U.S. Deal-Making Topped $1 Trillion in First Half

The volume of mergers and acquisitions in the United States topped $1 trillion in the first half of 2007, a record for the first six months of any year, according to Dealogic. Deal activity was even stronger in Europe, where the combined value of mergers so far this year surpassed U.S totals for the first time in four years. Goldman Sachs continues to ride the deal wave. The investment bank was ranked the top M&A adviser across the world, in the U.S. and in Europe during the first six months of the year, Dealogic said. Goldman, which advised on 223 deals worth $788 billion, was followed by Morgan Stanley and Citigroup in the global M&A ranking.
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Chairman Denies That S.E.C. Favors Business

By THE ASSOCIATED PRESS
Published: June 27, 2007
WASHINGTON, June 26 (AP) — The chairman of the Securities and Exchange Commission on Tuesday defended the agency’s record in pursuing corporate misconduct, rebuffing accusations that it may be tilting toward business interests.
At the same time, the chairman, Christopher Cox, showed some understanding for Republican lawmakers’ complaints that class-action lawsuits against corporations had grown out of control.
“Regulation has costs. So does litigation,” Mr. Cox said at a hearing of the House Financial Services Committee, where he appeared with the other four commissioners. He said regulators must be “particularly attentive” to potential conflicts of interest on the part of those who sue companies.
Mr. Cox also disclosed that the agency had started about a dozen investigations related to complex aggregations of debt known as collateralized debt obligations, in which hedge funds have increasingly invested. The situation took on urgency last week with the near-collapse of two funds managed by the Wall Street investment firm Bear Stearns.

Delay in Buyout Bond Sale

Two new signs emerged to suggest that investors are concerned that the buyout boom may be losing its momentum. US Foodservice, the American unit of the Dutch supermarket Royal Ahold, has postponed its sale of $650 million in bonds that were expected to finance the unit's equity buyout. Before the decision, US Foodservice had twice scaled back its debt offering to help finance its $7.1 billion buyout by Kohlberg Kravis Roberts and Clayton Dubilier & Rice.The decision to delay the sale, one anxiously watched by analysts as a weathervane for the newest crop of buyouts loaded with debt, came on the same day that shares of Blackstone Group, the giant private equity firm that went public last week, fell below their offer price of $31.
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AG's Hiring of Legal Counsel Opposed

Amanda Bronstad, The National Law Journal, June 26, 2007:

Two national tort reform groups have intervened in an Oklahoma case in an attempt to disqualify plaintiffs lawyers who were hired by the state's attorney general on a contingency-fee basis.
The U.S. Chamber of Commerce and the American Tort Reform Association (ATRA) recently filed an amicus brief in an environmental case brought by Oklahoma Attorney General W.A. Drew Edmondson against about a dozen poultry processing plants. State of Oklahoma v. Tyson Foods Inc., No. 4:05-cv-00329 (N.D. Okla.).
The Chamber and ATRA have been scrutinizing attorneys general for hiring outside counsel on a contingency-fee basis to bring big-ticket litigation against corporations.
In their brief, the chamber and ATRA claim that "permitting the state to 'contract out' its enforcement power to private attorneys can lead to prosecution of government lawsuits on the basis of profitability, not public interest."

Private Equity Investors Hint at Cool Down

By ANDREW ROSS SORKIN and MICHAEL J. de la MERCED
Published: June 26, 2007, The New York Times

The buyout boom may be about to hit a bump.
After years of supersize private equity deals, investors in the debt that supports these transactions — the lifeblood of the industry — have begun to not so quietly push back at several prominent transactions.
Rising interest rates and tougher terms from investors may signal that private equity players will soon be struggling to continue reaping the outsize returns that have made the buyout business so lucrative.
Already a raft of bond offerings for recently announced deals, including the $7.75 billion buyout of Thomson Learning and the $7.1 billion deal for U.S. Foodservice, have been scaled back after facing resistance from investors.
This week, two other buyouts, the $4.7 billion deal for ServiceMaster and the $6.9 billion sale of Dollar General, are expected to price their bonds, and they may serve as an important barometer for a series of even larger deals to sell bonds to investors this summer.
Stock in the Blackstone Group, the private equity firm that went public Friday, fell 7.5 percent yesterday, to $32.44, in another sign that investors may now be less optimistic about the buyout boom. Blackstone’s stock opened at $36.55 on Friday and closed that day at $35.06.

Does the Bell Toll for the Buyout Boom?

