Thursday, September 30, 2010

Deal Makers Cautious

September 30, 2010, 12:41 pm — Updated: 1:16 pm -->
Deal Makers Cautious Despite Uptick in M.&A.
A pickup in mergers and acquisitions over the last two months has the bulls on Wall Street thinking that the deal market is back in full force. But many senior deal makers remain cautious about the increase in M.&A. activity, given the continued uncertainty in the direction of the economy.
“Basically, M.&A. is a function of a market economy, and there are so many factors that come into play that there is no way to predict what will happen in the future,” Martin Lipton, one of the founding partners of the law firm Wachtell Lipton Rosen & Katz told DealBook at the Bloomberg Dealmakers Summit on Thursday in New York. “Yes, there has been a significant increase in activity lately — sometimes that portends an increase in deals, sometimes it doesn’t.”
M.&A. activity did pump up in August, which is normally one of the slowest months for deals of the year. That enthusiasm carried over into September with a number a major transactions announced, including Southwest Airlinesannouncement on Monday that it would acquire AirTran, a rival budget airline, for nearly $1.4 billion. Global M.&A. volume totaled nearly $730 billion in the the third quarter, up 43 percent from a year earlier, according to data from Dealogic.
But this past performance is not impressing deal makers. While they are seeing more deals in the pipeline these days, they are only seeing the strongest and largest companies emerge with completed transactions.
“The system is in a state of slow recovery,” Roger C. Altman, the founder and chairman of Evercore Partners, said at the conference. “Parts of it are functioning very well in relation to where it was and other parts of it, like middle-market lending, are functioning very poorly and are a very, very long way from recovery.
“If you look at the amount of commercial investment loans outstanding, they have been relentlessly declining for almost two years, and you know you cannot have a true healthy economic recovery with bank credit lending like that.”
But Timothy Ingrassia, the head of mergers and acquisitions for Goldman Sachs in the Americas, believes that while financing may still be an obstacle in doing some deals, the main obstacle he sees has shifted from debt to the equity side of the transaction.
“If you think about a $10 billion deal that requires $4 billion of equity, you are talking about multiple private equity firms that have to get together,” Mr. Ingrassia said at the conference. “Right now, that dynamic, creating consortia and having buyers back in unity to get something done, may be the most difficult piece of the deal, while six months ago I would absolutely say that financing was the most difficult part of the deal.”
Despite the difficulties in arranging club deals, Blair Effron, a partner at Centerview Partners, believes strongly that private equity will probably be the biggest part of the deal market in the next year. Many private equity firms will need to exit their investments and so that could mean a large uptick in deal activity there.
Regulatory changes that would increase the amount of taxes that private equity firms would have to pay to exit certain deals is likely to determine whether some new deals get done. But there seems to be only modest concern from deal makers, or their clients, about the impact that the sweeping new financial regulatory law will on their business.
“I find that general legislation like Sarbanes-Oxely and Dodd-Frank does not that much of an impact,” Mr. Lipton told DealBook. “Dodd-Frank has more of an impact on financial transactions, but if there is an opportune transaction, Dodd-Frank will not interfere with them going forward.”
– Cyrus Sanati
Copyright 2010 The New York Times Company

