Wednesday, February 27, 2008

Study: Midmarket M&A to keep pace in '08

Corporate DealMaker, Posted on February 26, 2008 at 5:13 PM

Dealmakers at middle-market companies are generally optimistic about the current and future deal climate, according to the results of a recent survey. CFO Research Services and CIT Group Inc. surveyed 529 senior-level finance decision makers at middle-market U.S. and Canadian companies for their report "M&A in Challenging Times." According to the survey:
Although a substantial number of respondents said that M&A activity would decrease over the next year (23 percent), many respondents predicted an increase in M&A activity (47 percent), while nearly a third said they believed M&A activity would stay the same. Not surprisingly, respondents said strategic players with strong balance sheets would not be deterred by uncertainty in the credit market. The results also indicated that fundamental business factors such as the need to enter new markets and responding to competitive threats would be the main deal drivers. The survey results generally support the conclusions reported in this Dealscape, which predicts midmarket players may find good deals in the months to come as companies hurt by the sluggish IPO market, low liquidity among smaller companies and a tough economy go looking for buyers.
For more on the CIT study, including a chart, see this item on Dealscape. - Baz Hiralal

Tuesday, February 26, 2008

Hedge Funds Still Pose Risk to Financial System, Report Says

Despite closer monitoring by regulators, hedge funds still pose significant risks to the financial system, a government report said Monday.
The loosely regulated capital pools favored by the rich and by large financial institutions “require continued monitoring by regulators and counterparties,” according to a report released by the Government Accountability Office, the investigative arm of Congress.
The study found that hedge funds’ inclination to take substantial risks with increasingly large sums of money — and to leverage those bets — means losses can spread and be magnified throughout the financial system.
The report said banks eager to do business with hedge funds often are not critical enough when assessing the risks of their complex investment strategies.
The G.A.O. study comes at a tough time for hedge funds, which last month reported heavy average losses in a slumping stock market. In December, new money invested in hedge funds hit its lowest level in two years as investors cooled to the sector.
As it has grown in size and gained public attention, the hedge fund industry has fought a series of battles over regulation and taxation on Capitol Hill and with the U.S. Securities and Exchange Commission, with mixed results
Go to Article from BusinessWeek »
Go to Article from Reuters »

Friday, February 22, 2008

Supreme Court Continues Pro-Business Stance

In three key business rulings handed down Wednesday, the Supreme Court continued its trend toward freeing companies from the conflicting regulation of 50 different states in favor of one federal regime.
The Court favored federal pre-emption over state laws and state court remedies in the areas of medical device regulation, interstate shipping of tobacco and arbitration of contract disputes.
In announcing one of the cases from the bench, Justice Antonin Scalia said the day's decisions made it clear that "we consider it part of our business" to sort out the balance between federal and state law.
But it was not a clean sweep for business Wednesday. In LaRue v. DeWolff, Boberg & Associates, the Court ruled that employees can sue employers under the Employee Retirement Income Security Act for mismanaging their 401(k) retirement plans.
Of Wednesday's pre-emption cases, Riegel v. Medtronic may have the broadest impact. The Court ruled against the estate of Charles Riegel, who died after a catheter made by Medtronic malfunctioned during heart surgery.
Riegel sued in federal court, invoking New York state common law to argue for liability and damages. Like lower courts, the Supreme Court ruled that the federal Medical Device Amendments of 1976 specifically preclude states from imposing their own requirements on the makers of federally regulated medical devices.
Justice Ruth Bader Ginsburg dissented from the opinion authored by Scalia. Ginsburg called the ruling a "radical curtailment" of state law remedies that Congress did not intend when it passed the law.
Jon Haber, head of the American Association for Justice, the organization for trial lawyers, criticized the ruling and said it "should be narrowly viewed as applying only to certain medical device cases and should not serve as precedent for cases involving drugs and other consumer products."

Tuesday, February 19, 2008

Investor Activism Tops Last Year's Record Pace

Kaja Whitehouse of the WSJ wrote this article on Saturday: "Efforts by activist investors to fight for board seats, oppose mergers and otherwise shake up companies are on track to beat last year's record levels, contrary to expectations that activity would dry up because of unstable market conditions.
There have been 72 campaigns waged by activists so far this year, as of Feb. 11, with targeted companies ranging from Countrywide Financial Corp. to New York Times Co. Last year, when shareholder activism hit record levels, there were just 54 campaigns waged over the same time period, according to FactSet SharkWatch, which tracks proxy contests and corporate-takeover defenses.
Hedge funds continue to be big participants. More than half, or 38, of the campaigns so far this year were initiated by hedge funds, compared with 21 during last year's period, according to FactSet SharkWatch."