Posted by Dana Cimilluca, June 25, 2007, WSJ DealJournal:

The recent lull in merger activity could mean one of two things. Either the market is pausing before an assault on yet another peak, or the end of the great buyout boom is near.
Joseph Rice thinks it may be the latter. The chairman of buyout firm Clayton Dubilier & Rice told Bloomberg in an interview over the weekend from Singapore that “We are pretty close to the peak” of this private-equity cycle, which began after the last downturn in the industry in 2000-2001.
Signs that Rice might be right abound. Providers of the loans and bonds that have fueled the deal-making frenzy are starting to hold their wallets a bit more tightly. Last week, Royal Ahold’s U.S. Foodservice unit — in the midst of being bought by private-equity firms — was forced to trim down and delay the sale of debt to back its leveraged buyout, as The Wall Street Journal reported Saturday.
Then there was the initial public offering of Blackstone Group Friday. It doesn’t take a strong imagination to see the landmark sale, which the firm’s owners are using to partially cash out their stakes, as the climax of the boom.
Alas, many bankers and private-equity practitioners have been calling for a bursting of the M&A and lending bubble(?) for months, and so far it remains intact. All the worry could in fact could sustain the boom a while longer, as we discussed here.
After all, CD&R just signed up for one of the largest deals in its history, the $10 billion acquisition of Home Depot’s supply business. The string of quiet Mondays lately (normally the preferred day for merger announcements) also could signal little more than a typical summer slowdown, where even hyperactive bankers pause for a moment to smell their abundant roses. Certainly Deal Journal colleague Mahammad Hadi here sees the buyout speculators getting their flip-flops ready.
Time will tell whether it is Rice’s words or his actions that should be watched the closest.

Bausch & Lomb: A Sorry Tale

From Business Law Prof Blog, June 24, 2007:

Bausch & Lomb, a 154 year old company, is selling to a private equity firm, Warburg Pincus for $65 a share. The company is struggling and its stock price is well down from highs of $80 a share two years ago. The CEO responsible for the company's recent setbacks is Ronald L. Zarella. Zarella will receive a golden parachute payout of $40 million and have an equity stake in the privatized company. If the company turns around, he will rake it more millions. There are three things seriously wrong with this story: First, Zarella is profiting from his own weak managing record (there were accounting problems while he led the company). Second, Zarella is conflicted in the buyout both by the overly generous golden parachute and by his participation in the purchaser. And third, the purchaser will undoubtedly do the cookie cutter "Peltz thing" to print money -- sell under-producing assets, sell undervalued assets, leverage and distribute money to shareholders (an extraordinary dividend or buyback). This is not rocket science; it is pathetically simple. If this is a viable strategy for the private company it is surely a viable strategy for a public company; Zarella should have done the Peltz thing as CEO of the public company. The entire deal smells. At some point, we are going to have to come to grip with the fact them many of the private buyouts are a huge reward for those who should not be rewarded and this reward may itself be a primary reason for the buyout. Buyout groups look for companies with poor managers and fat golden parachute agreements; convince the manager to sell, cash the agreement, and come abroad the buyout team which can use his knowledge and contacts (and inside information) and tell him how to behave. We need a decent judicial opinion on one of these deals that lays out more protections for shareholders.

Vonage set to resume patent battle

by Stacey Higginbotham, TheDeal.com:
Vonage Holdings Corp. is scheduled Monday, June 25, to appear in the United States Court of Appeals in Washington to make what may be a final stand in fighting charges that its online telephony service infringes patents held by Verizon Communications Inc.
A verdict against Vonage, a pioneering developer of so-called voice-over-Internet-protocol technology, which enables conventional phone calls to pass over IP-based technology, could prove fatal for the Holmdel, N.J., company. Yet prospects for Vonage, whose shares have tanked over the past year amid uncertainty surrounding its legal status appear marginally brighter now than after its last court hearing two months ago.

Congressional Scrutiny of Private Equity Continues

DealLawyers.com Blog, June 19, 2007:

As widely reported, Senators Baucus (D-MT) and Grassley (R-IA) introduced a bill last Thursday that would significantly change the taxation of publicly traded private equity firms structured as partnerships. This legislation, if passed, would cause publicly traded private equity firms to be taxed as corporations. As such, these firms generally would be subject to an entity-level corporate tax (with no preference for capital gains, including carried interest) and the owners of these firms would be subject to tax on distributions received from the firms. Here is a related NY Times article.
Rep. Charles Rangel, Chairman of the House Ways and Means Committee, praised the bill and said his committee would examine the legislation. If passed, the bill would be immediately effective for any firm that has not yet filed an IPO registration statement with the SEC. For firms that have done so, namely the Blackstone Group, the bill would not be effective until 2012.
Posted by broc at June 19, 2007 08:45 AM

Calpers Jumps on the Activism Bandwagon

NYT's DealBook, June 18, 2007, 3:56 pm:

