Looks like more and more companies these days are being sold through an auction process. With strategic buyers coming back with a vengeance, and buyout shops – who despite already sitting on mountains of “dry powder” – trumping each other with new world record funds (for example, Goldman’s recent $8.5B fund closing in April which topped Carlyle’s $7.85 fund closed in March), and with hedge funds “converging” into the buyout space, it’s safe to say that we’re in a seller’s market.
On one hand, strategic as well as financial buyers generally don’t like being a competing buyer in an auction. (Ah yes, the dreaded “Winner’s Curse”). On the other hand, whether it’s a Fortune 500 divesting a business unit or even a financial sponsor seeking an exit for a portfolio company, an auction seems to be the best environment to stir up competitive bidding to take advantage of a seller’s market.
With auctions being a fact of life in today’s deal environment, I thought it’ll be interesting (at least to me) to think about some recent developments in auctions:
1. Virtual Data Rooms. No, I’m not talking about eBay. I’m talking about online versions of those paper filled document rooms typically guarded by our trusty and fearsome first year associates. These VDRs (or sometimes, called EDRs for Electronic Virtual Data Rooms) seem to be popping up more and more in auctions in the US and abroad. There are third party providers like:
There are even proprietary systems housed on law firm extranets.
Some of the advantages of VDRs:
· 24/7, anywhere-in-the-world access via the internet
· VDRs are password protected, with some more sensitive documents further fire walled for even more limited set of eyes, even view-only access
· can easily accommodate multiple bidders simultaneously
· search features
· ability to monitor usage on a per-document basis
On the other hand, some disadvantages include:
· 24/7, anywhere-in-the-world access via the internet – for hackers, i.e., is anything truly hack proof?
· Cost, with it making sense for bigger deals, especially with multiple bidders
· If you’re a bidder, do you really want seller knowing what you looked at (and otherwise, figure out what’s important to you?)
2. Staple Financing. This is the wonderful development brought to us by your friendly “Conflict? What conflict” investment bankers, who, in addition to representing seller in an auction, benevolently offer to provide the financing to buyer. This pre-arranged financing package is commonly called “staple financing.” (Do you think bankers are subliminally sending a message by using “staple”, as in “What’s the staple of an investment banker’s bonus? Fees and more fees…). The popularity of staple financing is surging in today’s auction-packed market.
Bankers pitch staple financing as an efficient way to get the target sold because the financing’s in the bag (i.e,, no more financing contingencies or delays in buyer scurrying around to find money). Even if buyer doesn’t bite, the fact that a financing package is already in place show potential buyers that the deal’s finance-able (i.e., the target’s really worth seller’s rich asking price).
Conflicts? Did I mention conflicts? If the same banker’s collecting fees to sell the company as well as provide money to buyer, how comfortable can seller really be that its banker is truly looking out for seller’s best interest. (Hmm, let’s see: I make money on a success fee if I get target sold and I make money lending to buyer? Can you spell N-E-W-T-E-S-T-A-R-0-S-A??). If prospects for seller’s repeat business is low (i.e, the banker’s losing a client in the sale), what’s the likelihood that the banker’s licking his chops at the prospects of a new relationship as lender to buyer?
Fairness opinions get even trickier. Smart banks tell people to get a second (from another bank) fairness opinion when they’re sitting on both sides of the deal. Even smarter banks simply decline giving fairness opinions altogether.
It’s a question of allegiance. I’m sure no respectable banker would cross that line, but Eve’s apple is always out there.
3. Vendor Due Diligence Reports. From across The Pond comes this practice of seller engaging an independent (usually) accounting firm to provide a financial due diligence report on target. The reports are then offered to potential bidders as part of the information package in the data room. This practice is getting picked up by law firm on both sides of the Atlantic. See www.debevoise.com/db30/cgi-bin/pubs/Copy%20of%20PE%20Report%20Winter%202005.pdf for a good overview of the legal issues.
On the buy side, I’m not sure I’d tell a client that since there’s a VDD, there’s no need for further due diligence. On the other hand, it sounds like a great idea to streamline the sale process – and for law firms who provide the VDDs to get their piece of the auction.
If anyone has any other new developments in auction strategies, please feel free to share.
