May 05, 2008
My sense is that it is too early to know how this weekend's events will affect Steve Ballmer's future at Microsoft -- mainly because we don't know whether Microsoft is really done with Yahoo -- but this item from TechCrunch is interesting:
One reading of Ballmer’s obsession with the [Yahoo] deal is that he felt his job was on the line if he didn’t get it done. According to one secondhand account that leaked to us yesterday before the deal was called off, over the past week Ballmer increasingly has been “yelling and screaming at employees for almost no reason” and is being “more of a tyrant than usual.” One executive on the Microsoft deal team supposedly made a comment about “not having to worry about Ballmer anymore” if the Yahoo deal fell through. What the exec didn’t know, though, was that Ballmer was in earshot, and he screamed back that the deal would go through and that he wouldn’t let the board “crucify” him.
May 04, 2008
This is from Laura Martin, a senior analyst at Soleil Securities, in eWeek:
"I think you'll see a number of shareholder lawsuits on Monday. They've prioritized employees over shareholders in the hopes that someday they can create more than $8 billion of value, even if they have no track record of doing so."
Yahoo shareholders may sue, but what would their claims look like?
You refused to come to terms with Microsoft, you ... you ... dummies!
That may feel good, if you were Yahoo shareholder who wanted to sell, but it's not a winning claim.
May 03, 2008
So if you are a shareholder of Yahoo!, how are you feeling about Jerry Yang right now? This is an interesting tidbit from the NYT:
Reactions inside Yahoo are likely to be mixed. Several senior executives favored selling to Microsoft and said in recent days that they were hoping to see a deal happen. Yet other executives were high-fiving each other for defeating Microsoft’s bid, people close to the company said.
While its stock may fall on Monday, Yahoo's management was encouraged by discussions with its largest investors in which they urged management to not accept $33 a share, these people said. For Mr. Yang, Microsoft’s withdrawal is considered a “personal victory,” according to one person who spoke with him.
Hmm. Not so fast. If Yahoo's largest stockholders were opposed to a Microsoft acquisition, a hostile deal would be extremely difficult, but some reports suggest that Yahoo's largest investors were closer to being happy with a Microsoft deal than you might think. From C-Net:
With Microsoft's withdrawal of its increased Yahoo bid on Saturday, the Internet search pioneer's two largest institutional investors are fuming, according to a source familiar with their thinking.
The two investors were willing to accept an offer of $34 a share, the source noted. Microsoft was offering "Yahoo overplayed its hand," said the source." If Yahoo's two largest investors are willing to take $34 and Microsoft is willing to give $33, it's a lot closer than Yahoo's $37 (a share)."
The other big investor that people have been focusing on is Legg Mason, which announced last month that it would support Yahoo's management if Microsoft lowered the price in a hostile deal. But, "If Microsoft raises the offer, the pressure shifts very quickly to Yahoo to negotiate.... To me, bumping the number up a buck, that would have a big impact psychologically on shareholders." Hmm.
And what do you make of Microsoft's press release?
"Despite our best efforts, including raising our bid by roughly $5 billion, Yahoo! has not moved toward accepting our offer. After careful consideration, we believe the economics demanded by Yahoo! do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal," said Ballmer.
This deal has never been about Yahoo's demands. Perhaps Steve Ballmer learned something in the talks with Jerry Yang that changed his mind? This is from the letter Ballmer wrote to Yang:
I feel that our discussions this week have been particularly useful, providing me for the first time with real clarity on what is and is not possible.
The letter goes on to suggest that Microsoft backed away from a hostile bid because of Yahoo's expressed intention to "take steps that would make Yahoo! undesirable as an acquisition for Microsoft." What steps? Allying itself with Google!
We regard with particular concern your apparent planning to respond to a 'hostile' bid by pursuing a new arrangement that would involve or lead to the outsourcing to Google of key paid Internet search terms offered by Yahoo! today.
So did Yang's version of the scorched-earth defense work? Or would Microsoft return if the market chastens Yang? Note the first sentence of the press release:
We continue to believe that our proposed acquisition made sense for Microsoft, Yahoo! and the market as a whole.
Apparently, Microsoft's move is not merely a negotiating tactic, but don't count Microsoft out just yet. The ball is in Jerry Yang's court.
April 10, 2008
Yahoo's board of directors is meeting tomorrow. So many options. Or not.
Aside from Microsoft's solo bid, Yahoo's directors will likely discuss a plan under which Time Warner Inc. would fold its AOL unit into Yahoo in exchange for a roughly 20% stake in Yahoo. Another potential scenario for Yahoo is a joint deal with Microsoft and Rupert Murdoch's News Corp., owner of The Wall Street Journal, to combine News Corp's MySpace, Microsoft's MSN and Yahoo into a separate company, people familiar with the matter said.
Hmm. This is like shopping at a bad used-car lot.
This could all be over in a flash if Microsoft raised its bid. My guess is that it will eventually come to that, though probably not tomorrow. Steve Ballmer has a bit more time under his ultimatum, and he realizes that the Microsoft deal only looks better as Yahoo explores alternatives. So I suspect he will wait for awhile, raise the bid back up to $31/share (the original bid before Microsoft's shares declined in value) and bring the deal home.
By the way, Yahoo's biggest shareholder, Capital Research & Management Co., seems to think the price will be rising, too. According to an SEC filing yesterday, CRM nearly doubled its stake in Yahoo. It now owns 10.1% of the shares.
April 09, 2008
Lots of activity relating to Microsoft-Yahoo. On the one hand, the NYT is reporting that Microsoft is speaking with News Corporation about a joint bid for Yahoo. You may remember that News Corp was one of the companies tagged as a potential white knight for Yahoo. Here's the strategic rationale:
If News Corporation throws its weight behind Microsoft’s offer, that could allow Microsoft to raise its bid, putting even more pressure on Yahoo and its shareholders. At the same time, the alignment of Microsoft and News Corporation would remove a possible alternative for Yahoo, leaving it with fewer opportunities to escape Microsoft’s grasp.
This leaves lots of questions unanswered. Most importantly, how would Microsoft and News Corp cooperate in the post-acquisition world? That is a lot more interesting than the fight over Yahoo in isolation.
Meanwhile, W$J is reporting that Yahoo and AOL "are closing in on a deal to combine their Internet operations, a move that could thwart Microsoft's effort to acquire Yahoo." Standing alone, the AOL deal looks like a real stink bomb, but Yahoo's management is reportedly planning to link that move with two other transactions: "repurchasing billions of dollars of its own shares and ... negotiating with Google Inc. about an advertising tie-up." If I am a Yahoo shareholder, I want to know more about that buyout, but don't expect me to hang around for an encore.