Tuesday, February 12, 2008

How acquirers can ride the restructuring wave

Steve Zuckerman, director of the Special Situations Group at Farlie Turner & Co., writes exclusively for Corporate Dealmaker on how strategic buyers can muscle through tough economic conditions. The Corporate Dealmaker, February 12, 2008.

With less liquidity in the market and tighter credit standards now in place, it is likely that credit defaults will dramatically rise and companies will no longer be able to refinance themselves out of their financial challenges. This economic climate will create opportunities to acquire companies with overleveraged capital structures -- but sound business models -- for a significant discount.

The opportunities will develop in multiple sectors -- not just among real estate developers and mortgage lenders, but also in any industry tied to the housing market such as the myriad of building product and equipment rental companies. We also expect other industries to suffer considerable challenges, including retail, casual dining, manufacturers and distributors of durable goods. Within these industries, it is smaller and midsize companies that will feel the pressure first as they typically have fewer resources and are less likely to raise institutional capital.

Strategic buyers with strong balance sheets will benefit because they will be able to capture market share by acquiring undercapitalized competitors. Private equity firms, flush with capital, are also likely to find many favorably priced deals, although they will be unable to use as much debt to finance their purchases as in the past. Still, buyers will need to be vigilant, since different rules and strategies apply in distressed M&A.

When acquiring a company that is insolvent (generally defined as a company whose liabilities exceed its assets or one that is unable to pay its debts as they come due), one of the greatest risks is being sued for a fraudulent transfer. The term "fraudulent" is somewhat of a misnomer, since neither fraud nor misconduct needs to be proved. Instead, federal and state (constructive) fraudulent transfer law permits a transfer to be unwound if the transfer was not for fair consideration and the seller was not solvent at the time of transfer or become insolvent as a result of the transfer. A failed leveraged buyout, for example, is often attacked by creditors as a fraudulent transfer. As the buyer utilizes the target's assets to finance the transaction, the target arguably received less than "reasonably equivalent" value.

There are several ways for a buyer to limit its exposure to a fraudulent transfer claim, such as obtaining a fairness opinion, a solvency opinion or consummating the transaction in the context of a bankruptcy proceeding -- which is the most foolproof approach. Another interesting wrinkle in negotiating with a distressed company is that when the company enters into the "zone of insolvency," the fiduciary responsibility of directors and officers shifts from shareholders to creditors. Buyers can gain leverage by making this point painfully clear to directors and officers.

Whether the buyer is strategic or financially oriented, an important part of the acquisition strategy should be focused on whether the assets should be acquired in or outside of bankruptcy. Acquiring distressed companies and assets through a bankruptcy proceeding provides considerable benefits, such as cleansing the assets of liens, the ability to reject unfavorable contracts and the virtual elimination of various types of liabilities. However, these benefits must be weighed against the transparency of a bankruptcy proceeding, which is designed to fully vet an asset, foster competition and garner the highest and best price. Strategic buyers also need to consider the reputational impact of a bankruptcy and the effect it could have on trade vendors. If a company has critical and irreplaceable vendors, a buyer should consider contacting such vendors to determine whether they would discontinue doing business with the company if it files bankruptcy. In the end, each distressed situation presents unique facts and buyers should rely on experienced restructuring advisers to assist them in their quest to take advantage of the challenging times that lie ahead.

Steve Zuckerman. The author is director of the Special Situations Group at Farlie Turner & Co., a Fort Lauderdale, Fla.-based investment bank serving growth-oriented middle-market companies. Recently launched, the group provides investment banking, capital raising and financial advisory services to middle-market companies experiencing financial difficulties, ranging from underperforming to significantly distressed businesses.

Tuesday, February 05, 2008

SEC Proposes Further Section 404 Delay Blog:
The SEC has proposed yet another one-year delay in implementation of an independent auditor’s attestation report on the internal controls for the smallest public companies. As noted in the blog at the end of last year, Chairman Cox had promised this delay in his testimony before the House Committee on Small Business.
Under the proposal, non-accelerated filers would be required to provide auditor’s attestation reports beginning with their annual reports filed for fiscal years ending on or after December 15, 2009. The proposal does not affect the requirement that management complete its own assessment of internal control over financial reporting – which is now required for all filers, regardless of size. The proposing release is out for a 30-day comment period.
The proposed delay in fully implementing Section 404(b) – to over seven years after Sarbanes-Oxley was enacted – coincides with an announcement that the Staff has commenced its previously discussed study of the costs and benefits associated with the auditor attestation requirement for smaller companies. This is supposed to be an analysis of “real world” data in order to measure experience with the recent SEC and PCAOB guidance for management and auditors. The final results of the study are not expected for several months.