Everyone knows that even the most elegantly drafted earnout provisions can generate some unintended consequences in their actual implementation. A common earnout scenario involves the requirement that (i) at least one of the target’s officers (the “TO”) be an officer of the buyer (usually in charge of running the post acquisition target) and (ii) an audit be conducted by the buyer’s independent public accounting firm (the “BIPA”) regarding some or all of the earnout period. What many TOs don’t contemplate is that, as an officer in charge of the target’s post acquisition operations, the BIPA is, in all likelihood, going to require the TO is sign the BIPA’s management representation letter (“MRL”) as a prerequisite to the BIPA releasing the audit. The problem here is that the buyer may take positions regarding certain accounting issues regarding the earnout that the target would like to dispute, but with the TO signing the MRL, the target has at least tacitly concurred with the BIPA’s and buyer’s accounting treatment, thereby leaving the target to argue “I know I signed the MRL saying that I concurred with everything in the MRL and that everything in the MRL was accurate but now that we’re having this earnout discussion I disagree with some of the items I previously said I agreed with in the MRL…” Of course, the parties can agree that the MRL isn’t going “to be used against the target in any dispute” but the optics are difficult and you have to deal with the issue of inherent bias created with the mere presence of the TO’s signature to the MRL. The real solution is to have the parties agree when the deal is signed up that the TO will not have to sign a MRL. Because the BIPA can be the real stumbling block here (i.e., refusing to release the audit without a fully executed MRL) it’s a good idea to get them onboard at the same time.
Today, May 10, 2005, R. Hewitt Pate, Assistant Attorney General of the U.S. Department of Justice (AAG), and the chief enforcer of the country’s antitrust laws, resigned after completing a nearly two-year stint as AAG. http://www.usdoj.gov/atr/public/press_releases/2005/208940.htm. Pate will leave his position at the end of June.
Under Pate’s stewardship, the DOJ primarily focused on prosecuting bid rigging and other cartel arrangements under the antitrust laws, and was quite successful in that area. In the area of merger enforcement, though, the record of the DOJ under Pate is decidedly more mixed. Although the DOJ successfully negotiated merger remedies in several high-profile transactions–including First Data / Concord, Nestle/Dreyers, and Connors/BumbleBee–the Division also lost a high-profile merger challenge under Pate’s watch (U.S. v. Oracle Corporation), and suffered another high-profile loss in its challenge to the consolidation of school milk producers in Kentucky and Tennessee (U.S. v. Dairy Farmers of America).
Pate also emphasized the importance of intellectual property. His strong belief in the importance of protecting IP rights (even when directly in conflict with the antitrust laws) was evidenced in several significant amicus appellate briefs (most notably in Trinko v. Verizon) and speeches that he gave during his tenure as AAG. It will be interesting to see whether his successor places such a high premium on IP rights.
Will antitrust enforcement change fundamentally after Pate leaves? Doubtful. During the period before a permanent successor is announced, any interim antitrust chief will likely not take a radically different approach to antitrust enforcement. Any successor likely will come either from the ranks of the current DOJ leadership (the WSJ mentions Makam Delrahim, current one of Pate’s deputies) or someone hand-picked by the President’s circle of advisors. Until the next election, we’re likely to see more of the same from the DOJ.
Good news for us American lawyers, U.S. M&A law and practices are taking over the world. This really runs the gamut from acquisition strategies to due diligence to documentation practice.
Now admittedly, the examples that I’m going to cite are Asian-related deals, but you’ve got to look at who is talking.
Japan’s clubby boardrooms are all buzzing lately with odd words like “poison pills,” “greenmail,” and “hostile takeovers.” Check out that crumpled Japanese newspaper in your next sushi takeout and you’ll see stories of a maverick Japanese internet company that’s shaking up the Tokyo, Inc.
How? Looks like this web portal called Livedoor used some stealthy off-hours trading to snatch up one-third of Nippon Broadcasting System. Only problem is that Nippon Broadcasting was in the process of being acquired by its affiliate, Fuji Television Network. After some nasty litigation, Livedoor sold its interest in the target after cutting a sweet deal with Fuji.
This high profile contested deal had Tokyo’s boardrooms wondering if a little “corporate fugu” and other takeover defenses should be on the menu (“fugu”, otherwise known to us burger bubbas as “blowfish”, is that fish that gets the last laugh by poisoning itself as a way to fend off predators; it’s a delicacy in Japan). In fact, Matsushita Electric (the Panasonic people) just adopted a poison pill last week.
But Japan, Inc.’s heartburn really started last year when two unprecedented, at least in Japan, and very American developments occurred in contested acquisition involving three Japanese banks (I’m referring to that $41B UFJ/Mitsubishi/Sumitomo cat fight to create the world’s biggest bank). One involved a no-shop clause and the other one involved a hostile bid. To keep things simple, I’ll refer to the parties as Target, Suitor Number 1 and Suitor Number 2.