You may remember that we got all excited when shareholders of Bear Stearns filed a lawsuit in Delaware. Steve Davidoff just forwarded Vice-Chancellor Parsons' opinion in which he grants defendants' motion for a stay. Given the existence of a similar lawsuit in New York, Vice Chancellor Parson relied on traditional forum non conveniens factors in deciding to grant the stay. His big fear was the "risk [of] creating uncertainty in a delicate matter of great national importance." That last bit is an interesting part of the opinion:
I find the circumstances of this case to be sui generis. What is paramount is that
this Court not contribute to a situation that might cause harm to a number of affected
constituencies, including U.S. taxpayers and citizens, by creating the risk of greater
uncertainty.
The opinion also mentions plaintiffs' claims that the defendants colluded with the New York plaintiffs to "position the New York Action ahead of this one by stipulating to a schedule immediately after being notified, on or about March 24, that the Delaware Plaintiffs were about to request a temporary injunction against the anticipated April 8 issuance of the JPMorgan Shares." Vice-Chancellor Parsons viewed the two cases "virtually identical."
Vice-Chancellor Parsons suggests that New York would go ahead, regardless of the result in Delaware and that, as a result, restraint by the Delaware court is the better course. Question re strategy from a transactional lawyer: is this all there is to it? Or would the defendants in this case have an advantage being in New York rather than Delaware?
April 08, 2008
That's Paul Kedrosky, and he is incensed by this letter from Jerry Yang to Steve Ballmer.
Purportedly a calm and rational letter laying out why Yahoo continues to reject Microsoft's acquisition-related entreaties, it is mischievous and irritating. The note is replete with cute stuff and homespun dealmaking ditziness, all running over top of that Yang-ian "i love lower-case" faux familiarity.
...
The sooner Yang stops trying to be a kinder, gentler CEO, and just gets on with getting this deal figured out ... the better.
Amen to that.
April 06, 2008
As Gordon notes below, Microsoft has turned up the heat on Yahoo, and Ballmer aims to make shareholders anxious. Meanwhile, the New York Times reports on what seems to be the best chance for Yahoo to convince its shareholders to ignore Microsoft: its new AMP advertising system. The system, NYT reports, would "would greatly simplify the task of selling online ads, allowing Yahoo’s publishing partners, for instance, to place ads on their own sites as well as on Yahoo and on the sites of other publishers in the company’s growing network." Yahoo acknowledges that the system will not be put in place for some months. The announcement timing raises some interesting issues--this seems like a risky play, and I'm sure that the lawyers were wringing their hands because on the one hand Yahoo wants to produce something that would inspire confidence with shareholders, while on the other hand I suspect that with Microsoft lurking in the background Yahoo disclosed this earlier than they would have liked to. Yahoo may not have a very good sense sense of the potential of the product and when it could deliver the product. An analyst notes this risk:
“This gives Yahoo a little leadership in vision,” said Rachel Happe, an analyst with IDC, a consulting firm. But Ms. Happe noted that Yahoo’s last big advertising project, a platform known as Panama [recall that the Panama experiment was one of the unsuccessful initiatives Ballmer pointed to in his bear hug letter] and intended to reach people searching the Internet, was plagued by lengthy delays. She said it would be “problematic” for Yahoo if it were not able to deliver AMP on time.
"Problematic" may be another way of saying "shareholder lawsuits".
Here's the letter from Steve Ballmer to Yahoo's board of directors:
We believe now is the time for our respective companies to authorize teams to sit down and negotiate a definitive agreement on a combination of our companies that will deliver superior value to our respective shareholders, creating a more efficient and competitive company that will provide greater value and service to our customers. If we have not concluded an agreement within the next three weeks, we will be compelled to take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors for the Yahoo! board. The substantial premium reflected in our initial proposal anticipated a friendly transaction with you. If we are forced to take an offer directly to your shareholders, that action will have an undesirable impact on the value of your company from our perspective which will be reflected in the terms of our proposal.
We have all been wondering about the radio silence surrounding Yahoo's headquarters, and though we now know that Microsoft and Yahoo have been meeting, it appears that Yahoo lacks the appropriate sense of urgency.
But would Microsoft really lower its offer if required to go hostile? That might be hard to imagine, given the substantial resistance among some of Yahoo's shareholders to the original offer, but as I noted early on, many of Yahoo's current shareholders have purchased those shares lately in search of a premium. And they are unlikely to be too picky about the size of the premium at this point, because even a modest premium is better than Microsoft walking away. As Yahoo learned last week.
UPDATE: FT on the prospect of a lower bid:
A person close to Microsoft refused to confirm this meant the company would cut the value of its original offer but called Mr Ballmer’s letter “self-explanatory.”
The value of Microsoft’s cash-and-stock bid has already slipped from its original $31 a share as the software company’s own stock has fallen, taking it to $29.36 a share at Friday’s close. Speculation has been rife on Wall Street and in Silicon Valley that Microsoft would eventually sweeten its bid for Yahoo, at least taking it back to the original $31 and potentially lifting it higher in return for a negotiated deal.
In hostile takeover fights in the US, threats to cut the value of a bid are not unusual and are sometimes followed by eventual increases. Larry Ellison, chief executive officer of Oracle, has used the tactic in his own hostile deals, threatening to reduce his offer for BEA Systems last year and actually reducing his bid for PeopleSoft before eventually paying a higher premium for both companies.
March 26, 2008
Here we go ... the Wayne County Employees' Retirement System of Michigan and the Police and Fire Retirement System of the City of Detroit have filed an application for a TRO in the Delaware Court of Chancery. (Bloomberg) The Bear Stearns shareholders are trying to stop the sale of 95 million new voting shares to JP Morgan, which is projected to close on April 8.
We discussed this proposed sale here, and we mentioned Omnicare, Inc. v. NCS Healthcare. In that case, the Delaware Supreme Court invalidated a merger agreement and two voting agreements between an acquiring company and two shareholders of the target company. The two shareholders together controlled over 65% of the target company's votes, and the shareholders agreed to vote their shares in favor of the challenged transaction. In addition, the two companies had agreed that the target board would present the challenged transaction for a shareholder vote, even if the board received a better offer. The Delaware Supreme Court held that "the merger agreement and voting agreements, as they were combined to operate in concert in this case, are inconsistent with the NCS directors' fiduciary duties."
In doctrinal terms, the merger agreement and two voting agreements were treated as "defensive measures" under Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del.1985) and Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361 (Del.1995), which prohibit measures that are "preclusive" or "coercive." The Omnicare court reasoned:
Although the minority stockholders were not forced to vote for the [challenged] merger, they were required to accept it because it was a fait accompli. The record reflects that the defensive devices employed by the [target] board are preclusive and coercive in the sense that they accomplished a fait accompli. In this case, despite the fact that the [target] board has withdrawn its recommendation for the [challenged] transaction and recommended its rejection by the stockholders, the deal protection devices approved by the [target] board operated in concert to have a preclusive and coercive effect [because they] made it "mathematically impossible" and "realistically unattainable" for the [alternative] transaction or any other proposal to succeed, no matter how superior the proposal.
