outside directors for going along with the rushed process were sufficient to allege bad faith, although it signaled plaintiff was unlikely to prevail on that claim after trial. It also found the aiding and abetting claim against the buyer survived a motion to dismiss, although it also expressed skepticism about the viability of this claim at trial.
The use of blogs and social media in contested battles continues as noted in this DealBook piece:
Daniel S. Loeb is bringing a blog to a Web fight. In his effort to overhaul the board of Yahoo, the head of Third Point has started ValueYahoo.com, his own site, which features information on his coming proxy fight. The site, which went live at 10:30 Monday morning, includes an outline of his agenda, a mission statement and profiles on his slate of proposed directors. Shareholders and other interested readers can also subscribe to the site to get updates on breaking stories or new content.
And yes — in true new Web fashion — you can also “like” Mr. Loeb’s battle for Yahoo’s board by becoming a fan of the site’s Facebook page.
Although investors have used the Web to disseminate information on past proxy contests, Mr. Loeb’s full site is a novel approach. It serves two purposes. For one, it is a central hub of information for Yahoo shareholders considering Mr. Loeb’s proposal. And second, the medium is intended to show investors that Mr. Loeb gets the Web, according to one person close to Third Point, who spoke on the condition of anonymity because of the looming proxy contest. Third Point plans to update the site daily, with frequent contributions from Mr. Loeb himself.
The activist hedge fund investor is locked in a battle with Yahoo’s board, which is trying to stymie his attempts to add four new directors, including himself. Mr. Loeb, who owns a 5.8 percent stake in Yahoo, filed a preliminary proxy filing last month. Although Yahoo has made some overtures, including an offer to add one of Mr. Loeb’s candidates, Harry Wilson, to the board, Mr. Loeb has criticized the board for not taking his demands seriously and failing on several corporate governance issues.