Last July, a Tokyo court surprisingly granted an injunction in Suitor Number 1’s favor, enforcing a no-shop, actually a no-talk, clause that barred Target from pursuing its later-announced merger with Suitor Number 2. It was unprecedented – at least in Japan – that someone would sue to enforce a no-shop and even more unprecedented that a Japanese court would enforce it. Such a dispute sounds very American. What is even more interesting is that in the appeals process, one of the parties relied heavily on U.S. law on no-shops as well as related issues as authoritative precedent. Remember this is a purely Japanese deal. But because U.S. M&A law and practice is considered the best developed in the world, it was considered influential authority on how a Japanese court should rule.
As it turned out, Target prevailed in having the lower court’s injunction vacated. (The Tokyo Supreme Court held that the no-shop’s 2-year term was unenforceable, which would be the same conclusion in the US). In response to that move, Suitor Number 2 promptly announced that it was going to launch a hostile bid, yet another unprecedented U.S. oldie but goodie for Japanese banks.
One other example of American M&A tactics is the good old tortious interference claim. A couple years ago, the buyout group Texas Pacific Group sued a Taiwanese conglomerate for tortious interference with TPG’s proposed acquisition of a Chinese bank. It certainly got a lot of people’s attention, especially since TPG played its home town card by filing in Ft. Worth, Texas. As a Dallas lawyer, I can tell you that even we have concerns about being home-towned when we venturing the mere 30 miles to Ft. Worth. So how do you think the Taiwanese guys felt? You’ll also find high penetration of U.S. style M&A practice and documentation throughout the rest of Asia including, obviously, all the former British colonies, Korea and China.
One important caveat, sometimes the non-U.S. lawyers adopting our practice can turn things into a man-bites-dog situation. For example, in a recent deal with one of the top firms in China, I was presented with an opinion request by this Chinese lawyer that “The company’s financial statements are accurate.” So after picking myself off the floor, I did my best to explain no way, no how. To which the Chinese lawyer responded that he gets this requested of him all the time by U.S. lawyers, so why should I refuse? My reply was something along the lines of: if you see a toddler running with scissors, does it mean that it’s a good idea to let your kids do likewise?
Bottom line, globalization of American deal making is a beautiful thing. With any luck (at least for us American deal lawyers), our US M&A laws and practices will continue to follow a Starbucks-ian march around the world. Have passport – and Marty Lipton on Takeovers – in hand, will travel.
Without much fanfare or press, staffers are being moved “group-by-group” into the SEC’s new headquarters at Station Place — near Union Station on Capitol Hill. The big move was announced earlier this month in Capitol Hill’s Roll Call . I understand the new building will be accessible via underground tunnel from Union Station. The physical task of moving an entire governmental agency across town is estimated to take at least six weeks.
The first wave of personnel to move into Station Place came from the Division of Corporation Finance, including the Office of Mergers & Acquisitions, which moved in this past weekend. Without doubt the transition of employees, files and equipment is likely to cause some unavoidable delay in staff review time of filings as well as some increased difficulty in reaching examiners by telephone.
To assist you, here is OM&A’s new phone number: 202/551-3440. Note the “942” exchange has gone the way of the dinosaur!
The 115 Cardinals’ seclusion in the Sistine Chapel is a reminder to us all that the more things change, the more they remain the same. Namely, even in this age of conference calls, emails, webex meetings, and those prehistoric things called faxes, there’s simply no substitute for face-to-face meetings when there’s a complex deal to be made.
There’s only so much that phone calls and emails can do – and oftentimes, they are fertile media for miscommunication. I don’t know why but conference calls encourage people to posture and grandstand more than if they were performing in person. (Hint: people yelling into speaker phones). Maybe it’s the impersonal nature of just hearing a lot of voices babbling on and on. Emails also have a tendency to be misconstrued without the ability to see that slight gesture that signals that the speaker was just kidding and otherwise not intending to offend anyone.
On the other hand, face-to-face meetings give you the ability to observe body language. More importantly, meetings allow you to observe how the opposing counsel and her client interact. Even more important, face-to-face meetings allow you to build relationships with the other side’s lawyers and business people that are important to creating a collaborative atmosphere. Like that airline commercial said: You just can’t fax a handshake or a look in the eye.
True, conference calls and emails do make the dealmaking process more efficient but you just can’t beat getting all the people into the room and declaring that no one leaves until a deal is cut. Face-to-face meetings tend to force people to make decisions on the spot, obviously, favoring the creative, quick-thinking, and well-prepared types.