In the last section of the opinion, labeled "Effective Fiduciary Out Required," the Court went out of its way to provide an alternative basis for the ruling:
The defensive measures that protected the merger transaction are unenforceable not only because they are preclusive and coercive but, alternatively, they are unenforceable because they are invalid as they operate in this case. Given the specifically enforceable irrevocable voting agreements, the provision in the merger agreement requiring the board to submit the transaction for a stockholder vote and the omission of a fiduciary out clause in the merger agreement completely prevented the board from discharging its fiduciary responsibilities to the minority stockholders when Omnicare presented its superior transaction.
...
The NCS board could not abdicate its fiduciary duties to the minority by leaving it to the stockholders alone to approve or disapprove the merger agreement because two stockholders had already combined to establish a majority of the voting power that made the outcome of the stockholder vote a foregone conclusion.
Omnicare was a divided decision, with three justices in the majority and two in dissent. And post-decision commentary has been almost universally critical. But it serves as a nice base of comparison with the Bear Stearns-JP Morgan transaction. Which board of directors was more faithful to its obligations: the board that allowed existing majority shareholders to commit themselves to a transaction that they viewed as favorable (Omnicare), or the board that is planning to issue stock to the acquiring company to make approval of the transaction over the objections of the existing shareholders much more likely (Bear Stearns)?
That is not intended to be a difficult question. Nevertheless, the lawyers have structured the Bear Stearns-JP Morgan transaction in a manner that elides the obvious pitfalls in Omnicare. That is, it is not technically a fait accompli, and the Acquisition Agreement contains a fiduciary out.
Whatever the result of that line of analysis, the plaintiffs in this initial motion are not limiting themselves to the coercive-or-preclusive standard (aka Unocal/Unitrin). They are also arguing that the "lock up stock sale is designed primarily, if not solely, to eviscerate the voting franchise of the current Bear Stearns stockholders." Sound familiar? This is language designed to invoke the dreaded Blasius "compelling justification" standard.
The Delaware Supreme Court has limited Blasius to cases involving a "contested election for directors" (MM Companies, Inc. v. Liquid Audio, Inc.), but Vice-Chanceller Strine seems to have a more expansive view of the standard, suggesting that it might be applied to any "vote touching on matters of corporate control." Mercier v. Inter-Tel (Delaware), Inc. (2007).
If Blasius applied in this case, the Bear Stearns board would be required to show a "compelling justification" for its actions. According to Strine, "When directors act for the purpose of preserving what the directors believe in good faith to be a value-maximizing offer, they act for a compelling reason in the corporate context."
Could the Bear Stearns board meet that standard? Almost certainly, since they agreed to the lock-up as part of a negotiation to quintuple the price of the deal. A deal that was brokered by the Fed at a time when the prospects of the company looked bleak, to put things charitably. They may not have acted courageously or with all of the skill Bear Stearns' shareholders might have wanted, but this doesn't look like bad faith.
UPDATE: Writing with the benefit of the actual filing, Steve Davidoff analyzes the plaintiffs' claims. Lots of interesting insights, though Steve got a bit carried away at the end:
Here’s one thought. Delaware recently announced a procedure for the Delaware Chancery Court to accept certified questions from the Securities and Exchange Commission. The Delaware court could use this principle to turn the tables and certify a question to the Fed (or even perhaps the S.E.C.) asking this question: "If the share issuance and other lock-ups are knocked out on the usual grounds, would it endanger the financial system and therefore they should still be validated." You can fiddle with the wording but you get the idea.
If the Fed is actually going to orchestrate this deal, they and the Bush administration should bear the responsibility for pushing it through without upending Delaware and its well-reasoned doctrine and rules of law.
Permalink | Corporate Governance| Corporate Law| Delaware| M&A | Comments (8) | TrackBack (1)
March 25, 2008
March 24, 2008
Did JP Morgan or its lawyers make a mistake in drafting the original agreements with Bear Stearns? More specifically, did Morgan give a broader guarantee than it understood? Yes, according to the NYT:
One sentence was "inadvertently included," according to a person briefed on the talks, which requires JPMorgan to guarantee Bear’s trades even if shareholders voted down the deal. That provision could have could allow Bear’s shareholders to seek a higher bid while still forcing JPMorgan to honor its guarantee, these people said.
Inadvertent? Steve Davidoff (blogging at the NYT's Dealbook) considers the possibility:
A careful read of its guaranty agreement with Bear Stearns, part of its deal to acquire the troubled investment bank, suggests that the agreement may be much broader than JPMorgan intended. This apparent oversight likely played a role in JPMorgan’s decision over the weekend to consider raising its offer for Bear.
Under the merger agreement, if Bear’s shareholders vote down the takeover deal for a year, Bear can terminate the agreement. This we already knew. But it also appears that, in such circumstances, JPMorgan’s guarantee to backstop Bear’s liabilities stays in place — forever.
Well, that would be silly, wouldn't it? Unless ...
Check out John Carney's excellent bit of investigative work over at Dealbreaker, which quotes the following exchange between an analyst and Steve Black, the co-head of JP Morgan’s investment banking division, taken from the transcript of a conference call on the Sunday night that the Bear Stearns-JP Morgan deal was initially announced:
Mitch [Northern – Q Investments]: With regard to the guarantee of trading, if the merger is not completed what happens to the full facing credit of JP Morgan? Is that still behind Bear Stearns?
Steve Black: First of all the guarantee applies to all transactions on the books today and any transactions that are entered into while that guarantee is in place. We have every expectation that Bear Stearns shareholders will approve this deal. I think we are offering the best alternative that they got at this point and I would be surprised if a better alternative came along. If in the future the shareholders do fail to approve the transaction, then our guarantee would no longer apply prospectively. Of course everything that was on the books up to and to that point would be covered by the guarantee .
This is an interesting statement, which reveals two things about Black's understanding of the agreement. First, he realizes that Morgan's guarantee to backstop Bear's liabilities stays in place — forever. Second, he realizes that the liabilities subject to that guarantee do not continue to accumulate forever, but he seems to believe that the liabilities stop accumulating in the event of a negative vote by Bear's shareholders. The original Guaranty Agreement clearly did not provide for that, but stated that the liabilities would continue to accumulate until termination or closing. And termination would not happen under the original Acquisition Agreement for at least one year, regardless of the shareholder vote.
So the new question is: what did Morgan do about the guarantee in the latest round of negotiations? Again to Steve Davidoff:
The amendment makes clear that JPMorgan didn’t get the guarantee they wanted on the first bite. The guarantee now terminates at an earlier time instead of providing the ability of Bear to keep it out there for one year. Now it terminates 120 days following the failure of Bear to receive the approval of Bear’s stockholders for the transaction at any shareholder meeting.
