Chris Young, ISS’ M&A Research Director, blogs these thoughts in the new ISS “Corporate Governance Blog“:
“Conglomerates are not born rather they are created primarily via acquisitions. Many of the acquisitions used to build up conglomerates were undertaken based on the advice of investment bankers and attorneys, the same advisors that now counsel a reversal of course and the sale of “unrelated” businesses. Advisors first trumpet the supposed synergies to be derived from sharing the same roof, and then turn around and sing the praises of the “strategic focus” that comes from going it alone. Of course, the bankers and lawyers make their fees coming and going.
This change of heart phenomena is not limited to the build up and breakdown of conglomerates. On February 13, Merrill Lynch (MER) agreed to swap its mutual fund management business for a major stake in BlackRock Inc. (BLK). This move is in effect a reversal of the “one-stop shop” strategic rationale that was all the rage in the 1990s and which was used to justify a significant amount of M&A activity in the financial services industry.
Of course, hindsight is often 20:20, and no one can ever know for sure if the synergies forecasted for an acquisition will ever by realized. Yet the ease at which advisors apparently are able to “do a 180” should give shareholders pause when evaluating the importance of fairness opinions supporting acquisitions. Advisors may be able to profit twice despite being “wrong,” but shareholders do not have that luxury. As such, ISS recommends that shareholders apply a healthy dose of skepticism whenever a company justifies a deal based upon the receipt of a fairness opinion or highlights the participation of a brand name advisor.”
Tom Phillips of Effective Agreements shares this useful and amusing nugget from his life:
“One time, at DSC, we were negotiating with a European company, making a presentation on DSC’s financial performance. At one point the leader of our team and the leader of the European team bogged down in an increasingly heated discussion about inventory turns. The European leader insisted that our inventory turns were alarmingly high, indicating our products were not selling or we had invested far too much in inventory. Our team leader disagreed, saying our inventory turns were excellent both for our industry and for an American manufacturing company in general. The two men arrived at a complete impasse on the issue and were starting to get frustrated with each other.
As the junior member of the four man team by several levels, my job was to turn the slides. (That was not really my only job: I created the financial statements in Excel, etc.) As we were not going forward in the presentation, there was nothing I could do but sit and listen, and I happened to hear the European pooh-bah say the word “revenue” to one of his team.
I shouted “stop”, shocking the whole room into silence. I then asked the European leader how they calculate inventory turns? He answered, “dividing one year’s revenue by the inventory”. So, we explained that we calculate it using cost of sales: for the numbers to be comparable, he had to effectively double ours.
The “take-away” on this one (besides European accounting is not always the same as GAAP): every negotiating team should have one person whose assignment is to listen, and nothing else!”
In this podcast, Lisa Kunkle, a Partner of Jones Day, provides some gloss on the portions of the SEC’s recent executive compensation proposals that could implicate M&A, including:
– How do the SEC’s proposals deal with COC and termination payments?
– What are possible areas where commentators will focus?
– What are good examples already out there where companies have fully disclosed potential COC or termination payments to executive officers?
– What other modifications might need to be made to change in control agreements and deferred compensation plans as a result of 409A?
On Friday, the UK Panel on Takeovers and Mergers (which administers the City Code on Takeovers and Mergers) issued a consultation paper. This consultation paper mainly is a clean-up proposal as it looks to tweak 30 rules that come into affect later this year.
For background, consultation papers are the equivalent of proposing releases issued by the SEC – the UK Panel is required to publish proposed rules or amendments and consider responses from the public before publishing a statement of its conclusions.
The UK Panel is currently a non-statutory body, but this status is expected to change once the European Takeovers Directive has been implemented this summer.
Below is a nice explanation of why so many hostile deals are taking place in Europe, courtesy of this article from BreakingViews:
What is it about 2006 that makes executives so hostile? A handful of big, bold unsolicited cross-border takeovers have been launched in the first few weeks of the year. This comes after a year in which hostile bids actually fell. There were just 85 deals announced in 2005 worth $192bn (E158bn), down from 109 worth $251bn. The value of hostile offers in January is already twice what it was this time last year.
But it’s the audacity of some recent bids that surprises most. Take Mittal Steel’s E19bn bid for Arcelor. Not only is the Netherlands-based steelmaker funding the deal largely with debt, it’s taking a stab at a company many in France consider a homegrown champion.
Linde’s bid for Britian’s BOC, worth nearly £8bn (E12bn) , is another humdinger. Even before news of the offer hiked BOC’s shares, Linde was nearly a third smaller in size. That’s audacious. So, too, was the unsolicited attempt by chemicals group BASF to acquire Engelhard of the US. Given Engelhard’s staggered board and the ease of use of poison pills in the US, BASF’s endeavour borders on foolhardy.