Phone calls and emails are not always the money savers that we think they are. Working with different time zones alone will extend turnaround times by days. For example, in a recent deal, we had 3-4 hour daily conference calls for 2 weeks straight but we soon realized that we had to go face-to-face. We accomplished more in a 2-day meeting than during the previous 2 weeks combined.
An in-house friend told me of one deal which was on-going for 18 months before she broke the log-jam by calling a conclave that resulted in a deal being made in less than 2 weeks.
My guess is that 2 weeks of full-time (and usually, overtime) work was more efficient and cost-effective than 18 months of sporadic brushfires. Let’s face it, we all juggle several deals at a time, so can you imagine the inefficiency of gearing up and down for a deal over the course of 18 months?
So, if your deal is stalling, take a lesson from the Cardinals and maybe you too will be seeing a puff of white smoke sooner rather than later.
Last week, the Wall Street Journal criticized FTC Chairman Deborah Majoras for simply “rubber stamping” Staff’s recommendation to challenge the Blockbuster / Hollywood Video proposed merger. WSJ complained that Majoras failed to recognize market realities, and in supporting Staff’s recommendation to challenge the merger, Majoras hurt business. The Journal, in my opinion, is way off the mark in its criticism of Chairman Majoras.
This is the second time in four years that Blockbuster has proposed to acquire Hollywood Video. Four years ago, the five-person Federal Trade Commission voted to block the merger because of its effects on competition, and the likely negative impact that the transaction would have on consumers. Although Blockbuster abandoned its bid before the Commission voted during this last go-round, it seemed apparent that Blockbuster was again going to face a 5-0 vote against its proposed merger. That’s 10 independent votes against the merger, each one made after careful studies of the market, competition and anticipated effects of the transaction. Blockbuster, it seems, is a clear two-time loser. I’m at a loss as to why the WSJ considers Majoras’ decision at all incorrect, or is at all surprised at the decision to challenge.
A lot of people—practitioners, business folks and commentators—enjoy criticizing the FTC and DOJ for their antitrust activities. Practitioners complain that Second Requests are too burdensome. Consumer advocate groups complain that the FTC does not spend sufficient time investigating potentially anticompetitive mergers. Industry analysts complain that too many transactions are blocked by the DOJ and FTC; at the same time, Congress complains that too many oil/petroleum mergers are approved. Some complain that the FTC investigates too thoroughly the conduct of certain industries (pharmaceuticals, in particular); others complain of blatantly anticompetitive conduct going unchecked in the industry.
In my years of practice, I have found that it is easy to find someone or some entity that is blaming the FTC or DOJ for just about every decision it makes—for either being too lax in its enforcement decisions or too permissive in allowing industry consolidation. A sure sign that an agency is doing its job, though, is the ability to withstand this criticism and not bend to constituent complaints (often more properly classified as ranting and raving). Here, the FTC and DOJ should not—and I would suspect will not—bow to such pressure.
Specifically with regard to the Blockbuster/Hollywood proposed hostile takeover, it is not that difficult to understand why the FTC had significant concerns with the transaction. The two parties are by far the largest video rental chains in the country, accounting for a great majority of in-store rentals (and in some geographic markets, accounting for the only rental chains at all). Where there is competition, it is not nearly as robust as that offered by the parties—the selections are smaller and the availability of first-run (i.e., “new”) titles is lacking. Blockbuster contended that other market forces—in particular video purchases (from the likes of Walgreens and BestBuy)—would constrain the post-merger entity from raising prices, but the unambiguous evidence demonstrates that first-run movies sell (at stores like Walgreens and BestBuy) for nearly three times the price as they are rented. Such a price differential demonstrates clearly that even if Blockbuster raised the prices of its new movie rentals by 50% that consumers would be unlikely to purchase such selections instead, given the significant price differentials. Finally, other forms of movie rentals, including on-line rentals (from the likes of Netflix), video-on-demand, and pay-per-view, were not sufficiently competitive to have the clout to counter any anticompetitive activity from the merged entity.
So in the end, it is likely that Chairman Majoras did not simply follow the lead of her staff. Instead, it is far more likely that she saw the evidence that the parties presented, evaluated it, and determined that the merger would harm consumers. That Blockbuster and WSJ are unhappy with the decision is not in doubt. Nor, however, is it particularly relevant.
Here is a guest blog from Broc Romanek: On Friday morning at the ABA Spring Meeting, SEC Corp Fin Director Alan Beller spent about 10 minutes discussing the Titan Report and – as Brian Brehney stated during our webcast a few weeks back – reiterated that he believed that the Report was “unremarkable” and only was a clear statement of existing law.