Monday, September 13, 2010

Middle Market M&A on the Rise

Prices are rising, and deal volume is getting closer to precrisis levels. Is this a true recovery or a blip on the M&A screen?By KEN TARBOUS, Investment Dealers' Digest
September 12, 2010
Ridgemont Equity Partners, a Charlotte, N.C., financial sponsor, has been an active buyer of companies worth $10 million to $100 million this summer and it has plenty of company.
Last month, Mill Road Capital of Greenwich, Conn., completed a $91 million acquisition of Rubio's Restaurants Inc. of Carlsbad, Calif., and Austin Ventures snapped up YRC Logistics, a Kansas unit of YRC Worldwide, for $38.7 million.
Dealmaking has picked up from a year ago and it is expected to remain lively at least for the rest of this year. Sponsors are allocating more money to lower-middle-market businesses, and improved debt markets are allowing buyers to borrow more. Also, some market players cite concerns about potential changes in federal tax policy as a reason for the pickup in the pace of transactions.
According to Thomson Reuters, there were 72 deals worth $4.8 billion in the lower middle market last month, compared with 65 deals worth $3.7 billion in August 2009. (These mergers and acquisitions generally involve companies worth $10 million to $250 million.)
Private-equity firms have $400 billion of capital on hand to invest, according to Deloitte Corporate Finance LLC, and more than 75% of the firms that have raised funds this year are targeting middle-market companies.
"We've got improved debt markets, you've got an inventory of deals that has built up during the economic downturn that people couldn't really sell, and you've got an improving economy that's incentivizing people to take that inventory out to the market," said Travis Hain, a partner at Ridgemont. "And finally, you've got potential tax incentives, depending on one's views on capital gains, and obviously there's a predominant view that capital gains is going up."
His firm, which Bank of America Corp. spun off last month, invests in basic industries, consumer and retail, energy, financial services, health care, and telecommunications, media and technology. This week, it announced it had bought a majority interest in the data network provider Unite Private Networks, and last week it said it had sold its interest in the fiber-optic broadband provider Fibertech Networks.To some degree, the pickup in activity may be exaggerated by the sharp decline in M&A transactions that took place during the credit crisis; while the debt market conditions have improved, there is a cap on how much a sponsor firm can borrow. Others say the activity is being propelled by the simple fact private-equity funds get paid to put money to work.
In the second quarter, according to Thomson Reuters, there were 257 U.S. deals worth $17.7 billion involving companies with enterprise values of between $10 million and $250 million. A year earlier there were 199 such deals worth $10.7 billion.
GF Data Resources, which collects data from more than 150 private-equity firms on transactions valued between $10 million and $250 million, reported a similar pattern among the financial sponsors it covers. In the second quarter, these sponsors closed 26 deals in the lower middle market, versus 16 in the first quarter and 15 in the second quarter of last year.
Private-equity sponsors and M&A bankers say that even though this year's volume does not match that of the heady days of 2005 to 2007 (a three-year period when, by some industry estimates, buyouts totaled more than $1.6 trillion), there are "record or near record" numbers of companies up for sale now, and those companies have a goal of closing deals this quarter or the next.
"If even a fraction of these deals get done, it will be a very interesting couple months," said Justin Abelow, a managing director of the financial sponsors coverage group in the New York office of Houlihan Lokey. "I think one of the things that's going to happen is that there'll be a tension between getting some of these deals done as M&A deals and just doing dividend recaps of one sort or another, particularly where people think they are not going to get their prices."
Hain says the backlog and the rush to market have a positive side.
"The good news for everybody is that this inventory of deals that built up over two or three years, they're all quality companies," he said. "The first companies that come out in this environment are the best companies. We're tending to see better companies, and there are some companies that, in certain circumstances, you can afford to pay higher prices for, depending on what a buyer thinks that you can add to the equation as a buyer and investor."
Valuations are returning to what dealmakers call more realistic levels. The multiples paid for companies in the lower middle market are on the rise, according to GF Data. The average multiple climbed from 5.1 times EBITDA in the third quarter of last year to 5.2 in each of the following two quarters to 5.6 in the second quarter of this year. Companies sold in the second quarter of last year fetched an average of 6.7 times EBITDA.
Hain says improved conditions in the debt markets have provided an impetus for deals this year. "The debt markets are facilitating transactions very actively, whereas the debt markets were a real impediment to deals last year."
In addition, the equity and debt structure of the deals has been stabilizing. Debt as a percentage of the average deal's capital structure increased to 42.4% in the first half of this year, versus 28.2% for all of last year, according to GF Data.
The equity percentage dropped from 59.0% last year to 53.3% in the first half of this year, but that's still "a high number by any kind of historical standard, so it shows that the overhang of equity capital that is still to be invested that has been raised by these private-equity sponsors, that there's a lot of pressure to deploy that capital," said Graeme Frazier, principal and co-founder of GF Data.
Market participants, citing proprietary data, pitch count and new assignments, say there might not be enough middle-market bankers and private-equity professionals to handle the plethora of deals in the market, and processes may be truncated as a result.
"This is as busy as that market has ever been, after a time of relative inactivity, and there may not be as many people in all parts of that market as there used to be, but there is much more activity," said one market participant, who asked not to be identified. "I think people are trying to push a lot of water through a relatively narrow pipe, and I think that pipe is near a bursting point."

