Wednesday, April 29, 2009

Another View: A Bailout for the Plaintiff’s Bar

DealBook, NYT, April 29, 2009
In January 2008, I saw a rock musical in Los Angeles called “Blood, Bloody Andrew Jackson.” The refrain from the main number was “pop-u-li-sm: yeah, yeah!” By early 2009, thanks in no small part to the likes of the Troubled Asset Relief Fund, John A. Thain of Merrill Lynch and the American International Group’s bonus babies, that chorus spread east, enveloped the country and galvanized The People.
Such atrocities as banker bonuses and Mr. Thain’s bathroom redecoration have made delicious targets of contempt. It was the liberal media’s dream: a chance to position the lowly taxpayer, the outraged face of TARP, against the mustache-twirling titans of Wall Street.
Taxpayer vs. corporate bad guy is a good one. But how about taxpayer vs. shareholder?
That, surprisingly, is a story that’s largely evaded the news pages, despite the fact that settlements resulting from the scores of shareholder suits against TARP entities will stretch into the stratosphere.
Sure, through TARP, taxpayer money may be used to pay off mortgages and fund bonus pools. But, in what will amount to a far more expensive proposition, TARP money will also be used to line the pockets of allegedly aggrieved shareholders and the lawyers who, wrapped smugly in the flag of corporate governance, are in the process of making a billion-dollar cottage industry out of filing strike suits.
Take the villainous Merrill Lynch. On Jan. 16, the government announced it would invest $20 billion of TARP money in Bank of America and guarantee $118 billion of assets in order to help it absorb its acquisition of Merrill. On that same day, Merrill announced it would shell out $550 million to settle claims by shareholders that it misled investors about assets backed by subprime mortgages.
Where is that settlement money going to come from? At the minimum, settlements like this one mean Bank of America is less able to pay back TARP money. At the worst, the bank must cut into its TARP allotment in order to settle up. In either case, shareholders of companies that would have gone bankrupt but for TARP are instead getting their settlements funded by bailout money.
And there will be more. Thirty-two TARP recipients had received $1 billion or more in federal money as of April 15, according to the Treasury’s Web site. And 19 of those companies have been sued since January 2008, according to data accumulated by the Stanford Securities Class Action Clearinghouse. Put otherwise, of the more than $300 billion that’s been paid out in TARP money, nearly $240 billion of it, or 78 percent, is subject to shareholder suits.
Even in flush times, the shareholder class action is a controversial legal mechanism. Its backers claim that these suits keep companies honest by deterring corporate malfeasance and making the bad guys pay. (Yes, believe it or not, some will argue that even with the Department of Justice, the Securities and Exchange Commission and Attorney General Andrew M. Cuomo of New York patrolling Wall Street, we still need shareholder suits to keep companies honest.) But even in a typical, TARP-free paradigm, the bad guys don’t pay. Instead, shareholders wind up paying each other.
The shareholder class action is a “circular and costly” process, according to Adam Pritchard, a professor at the University of Michigan Law School. He explains: “It’s the company’s dollar that gets paid out in these suits. Shareholders effectively take a dollar from one pocket, pay about half of that dollar to lawyers on both sides, and then put the leftover change in their other pocket.”
But now, in the world according to TARP, that settlement money is no longer coming from the corporation or its insurance plan. It’s coming from you.
“At the end of day, you can’t avoid the fact that, in settling these cases, you will inevitably be taxing the taxpayer, as you shift tax money to the plaintiff-shareholder class,” says Joseph Grundfest, a professor at Stanford Law School and a former S.E.C. commissioner.
Ironically, by appearing to provide shareholders with a real remedy, class actions have long been billed as corporate law’s most populist event. But when taxpayer money, rather than the corporate coffer, is being used to fund the resulting settlements, whose bad behavior are we really punishing?
Dan Slater, a former litigator, is a freelance journalist in New York.

Tuesday, April 14, 2009

Report Sees Signs Bankruptcy-Related M&A Deals on the Rise

Brian Baxter, 04-14-2009
Citing data compiled by Thomson Reuters, the Financial Times reports that bankruptcy-related M&A deals have hit their highest level globally since August 2004. With the economic downturn forcing more companies into sales of distressed assets, it seems likely the trend will continue.
"We've only just begun," Skadden, Arps, Slate, Meagher & Flom restructuring Co-chair J. Gregory Milmoe told the Financial Times. "Given the dearth of capital and the substantial increase in the number of companies that will be troubled, one would expect the M&A rate to increase dramatically."
A few weeks ago we posted on the rise in section 363 asset sales and liquidations occurring in bankruptcy, citing pending sales by BearingPoint and The Greenbrier Hotel.
"[Section 363s] are a capital markets-driven phenomenon; there's less DIP financing to stay in the ordinary course of operations and support a standalone [bankruptcy] plan," Willkie Farr & Gallagher business reorganization Chair Marc Abrams told us. "And there are equally reduced levels of exit financing that would permit a company, once it comes up with a stand-alone plan, to emerge from bankruptcy."
The Financial Times points to the $350 million BearingPoint deal and the decision by auto parts manufacturer Delphi to sell its brakes business to a Chinese company for $100 million as evidence that bankruptcy-related M&A is on the rise.
Thomson Reuters identified 34 such deals in March alone and 67 so far this year. The bulk of those deals were in the U.S. and Japan, the Financial Times reports, because of the length of time both countries have been in recession and more liberal bankruptcy rules that allow companies to operate while they restructure.
According to Thomson Reuters data, monthly totals for bankruptcy-related M&A peaked at 87 such deals in July 2002 and dwindled to a mere seven in May 2007, shortly before the onset of the global recession.
While many of the deals of the last downturn involved telecoms and tech startups being acquired by strategic and private equity buyers, this time around, the private equity money has remained on the sidelines because debt has become more expensive.
Since insolvencies tend to peak 12 to 18 months after the beginning of a recession, Thomson Reuters data suggest that more bankruptcy-related M&A work will emerge later this year, the Financial Times reports.