What’s driving this? For one, credit conditions remain historically easy. Companies may be taking advantage of this before the cycle inevitably turns. And executives are feeling confident as their share prices have blossomed. Linde is up almost 50% in the past year; BASF a third. Moreover, investors are egging them on. Mittal shares surged on its ballsy bid Friday. Linde’s have also rallied since its BOC bid was made public. BASF stock has held up despite daunting challenges to its Englehard bid.
None of this means a boom in hostiles will necessarily arrive, however. To succeed, companies must have an edge before going hostile. Mittal, for example, has timing on its side. Arcelor became vulnerable to a deal by overpaying for Dofasco and going hostile itself for the Canadian steel group. Linde, in the meantime, may be playing on the fact that BOC is the only one in the industrial gases industry that regulators may allow.
As for BASF, its edge is less clear as it kicked Engelhard into a competitive auction. Its only advantage may be in its possible willingness to overpay. Once that becomes apparent, managers considering hostile takeovers of their own may adopt restraint – or face the wrath of suddenly less supportive shareholders.
Late Friday, the SEC posted this 370-page proposing release regarding executive compensation and related-party transaction disclosures. Reads like a novel; here are some page numbers for a handful of the many key sections of the release:
– description of change of control and termination disclosures (p. 77-79)
– description of new “Compensation Discussion & Analysis” section (pgs. 16-19)
– discussion of possible double-counting of comp (p. 24)
– introduction of revised “Summary Compensation Table” (p. 25-26)
– discussion of “Total Compensation” column (p. 27)
– discussion of Plan-Based Awards tables and use of 123R valuations (p. 30-38)
– discussion of proposed Perks requirements (p. 43)
– interpretive guidance regarding what a perquisite is (p. 46-48)
This is just the tip of the iceberg for a 370-page release; learn more about “what you need to do now” from our two imminent webcasts on CompensationStandards.com.
On the heels of our webcast on Tuesday – “Should We Merge or IPO?” – the WSJ ran this column about how start-ups backed by venture-capital investors are not going public as much (and as fast) as they used to in the “old days” of a few years ago. Here is an excerpt from that article:
“Last year, 41 start-ups backed by venture-capital investors became publicly traded U.S. companies, down from 67 in 2004 and 250 in the boom year of 1999, according to research firm VentureOne. Overall IPOs of U.S. companies also declined last year, but not as sharply, to 215, from 237 in 2004.
The drop in venture-backed IPOs isn’t just a hangover from the technology-stock bust early this decade, when bankers became gun-shy about taking small companies public. In 1995, 144 venture-backed companies went public, and 168 did so in 1992.
Venture-backed start-ups now also need more time to take the IPO plunge — more than 5½ years, on average, from the time of their first venture-capital investment, up from less than three years in 1998, says VentureOne, a unit of Dow Jones & Co., publisher of The Wall Street Journal.”
To learn more about this topic, check out the audio archive of the webcast.
Since the SEC’s Titan 21(a) Report was issued in last March, many companies filing a merger document have included a disclaimer in those filings. We have posted a number of samples of these Titan disclaimers; there are many different versions of the same basic concept. Some companies are even putting this language directly into their merger agreements.
Note that a disclaimer typically provokes a standard SEC comment, such as “Delete the disclaimer in the [_th] paragraph on page [22] as it is inappropriate to advise stockholders that they are not entitled to rely on the disclosure in the [proxy statement]).” There are Titan legends that are acceptable to the SEC Staff if they don’t disclaim shareholders’ ability to rely.
According to this press release from the investment fund plaintiff, the Delaware Court of Chancery denied a motion by Bally Total Fitness last week for expedited discovery in furtherance of the company seeking a determination that its “poison pill” has been triggered.
According to the release, the Court concluded that Bally failed to show that it would suffer irreparable harm if its motion was not granted. In addition, the Court said that Bally had waited too long to bring its motion – and that it would be unfair to subject the plaintiff to “the heavy machinery of expedited discovery” before Bally’s annual stockholder meeting, which is scheduled to take place on January 26th.
The Court’s decision arose out of a counterclaim filed by Bally shortly before midnight on January 9th in an action originally brought before the Court in December 2005 by the fund to challenge the legality of certain provisions contained in Bally’s “poison pill” plan that purport to prevent one or more stockholders collectively holding in excess of 15% of Bally’s stock from, among other things, acting in concert to run a proxy contest.
I’m not familiar with the case – but it sounds like relatively aggressive behavior that should be interesting to watch (but not precedent setting from a legal perspective). It may suggest some skepticism by the Court as to the merits of Bally’s claim. Bally’s claim (as I understand it) was a very aggressive use of the pill and one with which the Court would not lightly agree. It would have been a bigger deal had the Court granted expedited discovery.