As shareholder activists grab the spotlight more often — the most recent example being The Children’s Investment Fund’s pushing for a sale of ABN Amro — one of the largest institutional investors in the United States has decided to hitch itself to itself to their star.
The California Public Employees’ Retirement System, the largest state pension fund in the country, will invest $12 billion with activist investors, a Calpers official said at a conference Monday, Bloomberg News reported. That would more than double the $5 billion the fund currently invests in such funds.
“Global activism is on the rise,” Christy Wood, a senior investment officer for global equities, told the GAIM conference in Monaco via videoconference. “Shareholders are increasingly taking an interest in what is happening in the companies they own.
DealBook has noted on more than one occasion that shareholder activism of late has earned handsome returns for practitioners. Studies by Columbia Business School and the Wharton School point out that activist funds have produced returns of at least 7 percent over the short term, with the stocks of targeted companies often remaining up over the longer term.
Yet both studies point to a worrisome trend for Carl C. Icahn, Daniel S. Loeb and their acolytes: more activists are chasing fewer good targets. The Columbia study, for instance, noted that average stock returns for targeted companies have declined from 10.6 percent in 2001 to 4.8 percent in 2005.
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Justices Turn Back Antitrust Suits Against Wall St. Firms

New York Times, WASHINGTON, June 18 — The Supreme Court ruled in favor of more than a dozen Wall Street investment banks today as it found that they could not be sued under antitrust law over losses in the crash of technology stocks seven years ago.
By a 7-to-1 majority, the court held that securities law, not antitrust law, applies to the conduct that the dissatisfied stock buyers alleged in the case. They complained in part that the investment banks conspired to drive up prices on hundreds of new stocks.
Today’s ruling overturns a 2005 decision by the United States Court of Appeals for the Second Circuit, in Manhattan, which said it found “dangerous manipulation” by the banks and would have allowed the plaintiffs to proceed under antitrust law.
The case had been closely watched on Wall Street, in part because a successful suit under antitrust law could lead to triple damages, unlike penalties under securities laws.

Must-Read Decision: VC Strine Enjoins Merger Vote Topps Case

From DealLawyers.com Blog, June 18,2007:
On Thursday, Vice Chancellor Strine of the Delaware Chancery Court issued an opinion in which he enjoined The Topps Company from proceeding with a meeting of stockholders to vote on a merger with The Tornante Company (controlled by Michael Eisner). The injunction required (i) supplemental disclosure regarding Eisner's assurances that he would retain existing management and (ii) that Topps release Upper Deck, a second bidder, from a standstill agreement so that Upper Deck could communicate with Topps stockholders and launch a topping tender offer. The Vice Chancellor concluded that Topps improperly failed to waive the standstill, used Upper Deck's status as a competitor as a "pretext," and that the evidence "regrettably suggests that the Topps Incumbent Directors favored Eisner, who they perceived as a friendly suitor who had pledged to retain management...."
This decision is a must-read for M&A practitioners. Here are some highlights from the 67-page opinion:
1. The court validated Topps's decision to negotiate privately with Eisner and not to conduct an auction. VC Strine observed that (a) Topps conducted a failed auction in 2005 for its confectionary business and (b) the directors engaged in a "spirited debate" on the subject. He also noted that a recent proxy contest had put potential buyers on notice: "the pot was stirred and ravenous capitalists should have been able to smell the possibility of a deal."
2. The court recognized the value of obtaining a binding bid from Eisner (the "proverbial bird in hand") and found that the board left itself "reasonable room for an effective post-signing market check" through the use of a go-shop provision ("For 40 days, the Topps board could shop like Paris Hilton").
3. VC Strine validated the customary deal protection measures used by Topps - a termination fee and matching right. He observed that while matching rights are "a useful deal protection" for buyers, they have "frequently been overcome in other real-world situations." He considered the 4.3% post-go-shop termination fee "a bit high in percentage terms" but deemed it reasonable since it included Eisner's expenses and "can be explained by the relatively small size of the deal." "At 42 cents a share, the termination fee (including expenses)is not of the magnitude that I believe was likely to have deterred a bidder with an interest in materially outbidding Eisner."
4. VC Strine sharply criticized the Topps board for having little basis on which to terminate negotiations with Upper Deck when the go-shop expired (which was permitted if Upper Deck was deemed to be an "Excluded Party"): "Upper Deck was offering a substantially higher price.... [and] the Topps board chose to tie its hands by failing to declare Upper Deck an Excluded Party in a situation where it would have cost Topps nothing to do so."
5. Most importantly, VC Strine came down hard on Topps's refusal to waive a standstill agreement which prevented Upper Deck from making public statements or proceeding with a premium hostile tender offer: "That refusal not only keeps the stockholders from having the chance to accept a potentially more attractive higher priced deal, it keeps them in the dark about Upper Deck's version of important events, and it keeps Upper Deck from obtaining antitrust clearance, because it cannot begin the process without either a signed merger agreement or a formal tender offer."
6. The court ordered supplemental disclosures to make clear that, even though management had not negotiated retention agreements, Eisner had already made clear that he planned to retain "substantially all" of Topps's "senior management and key employees." The court also ordered supplemental disclosures of Upper Deck's "he-double-hockey-sticks or high water" offer to divest itself of assets to obtain antitrust approval, which the court deemed relevant since Topps cited antitrust concerns in its decision to terminate discussions. The court also chastised Topps's financial advisors for adjusting cost of capital assumptions and shortening management's projections from five to three years-apparently in an attempt to support Eisner's offer. The court ordered supplemental disclosures that reflected the original and full projections.
Practitioners should note that unlike other recent decisions, such as Caremark-Express and Netsmart, Topps is not solely a disclosure injunction. VC Strine granted substantive relief regarding the standstill. Practitioners also should note (not surprisingly) that the plaintiff who obtained that relief was the topping bidder, not a stockholder plaintiff. VC Strine expressly noted that the arguments made by the stockholder plaintiffs would not have supported a Revlon injunction. Topps thus does not increase deal risk absent the presence of a meaningful topping bid.
Topps' ruling on the standstill provision is frankly a welcome precedent. The questions created by aggressive standstill agreements and subsequent waivers have been part of the Delaware counseling mix for some time. Without any meaningful decisions on the issue, however, concerns regarding potential fiduciary duty issues were often given short-shrift. Topps confirms that the use of standstill agreements and reliance on them to foreclose subsequent bids are areas that must be approached with particular care.