I find this a bit confusing, so let me unpack it to see exactly what Morgan gained in this renegotiation. Under both old and new Guaranty Agreements, Morgan "unconditionally guaranties the due and punctual payment of all Covered Liabilities." Also under both agreements, the term "Covered Liabilities" includes liabilities in existence at the date of the Guaranty Agreement and liabilities "that arise ... during the Guaranty Period." That's the key term.
Under the old agreement, the Guaranty Period lasted for one year, as noted above. Under the Amended and Restated Guaranty Agreement, the Guaranty Period ends on "the date that is 120 days following the failure of [Bear Stearns] to receive the approval of [Bear Stearns'] stockholders." Assuming the shareholders vote more than 120 days before the one-year anniversary of the Acquisition Agreement, this could save Morgan some money. For this Jamie Dimon was "apoplectic"?
I don't doubt that he presented the case in this way, but forgive me if this sounds like a bit of buyer's remorse. In other words, Dimon's indignation at his lawyers looks like a pretext for another problem with the original deal, namely, that Morgan no longer wanted the deal to stay open for a whole year if Bear's shareholders rejected it.
Remember that under the initial deal, Morgan wanted to keep the deal open for the year and negotiated for the innovative (if misguided) Section 6.10, which I discussed here and here. Lo and behold, that provision was removed from the latest Acquisition Agreement and suddenly Morgan doesn't like the one-year guaranty, either. Mistake in the initial contract? Hmm.
In any event, the bigger issue is clearly Paragraph 3 of the Guaranty Agreement, which remained essentially unchanged in the new agreement:
Notwithstanding any other provision hereof, this Guaranty and the obligations of the Guarantor hereunder shall terminate and be of no further force or effect (and the Guarantor shall have no further liability hereunder) on and as of the termination of the Acquisition Agreement pursuant to Section 8.1(e)(i) thereof. For the avoidance of doubt, the termination of the Acquisition Agreement, other than pursuant to Section 8.1(e)(i), shall not affect or impair the effectiveness of the guaranty provided herein with respect to the Covered Liabilities of the Covered BSC Entities guarantied hereunder or the obligations of the Guarantor hereunder with respect thereto.
This provision obligates Morgan to stand behind the guarantee, even if Bear's shareholders reject the deal, as long as Bear's board of directors doesn't change its recommendation to the shareholders regarding the Morgan transaction or breach specified obligations under the Acquisition Agreement.
Summing up, here is the way it looks to me: Morgan gave the expansive, one-year guarantee in haste when everyone was certain that it would acquire Bear Stearns. That expansive guarantee would have been quite useful a week ago, when everyone was wondering whether Bear Stearns would survive Monday. Well, Bear Sterns survived, and in the ensuing week, the acquisition has seemed less certain. (What if the Bear shareholders rejected the deal?) A guarantee that looked great at a purchase price of $2/share when Morgan thought it had a done deal doesn't look so good if Morgan is faced with $10/share and a market that thinks the price will go even higher. (Bear has been trading above $10 all day.)
As for the deal, will Bear's shareholders reject it? Under the new deal, Bear will own 39.5% of the shares, and that should go a long way to ensuring success.
By now you have heard about the new deal between Bear Stearns and JP Morgan, and you may have been puzzled by this line in the NYT: "Under a Delaware precedent, where the companies are incorporated, a company can sell up to 40 percent without shareholder approval."
Um, no.
This is what is known in the law biz as "wrong." There is no 40% cutoff under Delaware law. My immediate reaction to the story was that the author of the piece (Sorkin) must have been trying to convey one of the supposed lessons on Omnicare. Steve Davidoff confirms that reaction at Dealbook (emphasis added):
In Omnicare v. NCS HealthCare, a uniformly criticized opinion, the Delaware Supreme Court by a 3-2 vote struck down a locked-up deal. There, the court held that under the Unocal standard for testing defensive measures, the agreement of 65 percent of the shareholders to vote for a transaction, together with a force-the-vote provision requiring the company to hold a shareholder vote, was preclusive and coercive. The merger protections were both preclusive and coercive because “any stockholder vote would have been robbed of its effectiveness by … [the] predetermined outcome of the merger without regard to the merits of the Genesis transaction at the time the vote was scheduled to be taken.”
Thereafter, in the Chancery Court case of Cullen v. Orman, the court upheld an agreement for a controlling shareholder to vote in favor of the merger and for 18 months after termination of the agreement to vote against any other transaction. Notably, the shareholder vote was conditioned on approval of a majority of the minority and the judge relied on this fact — that it was not a fait accompli — to make this decision. Since Orman, takeover practitioners have generally advised that as long as a deal was theoretically possible, Omnicare wasn’t implicated. Delaware practitioners have settled on the “40 percent rule” to set a limit on [how] high you could go on a lock-up. Hence the 39.5 percent figure in Monday’s deal with Bear. Of course, none of this has been tested in court.
The bottom line is that JP Morgan is trying to lock up the acquisition of Bear, but it can't be too aggressive without triggering the wrath of the Delaware courts. 39.5% plus the shares of the Bear directors who "have indicated that they intend" to vote for the revised deal should get them to about 45%, and that may be enough to bring the deal home.
Lots of other issues, but that is one mystery solved ...
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March 04, 2008
Yahoo would rather merge with AOL than be acquired by Microsoft!
Correction: Yahoo's managers hate Microsoft.
What do Yahoo's shareholders want? Some of them are suing those managers. Others may get a chance to vote soon, as Microsoft looks toward a proxy contest. According to the NYT, Yahoo is thinking about postponing its annual meeting, but it can't put off the vote forever.
Here is the important thing to understand: lots of shares have changed hands since the Microsoft bid was announced, and those new buyers did not buy Yahoo because they have warm and fuzzy feelings about Jerry Yang. These new shareholders paid a premium for their shares, and they are counting on a big transaction. Yahoo's managers are facing tremendous pressure to deliver.
February 26, 2008
The WSJ Law Blog reported today that three cases have been filed in Delaware against Yahoo in connection with its efforts to drive away Microsoft and its unsolicited acquisition offer. Specifically, shareholders want the court to determine that Yahoo's severance package for all employees (to be paid in event of termination within two years of merger) violates the Board's fiduciary duties under the enhanced scrutiny required by Unocal. The complaint presents the Microsoft bid as noncoercive and reminds the court that it reflects a large premium. In addition, remember that Microsoft has not launched a tender offer at this time but is considering a proxy fight.