This article first appeared on The Am Law Daily blog on
Copyright 2009. Incisive Media US Properties, LLC. All rights reserved.

Friday, April 10, 2009

Q1 Worldwide M&A League Table

Here's Thomson Reuters' Q1 Worldwide M&A league table.
Announced deals 01/01/09 - 31/03/2009
1. Morgan Stanley - $218.6bn deal volume, 70 deals
2. JPMorgan - $203.3bn, 70
3. Citi - $182.7bn, 59
4. Goldman Sachs - $160.2bn, 37
5. Deutsche Bank - $133.4bn, 50
6. Credit Suisse - $116.2bn, 50
7. Bank of America / Merrill Lynch - $99.2bn, 42
8. UBS - $93.1bn, 42
9. Barclays Capital - $69.7bn, 11
10. Evercore Partners - $67.3bn, 6
11. Lazard - $41.6bn, 39
12. Rothschild - $35.4bn, 52
13. Nomura - $31.9bn, 58
14. Santander - $28.3bn, 16
15. RBC Capital Markets - $26.1bn, 23
16. Mediobanca - $21.5bn, 10
17. China Int Capital Co - $20.1bn, 11
18. Blackstone Group - $19.3bn, 11
19. CIBC World Markets - $19.0bn, 8
20. BNP Paribas - $12.1bn, 17
21. ING - $11.9bn, 9
22. RBS - $11.1bn, 13
23. NIBC NV - $10.8bn, 2
24. Scotia Bank / Bank of Nova Scotia - $7.9bn, 9
25. Grant Samuel - $7.6bn, 7
Source - Thomson Reuters

Thursday, April 09, 2009

Nail the Shorts?

Floyd Norris, NYT, Notions on High and Low Finance, April 8, 2009:

The S.E.C. is putting out for comment a bunch of possible short-selling restrictions today. There are several variations on two ideas. First is an uptick rule, like one we used to have, that bars short-selling at a price lower than the last different price. Second is some type of circuit breaker, like barring further short sales of a particular stock on a day that stock has fallen 10 percent.
I assume the commission will eventually adopt something. The pressure from Congress, and the public, is great.
And I suspect that the eventual impact of what they adopt will be modest, at best.
Listening to the five commissioners speak was refreshing, in contrast to the unlamented S.E.C. during the chairmanship of Christopher Cox. Last fall, the S.E.C. introduced panic measure after panic measure to halt or reduce short-selling. There was little effort to carefully consider whether there was any evidence to support the measures, which seemed to change every hour or two. Then they had to be tweaked as unanticipated consequences piled up.
This time, all five commissioners, led by Chairwoman Mary Schapiro, seemed to understand that there is no empirical evidence to support the belief that short-sellers are to blame for much of anything, even if there is public outrage. Whatever rule is adopted will be chosen after everyone has a chance to comment and point out unintended consequences.
It sounds as if panic is receding at the commission.

Wednesday, April 01, 2009

Will the stimulus package stimulate M&A?

Posted on April 1, 2009 at 1:26 PM,
M&A advisers don't see such a rosy future for their business, at least not in the near term, according to an annual survey by communications firm Brunswick Group LLC. Only 29% of the 59 respondents -- including bankers, lawyers and other market players -- maintain there will be signs of recovery in "a year to eighteen months" -- down from 52% who shared that view in April 2008. Indeed, 69% believe it will take up to five years to return to the level of M&A activity seen in 2007, up 28% from last year's survey. Respondents cited the lack of credit (39%), slowing economy (26%), lack of CEO confidence (26%) and equity market decline (9%) as the most significant factors stifling M&A. Asked about the likely impact of the stimulus package on dealmaking, 44% believe the package will have a positive affect on M&A if it is able to "restore confidence" and "ease credit" while 46% believe the package will have a neutral effect. "While advisers caution that recovery will take time, the survey indicates some areas where we can expect activity in 2009," Brunswick senior partner Steven Lipin said in a statement. "Lower company valuations as well as the potential impact of the stimulus package on both credit and confidence could drive domestic deals, especially in the healthcare and financial sectors, and prompt unsolicited transactions."Topping the list of sectors considered ripe for consolidation are healthcare (25%), financial services (24%), energy (15%) and consumer goods/retail (14%). - Claire Poole

Angel Investors’ Wings Are Being Clipped

From Claire Cain Miller at Bits:
Entrepreneurs had a harder time getting angel funding to get their start-up idea off the ground last year, according to a new report from the Center for Venture Research at the University of New Hampshire. In 2008, angel investors funded young companies at the same pace as they did the year before, but they invested significantly less in each start-up.
Angels invested $19.2 billion in start-ups in 2008, a decrease of 26 percent from $26 billion in 2007. Still, they financed 55,480 ideas, only a slight decrease of 3 percent from 57,120 the year before. As a result, the average deal size for 2008 fell 24 percent from 2007. MORE »