Congress Puts a Chill in Blackstone’s IPO

WSJ Deal Journal, June 14, 2007, 4:52 pm

Congress has finally lowered the hammer on the private-equity industry. And it’s hitting Blackstone Group in the head.
Sens. Max Baucus and Charles Grassley, the ranking Democrat and Republican on the Finance Committee, introduced a bill today that would eliminate favorable tax treatment for the private-equity firm, which is planning to go public later this month.
In short, the bill says the fees Blackstone collects from its investors should be taxed like regular corporate income, and not at the more favorable “partnership” level that Blackstone had planned.
The bill, which could be passed as soon as a few weeks from now if it gets added on to the budget bills the Congress is currently working on, could put a big chill on Blackstone’s IPO and other such offerings waiting in the wings.
Deal Journal has also been told by people close to the issue that Baucus and Grassley will introduce a bill in July to make sure that carried interest profits pocketed by private equity firms are taxed as regular income, at as much as 35%, and not the reduced capital gains rate of 15%.
If the bill passes, Grassley and Baucus made sure it will become effective retroactively — back to today, the day it was introduced. This is very signfiicnat because it ensures that Blackstone will have to comply even if it goes public before the bill passes.

Concerns grow over risky equity bridge loans

NEW YORK, June 14 (Reuters) - The recent popularity of a risky private equity financing agreement, known as an equity bridge loan, is raising concerns among analysts, regulators and even the bankers who arrange them.
Equity bridge loans allow private equity firms to get investment banks to share in the cash payment on deals. Such loans are great for buyout firms wanting to pursue takeovers without joining forces with competitors, but carry huge risk and skimpy pay-offs for the investment banks.

Deliver and you get paid

The private equity industry's pay-for-success approach to executive compensation could be a model for public companies, The Deal's David Carey writes. The article looks at common features of executive pay packages at private-equity-backed firms.
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The Private Equity Effect

As buyout firms hunt for underperforming public companies, many are trying to boost their stocks with asset sales, spin-offs, and restructurings

As private equity firms continue to gobble up assets at unprecedented rate for unprecedented sums, their deal-frenzy is causing a chain reaction among firms who are eager to escape the clutches of these cash-rich hunters.

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Hedge fund activism works – for now

William Wright and William Hutchings
04 Jun 2007

Hedge fund activism generates big returns for shareholders – but these returns are falling as more funds chase fewer attractive targets, according to the most comprehensive academic study yet produced.
Shares in companies targeted by activist hedge funds in the US outperformed the market by more than 7% in the short-term, and targeted companies posted significant improvements in operational performance and return on equity in the two years after hedge funds called for change, according to the study of nearly 900 interventions by more than 130 different hedge funds in the US between 2001 and 2005.
In a quarter of all cases the excess returns were higher than 17%. The study, published last week by the Wharton School at the University of Pennsylvania and written by four academics, also shows that hedge fund activists have a bigger impact on share price performance than traditional activism by pensions funds or mutual funds.