Golden parachutes are generally an efficient way to align the interests of senior management with shareholders and allow each group to share in a profitable acquisition. However, here the severance package extends to all employees so could be seen as more of a tool to raise the total cost of the acquisition without any benefit to the shareholders. Although the plaintiffs in the case emphasize that the total cost of the severance package could add $1 to $3 billion to the purchase price (is that based on Microsoft firing everyone?), very large golden parachutes are not unheard of. In Bill Carney's M&A textbook, he points out that in the RJR Nabisco buyout, golden parachutes to the top 3 executives amounted to $117,700,000 in a $25 billion buyout. However, in 2007 dollars, that would amount to only $212 million in payouts on a $45 billion deal, the same size as the Microsoft-Yahoo deal.
This is getting interesting. . . .
February 20, 2008
One gets the feeling that Microsoft and Yahoo are both putting their armor on, in preparation for a hostile fight. Perhaps they are hoping for peace, but preparing for war. Microsoft is preparing to nominate a slate of directors by March 13, in anticipation of a proxy fight. A proxy fight will be cheaper to wage than a hostile tender offer, won't trigger Yahoo's poison pill, and might create an atmosphere more like Blasius than Unocal.
Meanwhile, Yahoo is offering all of its full-time employees generous severance packages that will kick in if they are terminated without cause in the two years following a merger. Although Yahoo claims these packages are designed to "prevent an exodus of employees," they seem designed to increase the costs of a hostile takeover. Microsoft believes there are synergies to be had from a merger, and synergies usually entail the termination of employees in redundant areas. Now, any synergies to be gained from that strategy may cost more than would be saved. Yahoo's plan is also suspicious given the fact that Yahoo's own management has begun laying off employees. The severance plan does not apply to a Yahoo management-inspired exodus, only terminations after a merger. This plan may backfire, however, if it also raises costs for any white knight that Yahoo was courting. Perhaps the institution of the plan signals that no white knights have been forthcoming.
My Securities students are keeping me informed on this merger. Two students sent me the link to Yahoo's poison pill, which has a 15% trigger. Poison pill is here.
February 10, 2008
It's hard to tell whether FT has a scoop or is just speculating, but it doesn't take a rocket scientist to predict that Microsoft's next step is a hostile bid:
Microsoft is gearing up to take its bid to acquire Yahoo directly to the Silicon Valley company's shareholders after the expected rejection by the Yahoo board of the software giant’s $31-per-share offer....
Microsoft has a team of advisers in place for any proxy fight. It includes Alan Miller of Innisfree, the proxy solicitation firm, and Joele Frank, the New York M&A public relations specialist, as well as financial advisers from the Blackstone Group and Morgan Stanley. Yahoo is using Dan Burch at MacKenzie Partners, a proxy firm that would lobby shareholders to try to secure their votes in favour of the current board.
This could be fun ...
February 04, 2008
Flickr users are not taking the Microsoft bid for Flickr-parent Yahoo! lying down. They are doing what Flickr users do better than anyone else: uploading photos ...
This morning's financial news is all-Microsoft/Yahoo, all the time! The most important development in the saga of Microsoft's unsolicited bid is that Google has stepped into the fray, contacting lobbyists in Washington to try to stimulate antitrust review interest and also other companies to see if anyone else is interested in outbidding Microsoft. Although Google may be too large itself to be Yahoo's white knight, the media is speculating that Google could either tie up Yahoo's crown jewel of ad search placement by entering into a long-term contract or purchasing it outright. In another scenario, multiple bidders might bid for different parts of Yahoo. Even if these bids are ultimately unsuccessful, Google would benefit by forcing Microsoft to pay more (or even overpay) for Yahoo.
As the media scrambles to assess what the technology landscape would look like in a post-Yahoo world, it is tripping over itself to have as many stories in the news as it can, even if they are inconsistent. My favorite dueling headlines this morning were both in the NYT, and even share a common author:
Microsoft Adds Research Lab in East as Others Cut Back -- As other high-tech companies cut back on their research labs, Microsoft continues to increase its ranks of free-rein thinkers.
Another Difficulty for a Microsoft-Yahoo Marriage: Recruiting -- The crowds of engineering students stood as many as six deep at the recruitment table Google set up at a job fair at Stanford last fall. Facebook's representatives faced a similarly thick crowd clamoring for a few minutes of their time. At the Microsoft and Yahoo tables, by contrast, students looked, but generally did not linger.
February 01, 2008
So many questions ...
How does Yahoo! feel about this proposal? The companies have been talking about a deal for 18 months, and Steve Ballmer called Jerry Yang last night to tell him that Microsoft was going public with the offer. Ballmer's letter to Yahoo's board of directors includes the following:
In late 2006 and early 2007, we jointly explored a broad range of ways in which our two companies might work together. These discussions were based on a vision that the online businesses of Microsoft and Yahoo! should be aligned in some way to create a more effective competitor in the online marketplace. We discussed a number of alternatives ranging from commercial partnerships to a merger proposal, which you rejected. While a commercial partnership may have made sense at one time, Microsoft believes that the only alternative now is the combination of Microsoft and Yahoo! that we are proposing.
In February 2007, I received a letter from your Chairman indicating the view of the Yahoo! Board that "now is not the right time from the perspective of our shareholders to enter into discussions regarding an acquisition transaction." According to that letter, the principal reason for this view was the Yahoo! Board's confidence in the "potential upside" if management successfully executed on a reformulated strategy based on certain operational initiatives, such as Project Panama, and a significant organizational realignment. A year has gone by, and the competitive situation has not improved.
Based on this and the fact that Microsoft's offer is "unsolicited," we can safely infer that Yang is not enamored with the deal.
Does it matter what Jerry Yang thinks? Yang matters, of course, but probably not enough to stop this deal. The market reaction suggests that Microsoft has convinced many people that the deal will happen. The bid is $31, and Yahoo's shares are hovering around $28 (up about 45%). (Microsoft's shares are down around 6% ... perhaps suggesting that Microsoft is offering too much for a depleting asset?) So while it looks far from a done deal, Microsoft is obviously determined and Yahoo's shareholders might be willing to abandon ship. They saw prices like this as recently as last October, but the company hasn't looked like a world beater since the turn of the millennium.
How about antitrust? Former Glom guest, Danny Sokol, is wondering the same thing:
If Microsoft is as dominant as its critics claim, then why has it offered to acquire Yahoo in what seems to me to be a defensive move because of the threat of Google to Microsoft? It goes to show that antitrust needs to proceed carefully against unilateral conduct in markets that change so quickly (is anyone having an IBM case tingle?). The landscape of 10 years ago in which Microsoft was dominant looks quite different today.
Amen to that post. With Google out there, is Microsoft-Yahoo really worth the trouble? (No.)
What is the plan for the new company? The Ballmer letter mentions the dreaded S-word (synergy). But are these supposed synergies real? Elsewhere, Steve Ballmer stated, "The Windows experience increasingly needs to embrace the Internet." Umm ... yeah. Microsoft hasn't tried that before. So what happens to all of the competing pieces of these companies?
So many questions. At the moment, however, this sounds more like Time-Warner/AOL 2.0 (or the "deal of the dinos") than Google.