Alan stated that the principal issue to be drawn from Report was whether a reasonable investor could conclude, based on the total mix of information, that the representations in the merger agreement between two companies should be construed as a statement of fact. Alan emphasized that the Report does not say that the SEC believes that an investor is entitled to such a conclusion or that such representations and warranties are for the benefit of investors (although Alan pointed out that there were a few unreported court decisions which made that finding). But Alan noted that the Report categorically rejected the notion that investors can’t even consider the reps & warranties (thus rebuffing the theory that the merger agreement is simply relevant to the contracting parties).
Alan also pointed out that – as part of the SEC settlement – Titan was not found to have violated the FCPA or any other law. So clearly this is an atypical Section 21(a) report on that basis alone, as these types of reports normally require violations to serve as the premise of the report.
Alan warned the audience that it would be problematic if lawyers were to start advising clients to not include their merger agreements in their SEC filings in reaction to the Report.
As for the ability to include disclaimers to warn investors that the reps and warranties in such an agreement should not be taken as a statement of fact, Alan indicated that he did not object if a company believes that it is right to provide such advice to investors in a particular situation. But as noted later in the Negotiated Acquisitions Committee meeting, this approach ultimately might not sit well with the SEC Staff – as a disclaimer could trigger a request by the Staff to submit disclosure schedules as supplemental materials and ultimately include some of that information in the proxy statement. We continue to post law firm analysis of the Titan Report in our “Disclosure” Practice Area.
Check out this controversial tidbit from a recent Broc’s Blog (in www.thecorporatecounsel.net) , which is still timely if not scary.
Is the SEC trying to tell us to start filing our (otherwise confidential) acquisition agreement disclosure schedules to keep reps from being misleading? Should we start adding disclaimers to the content of exhibits (or items incorporated by reference) to SEC filings? At the very least, Titan’s otherwise well-intentioned and time-honored efforts to be complete turned into a man-bites-dog nightmare. Check out Titan’s Section 21 Report and various law firm memoranda at www. DealLawyers.com’s practice area “Disclosure.”
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Implications of SEC’s Action Against Titan on Mergers
On Wednesday [March 1], the SEC announced a settled enforcement action against Titan Corporation alleging Foreign Corrupt Practices Act violations for funneling approximately $2 million towards the election campaign of Benin’s then-incumbent President. The amount of this settlement – $15.5 million in disgorgement and prejudgment interest and a $13 million penalty – is the highest ever paid for FCPA violations.
However, the most significant aspect of this proceeding is a Section 21(a) Report of Investigation that asserts that representations in an agreement filed as an exhibit can be actionable by the SEC if they are materially false. This assertion relates to a FCPA representation made by Titan in a Merger Agreement with Lockheed Martin (my alma mater!), which was also publicly disclosed in Titan’s proxy statement (since the Merger Agreement was in the proxy statement). It is noteworthy that the Report does not allege a violation by Titan of Sections 10(b) or 14(a) – or Rules 10b-5 and 14a-9 – and that the SEC has not charged Titan with such violations.
The Report recognizes that Titan shareholders were not beneficiaries of the FCPA Representation in the Merger Agreement, but states that the inclusion of the Representation in a disclosure document filed with the SEC, “whether by incorporation by reference or other inclusion, constitutes a disclosure to investors.” The Report goes on to say that disclosures regarding material contractual terms such as representations may be actionable by the Commission. The Commission will consider bringing an enforcement action if it determines that “the subject matter of representations or other contractual provisions is materially misleading to shareholders because material facts necessary to make that disclosure not misleading are omitted.”
Smoking guns emails are nothing new but recent developments are enough to make even prolific emailers want to reach for their spy kits with the disappearing ink.
First, there’s Boeing’s CEO whose brief tenure at the helm was cut short by smoking (and I guess the content was really smokin’) gun emails to his Boeing colleague/paramour. OK, you say, what the heck does this have to do with deal making? Nothing but I couldn’t resist.
One email-bites-man development does involve law and deals. In a suit filed by financier Ronald Perelman against Morgan Stanley, the Florida court last week took the unusual step of shifting the burden of proof to the defendant, Morgan Stanley, to prove to a jury that it didn’t help Sunbeam defraud Perelman. Apparently, the court was PO’ed about MS’s lack of internal controls in producing emails requested in discovery. The judge describes MS’s failures as “gross abuse” of its discovery obligations. As such, the judge decided to level the playing field by shifting the burden of proof.
Ouch! Just two reminders to us all that emails do bounce back – sometimes in your face.
It’s enough to make you wonder why anyone would send emails. Come to thing of it, why would anyone blog? Oops time to stop…