UPDATE: Larry Ribstein wonders about synergies, too.
So we are snowy here in Champaign (and at home due to K-12 school closures), but things seem to be heating up in the online search and advertising industry! Microsoft, after being rebuffed by Yahoo management, has gone public with its offer to acquire Yahoo at a 62% premium (that's over $44 billion to you and me). WSJ article here.
What will happen? Will Yahoo management feel pressure to accept this offer, coming on the heels of Yahoo news regarding layoffs, etc.? Will, as the article suggests, Microsoft "go hostile"? This could get very interesting. Here we thought that the acquisition world was increasingly dominated by private equity taking firms private, and here's a good, old-fashioned merger of two publicly-held companies! In addition, should Yahoo be acquired, Yahoo's disappearance may be a sign of the final end of the dot com era. After years of consolidation of the first search firms to arrive on the Internet scene, Yahoo will be the acquired, not the acquirer.
What about competition concerns? Will merger approval be easy or not so easy? (Those seem to be the only two possibilities these days, at least in the U.S.) Microsoft seems to be anticipating these concerns. In its letter to Yahoo management, Microsoft management tells us not-so-subtly that Microsoft is no longer the biggest kid on the block:
Today this [advertising platform provider] market is increasingly dominated by one player. Together, Microsoft and Yahoo! can offer a competitive choice while better fulfilling the needs of customers and partners.
Hmmm. Who could that "one player" be? While other combinations have cited Microsoft as creating competition in various markets, Microsoft is now pointing to Google as a reason to let this merger slide on by.
The "market for Yahoo" may not be as competitive as the advertising platform provider market. With Microsoft's big pocket, other bidders may stay away.
UPDATE: My colleague Larry Ribstein has more here.
January 25, 2008
I just saw a wonderful presentation on trends in private equity deal terms, part of Emory's M&A Workshops sponsored by our Center for Transactional Law and Practice. Two M&A lawyers from Paul Hastings in Atlanta, Frank Layson and Erik Belenky, presented results of a study of 48 private equity acquisitions of public companies signed between January '06 and May '07. Deal trends for the period reflect a marked shift in bargaining power toward sellers and away from buyers. No surprise, given the easy financing and wealth of buyers in the market during the sample period. To the M&A lawyer, these trends may be old news, but we academics don't always get down to (or even near!) the front lines as much as we'd like. What was especially appealing about this talk was that instead of the standard offering of war stories and impressionistic assessments, they actually had data! Pie charts and everything!
Interesting trends include the following:
1. Reverse break-up fees:
74% of the deals contained reverse break-up fees, payable by the buyer for failing to close or failing to perform a material covenant or obligation. Fees ranged between 1% and 4% of the deal value, and often mirrored the amount of the seller's break-up fee.
An interesting legal question is the interplay between the reverse break-up fee and other affirmative buyer obligations (e.g., best efforts clauses). Is the fee the equivalent of an option for the seller to walk away from the deal? Or might there be additional liability for failing to exert best efforts? See the recent Delaware Chancery Court decision in United Rentals, Inc. v. RAM Acquisition Corp. (Cerberus).
2. No financing contingencies:
98% of the deals contained no financing contingency.
3. Financing commitment letters delivered at signing:
96% of the deals required delivery of commitment letters, with sellers often enjoying either third-party beneficiary status to sue the lender or a provision requiring the buyer-sponsor to take enforcement action against a breaching financer.
4. Sponsor guarantees of obligations and covenants of the acquisition vehicle (66% of deals).
5. Go-shop provisions:
66% of deals contained a go-shop clause, which allows the seller to solicit competing bids for some period post-signing.
Our next M&A workshop is on February 22. Emory's own Bill Carney will be debating Chancellor William Chandler on the continuing value of Delaware corporate law. Also don't forget our Center's conference next May on Teaching Drafting and Transactional Skills: The Basics and Beyond. For information on our events and activities, please contact Tina Stark, who directs the Center.
UPDATE: Steven Davidoff, the newly minted NYT Deal Professor, has a post today on M&A deal points as well. He looks at 4 recent private equity deals (announced since December, as compared to the not-so-recent deals covered in the study I describe above), and it appears that the credit crunch has not affected deal terms too much.
Permalink | Contracts| M&A| Takeovers| Transactional Law | Comments (1) | TrackBack (0)
January 19, 2008
Two interesting recent empirical papers address the issue of information leakage from private lenders that affects securities trading and takeovers. Private lenders receive confidential information about their borrowers as part of their lending activities. These papers document channels through which this private information leaks into securities markets and the market for corporate control.
One paper, Institutional Investors and Loan Market Information Spillover, by Victoria Ivashina (HBS) and Zheng Sun (Stern), marshalls evidence that private lenders also trade on this information, though not in the securities of the borrower but in the securities of firms in the same industry, or firms whose earnings or stock returns highly correlate with those of the borrower. Institutional investors who buy commercial loans do better in the stock market than those who don't.
The second paper, Bank Debt and Corporate Governance, by Victoria Ivashina, Vinay Nair (Wharton), Anthony Saunders (Stern), Nadia Massoud (York), and Roger Stover (Iowa State), finds evidence that banks facilitate takeovers by producing information as part of their lending activities and then transmitting this information to potential acquirers. In particular, (a) greater bank lending "intensity" for a firm (as measured by the number, amount, and maturity of loans by a bank to a borrower, among other things) improves the likelihood that the firm will be the target of a takeover bid; (b) a firm with lending relationships with banks that have more clients in the same industry are more likely to receive a takeover bid; (c) the bank lending intensity effect is stronger where the target and acquirer have a relationship with the same bank; and (d) potential acquirers who switch to a new relationship bank are more likely to bid for other clients of the new bank.
Interesting stuff!
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August 01, 2007
Following the decision to sell the Wall Street Journal has been fun, dynastic, twisty, public, and now over. Rupert Murdoch has the prize, and though some commenters have scowled that "the Bancrofts never stood a chance," it seems to me that the reason News Corp. was able to purchase the asset was because it was willing to pay much, much more than anyone else dreamed it was worth. The Bancrofts, whom I had never heard of until News Corp's offer, and who apparently didn't spend a lot of time running the Journal, are laughing all the way to the bank.
But what next? From my selfish perspective, this deal will not have been worth it if the Journal becomes only as good as the News Corp property the Times of London ... which isn't very good (go ahead, scroll around, and try to argue that you're impressed - nothing on the WSJ acquisition by this writing, btw).
My spies in the journalism community always marvelled at how small the actual news hole was at the Journal, given the number of staffers. It meant that you could go a while without getting in print. But it also meant that you could spend a week, or even more, on a minor beat story, no problem. If News Corp doesn't want to run the Journal like an unprofitable trophy, you have to think that staff cuts, paired perhaps with the creation of an investigative unit, are likely.
My final observation: at least one Bancroft, Jane Cox McElvee, resigned from one of the family's share-controlling trusts rather than vote against the deal, because she thought she'd expose herself to liability, or at least lawsuits, from trust beneficiaries. Really? Does trust law force you to take rich buyouts? Conceptions of fiduciary duty have changed, I guess. Cynics might say that trust law was invented to lock in landed English families to their estates in perpetuity. Not force their heirs to sell to any buyer bidding above market.
July 13, 2007
I've been a little behind in blogging about current events the past couple of weeks, and I let pass some interesting media attention to the future of Midwest Airlines. As a former Milwaukee resident, I still have a Midwest Airlines credit card and Midwest MIles, so I guess I should care what happens to this airline that is so inconvenient to me now (it basically flies from Milwaukee to other markets, but not really in between those other markets). I liked flying Midwest, though -- roomy leather seats, chocolate chip cookies baked onboard.
AirTran has offered $389 million in a takeover bid, which apparently 60% of MIdwest shareholders lined up to receive so far. The tender offer has been extended until August 10. However, the board is against any acquisition by AirTran and has invoked the Wisconsin constituency statute as support for their hard stance. (Hat Tip: Business Law Prof Blog.) At Midwest's shareholder meeting in MIlwaukee last week, shareholder voted in three directors nominated by AirTran, representing the one third of the board that was up for election.
The media reports that try to explain what the constituency statute does are slightly misleading. For example, the WSJ has reported that
Yet Midwest management, which under Wisconsin law can adopt a poison-pill defense that would block the takeover no matter what level or support it has from shareholders, refuses to even meet with AirTran executives.
Of course we know that under twenty-year old Delaware law poison pills are generally allowed although they are presumably analyzed by the court with a higher degree of skepticism than routine business decisions. This board decision seems like the kind that are upheld. In addition, Midwest does not appear to be on the auction block and hasn't interfered with any other shareholder right, such as the right to vote. If Midwest has or adopts a poison pill defense, it would probably be upheld under Delaware law and probably any other state law.
But Wisconsin does have its version of a constituency statute, which of course were once thought to help shareholders who might want corporations to take a broader view of other stakeholder interests besides maximizing shareholder value. Of course, in the merger context, boards may have had too much slack already to ignore shareholder value and ward off potential acquirors. I think the general consensus is that constituency statutes merely give boards of directors more leeway to provide rationales for their own self-interested agendas and are not particularly shareholder-friendly in practice. And of course, because they are written permissively ("the board may. . . ."), these statutes don't really require boards to consider the community, the environment, or any other particular stakeholder group.
Wisconsin's statute is found at 180.0827 and states:
In discharging his or her duties to the corporation and in determining what he or she believes to be in the best interests of the corporation, a director or officer may, in addition to considering the effects of any action on shareholders, consider the following: (1) The effects of the action on employees, suppliers and customers of the corporation; (2) The effects of the action on communities in which the corporation operates; (3) Any other factors that the director or officer considers pertinent.
To have Midwest acquired may have a negative impact on the Milwaukee community; I don't know. Having Midwest fail surely would, though. We'll have to stay tuned.
May 31, 2007
When they first heard of Newscorp's bid for Dow Jones, the Bancroft family was mostly icy. Now they are meeting with Rupert Murdoch, and the tone has changed. Here is Michael B. Elefante, a Dow Jones director and representative of the family:
After a detailed review of the business of Dow Jones and the evolving competitive environment in which it operates, the family has reached consensus that the mission of Dow Jones may be better accomplished in combination or collaboration with another organization, which may include News Corp.
The market seemed fairly confident that they would come around. This is from the W$J:
May 05, 2007
Ann discovered the charms of business histories on the road:
I adore [Paul] Orfalea, [founder of Kinko's,] who wrote a memoir called "Copy This! How I turned Dyslexia, ADHD, and 100 square feel into a company called Kinko's." He got me through the loneliest segment of that 1235 mile drive from Austin to Madison last month as I clicked the satellite radio over to C-Span and heard him giving a talk based on that memoir. What a wonderful, inspiring guy! Did you know Kinko's is called Kinko's because Ofalea was called Kinko because of his kinky hair.
As I have noted many times on this blog, I love business histories. When well done, they are both dramatic and instructive. With a recommendation like Ann's, Orfalea's book just went on my summer reading list.
Permalink | Businesses of Note| M&A | Comments (2) | TrackBack (0)
May 04, 2007
Microsoft and Yahoo! are talking again. Nice!
UPDATE: Paul Kedrosky discusses the rumors and responds memorably to the suggestion that Microsoft should spin out its "Internet" business and combine that with Yahoo:
Pretending there are are Internet and non-Internet aspects to a tech company like Microsoft is like pretending you can have peeing and non-peeing sections in a swimming pool. It doesn't work.
April 06, 2007
What year is this? Kirk Kerkorian (through his investment company, Tracinda Corp.) just announced an offer to buy Chrysler for $4.5 billion in cash. (Jerry York's offer letter is here.) The last time he did this, in 1995, with the assistance of Lee Iacocca, he did not have financing arranged prior to launching the bid. Though his takeover bid failed, Kerkorian turned his stake in Chrysler into a $3 billion profit when the company merged with Daimler-Benz. (You may be wondering about the valuations here. According to the W$J, "Analysts have put the value of Chrysler at about $5 billion to $7 billion, compared with its purchase price [by Daimler-Benz] of more than $35 billion." Yikes!)
Kerkorian's new offer comes with some strings: "The offer is ... contingent on reaching a 'satisfactory' labor contract agreement with the UAW, and working out a plan with DaimlerChrysler to share Chrysler's roughly $15 billion in unfunded pension liabilities and retiree heath-care costs." The UAW didn't comment on the proposal, but I suspect that they need time to study it because the proposed deal contemplates a significant equity position for the labor union. According to the York letter, Tracinda plans to:
Offer a substantial portion of equity in the company to the UAW as part of finding a solution to ever-rising healthcare costs, which not only are unaffordable by corporations, but over time will likely prove to be unaffordable by governmental entities as well.
Hmm. This could get interesting. Many employees don't want equity stakes in their companies, which is why the employee-ownership fad of the early 1990s fizzled. I will be interested to see the reaction of the UAW.
One other point: Tracinda has requested the exclusive right to conduct due diligence for 60 days. On this aspect of the deal, Anthony Sabino, attorney for Sabino & Sabino and a professor of law and business at St. John's University states: "Chrysler's board has to be very careful here because, as is well established under American corporate law, once you're on the block, you have to keep yourself open to all bidders."
No. The "Chrysler Group" is part of DaimlerChrysler AG, a German corporation. So "American corporate law" (Delaware?) doesn't apply to this decision. Even if "American corporate law" applied, this would not be a Revlon case. This is a spinoff of a division of DaimlerChrysler, not a sale of the company. Spinoffs don't trigger Revlon duties. Cf. In re Toys ""R'' Us, Inc. Shareholder Litigation, 877 A.2d 975 (Del.Ch. 2005).
December 12, 2006
I just returned home from a post-semester trip, and I overheard Northwest Airlines flight attendants speaking in the Minneapolis St. Paul International Airport: "If there is a merger, are our shares worth nothing?"
Northwest just petitioned the bankruptcy court for permission to hire Evercore to advise the airline on strategic alternatives, including potential mergers. The three flight attendants were having quite a vigorous conversation about their company's options.
September 19, 2006
GM and Ford reportedly flirted with the idea of forming an alliance, but they have dropped the subject. For now. Last night on Marketplace, host Kai Ryssdal quipped, "if GM and Ford can lose billions separately, imagine how much they can lose together."
Two wrongs rarely make a right in the world of mergers, but it may make sense for GM and Ford to explore discrete opportunities for cooperation. GM is preoccupied with Nissan and Renault right now, but don't be surprised if alliance talk with Ford springs to the headlines again in the future, especially if discussions with Nissan and Renault do not produce any results.
July 24, 2006
The WSJ is reporting that a group of private equity investors are buying out HCA, Inc. for an amount (in cash and assumption of debt) equaling $31.6 billion. This purchase price narrowly tops the price paid by KKR for RJR Nabsico in 1989. Of course, the RJR buyout is more cautionary tale than gold standard for buyouts. KKR is also in the HCA syndicate, but Merrill Lynch has the greatest amount at stake. Interestingly, we don't call these deals "leveraged buyouts" anymore, just "buyouts" by "private equity." The "leveraged" is silent.
July 18, 2006
GM CEO Rick Wagoner briefed his board of directors about his discussions with Renault/Nissan CEO Carlos Ghosn, but the companies are wading through a self-imposed quiet period while they sort things out.
In the meantime, GM's top North American sales and marketing executive claims that the company's strategy of avoiding deep discounts is working, even though sales are down 12% over last year: "First you have to stabilize it. Then you can make it go in the right direction."
How is GM going to turn this thing around? By selling lots of BIG VEHICLES:
Starting late this year, GM will start rolling out three new eight-passenger "crossover" vehicles that will offer the room and seating capacity of large sport-utility vehicles but ride smoother and consume less gas.
"Consume less gas" means they will get about 25 mpg. On the highway.
GM is also counting on Saturn to be a "conquest brand." This is the same brand that, just over two years ago, was struggling so badly that it had to surrender its independence from other GM brands. Count me skeptical, even though the Sky is a very cool car.
June 07, 2006
As both Tom K. and Larry R. have noted, lawsuits have been filed in both Texas and Kansas by minority shareholders complaining about the management buyout of Kinder Morgan. As Larry predicts, the buyout transaction, led by Rich Kinder, would probably be reviewed by courts as a transaction with a controlling shareholder. Therefore, the transaction would need to be "entirely fair" as a threshold matter. This account of the plaintiffs' allegations state that the MBO offer contains a termination fee and a "no-shop" clause designed to scare away other would-be suitors who might offer a higher price for Kinder Morgan shares and increase the value to all shareholders. (So far, no other buyer has come to the table; however, the price is very high and KM was downgraded by some analysts yesterday.) The article also states that a committee of noninterested directors would be formed who would consult outside valuation experts. I would have thought the committee would have been formed before the acquisition agreement (with the the termination provision and the no-shop clause) was signed.
The MBO offer is for $100, which reflects a healthy premium over the market price at the time of the offer, $84. However, plaintiffs argue that the 52-week high for the firm was $103 and that management timed the offer to come before numbers for a strong quarter were announced. The one-year stock chart for Kinder Morgan, Inc. is below.
April 25, 2006
The Far Eastern Economic Review has a nice analysis of M&A trends in China. Especially interesting is the description of the rise of the "POE"--the privately owned enterprise, founded by ex-employees of a state-owned enterprise (SOE). This spinoff starts by picking off the SOE's most cost-sensitive customers, which funds the POE's expansion and the attraction of more and more of the SOE's employees. If all goes well, pretty soon the POE becomes a serious competitor of the once-dominant SOE. The new POEs offer a lever into China acquisitions, especially as strategic partners for the privatization and restructuring of SOEs the government is willing to sell.
March 31, 2006
Bill Sjostrom over at Truth on the Market reported earlier this week on a New York Times article discussing the appearance of “go shop” provisions in several recent merger agreements. Basically, these provisions allow a seller to look around for better bids for a limited period of time (say 30-45 days) after signing an acquisition agreement. If the seller can find a better offer, it can terminate the original agreement and sell at the higher price, provided it pays a negotiated termination fee to the jilted buyer. As Sjostrom notes, the provision is unusual in that it departs from the traditional formula for locking up an acquisition. Traditionally, a buyer and seller would sign a merger agreement containing a “no shop” provision that barred the seller from soliciting or considering additional bids. The only exception (the so-called “fiduciary out”) was if an unsolicited bid appeared in which case the Board could consider it in order to discharge its fiduciary duties. Even then, however, an acquirer might hold “matching” (or “topping”) rights giving it the right to match (or top) the superior bid.
When I first read the Times article, my initial reaction was that the go-shop provision might be driven by private equity firms frustrated with the current buyout market. My contacts in the private equity world have frequently noted the challenge of today’s buyout environment where seemingly every deal involves a fiercely competitive auction (thus raising purchase prices, which is good for shareholders but bad for buyout firms). Presumably, this development stems partially from a target board's desire to discharge its Revlon duties prior to engaging in a buyout by conducting a thorough market-check. My instinct was that a go-shop provision might reflect an attempt by financial buyers to avoid these auctions while formally allowing a board to comply with Revlon through a market-check. Of course, the selling company will still conduct an auction, but practically speaking, there are a number of reasons why fewer firms should be interested in investigating the company after a deal has been signed. This is especially true where a buyer has negotiated matching/topping rights. Not only would prospective bidders have to bid enough to compensate for any termination fees, they might fear over-bidding due to the “winner’s curse” phenomenon.
Curious, I decided to look at the two instances cited by the Times where go-shop provisions were used. Consistent with my theory, both involved buyouts: Ripplewood’s attempted buyout of Maytag last year and Providence Equity’s proposed buyout of Kerzner International this year. But when I examined the actual go-shop provision for each deal (you can find the acquisition agreements here and here), I discovered a peculiar fact: neither contained matching/topping rights. As a result, one might say each deal was unduly at risk during the go-shop period. In fact, Ripplewood ultimately lost the Maytag deal when Whirlpool emerged with a superior bid. Of course, Ripplewood received a $40,000,000 termination fee, but Maytag’s proxy statement makes clear that Ripplewood was not at all happy about losi