Thursday, September 09, 2010

Banks, Bosses Benefit from U.S. Supreme Court's Tougher Lawsuit Standards

By Thom Weidlich -, Sep 9, 2010
Two U.S. Supreme Court decisions making it tougher to pursue lawsuits may have begun to bear fruit for corporations fighting investor claims or employee litigation.
Where once it was enough to give a defendant “fair notice” of a claim and the grounds on which it rested, the high court’s 2007 holding in Bell Atlantic Corp. v. Twombly required an antitrust complaint to contain enough facts to show a claim that is “plausible on its face.” Two years later, in Ashcroft v. Iqbal, the court applied Twombly to all federal civil suits.
The Supreme court rulings mean that someone who wants to sue in federal court “should not subject a defendant to the costs and burdens of litigation when there is no plausible basis for their claims,” Lisa Rickard, president of the U.S. Chamber of Commerce’s Institute for Legal Reform, said in an e-mail. The Washington-based business advocacy group filed a friend-of-the- court brief in Twombly.
The rule aided financial-services companies after the February 2008 collapse of the $330 billion auction-rate securities market.
Judges cited Twombly alongside the 1995 Private Securities Litigation Reform Act, which also added hurdles to investor cases, in dismissing suits against Citigroup Inc. and Bank of America Corp.’s Merrill Lynch unit over the sale of the securities.
‘Keys to the Courthouse’
“Implausible conclusory allegations are no longer keys to the courthouse,” Scott D. Musoff, a partner at Skadden, Arps, Slate, Meagher & Flom LLP in New York and a lawyer for Merrill Lynch in the auction-rate litigation, said in an e-mail. “This is especially important in the wake of a financial crisis when people are looking for someone to blame for their losses even if they have no factual basis to support their claims.”
Musoff wouldn’t comment specifically on Merrill’s auction- rate case.
Plaintiffs’ lawyers say the justices’ new threshold unfairly closes the courthouse to their clients or increases their costs by forcing them to gather facts before suing, often before they can gain access to key information. Fred T. Isquith, a plaintiffs’ lawyer in class actions, criticized the Twombly court for trying to cut caseloads at the expense of litigants seeking redress.
“It is the most fundamental task of government to administer justice and provide judgment,” Isquith, a partner at Wolf Haldenstein Adler Freeman & Herz LLP in New York, said in an e-mail. “Dismissing cases is not the solution; the solution is more judges and more money for the court system.”
Waste Management
In tossing out James Stenger’s age-bias lawsuit against his employer, a waste management firm owned by Zurich-based Credit Suisse Group AG, U.S. District Judge Eric F. Melgren in Kansas City, Kansas, said the claim didn’t raise enough facts to cross the line “from conceivable to plausible.”
Melgren allowed Stenger, 55, a former customer-relations worker at Shawnee, Kansas-based Deffenbaugh Industries Inc., to refile his complaint with more detail. Deffenbaugh again asked the judge to dismiss. He has yet to rule.
Twombly and Iqbal supplanted the standard set by the Supreme Court in Conley v. Gibson in 1957. Under Conley, a suit could be dismissed if “it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief.”
Federal civil cases typically proceed from the complaint to the motion to dismiss, followed by an evidence-gathering stage known as discovery, then summary judgment if there are no facts in dispute that would require a trial to resolve.
Earlier Disposal
Twombly and Iqbal are part of a trend to dispose of suits earlier in the process, said Arthur R. Miller, a professor at New York University School of Law. In 1986, the Supreme Court made it easier to decide a lawsuit between discovery and trial.
“Twombly-Iqbal now moves it to the motion to dismiss based on a single document, the complaint, with no opportunity for discovery,” said Miller, who is also special counsel to New York-based law firm Milberg LLP, which represents plaintiffs in securities litigation. “It’s becoming a big battle.”
The Chamber of Commerce says suits deserve more scrutiny in part because of the expense incurred by defendants in discovery. A report the group co-sponsored this year found that the discovery cost in 20 cases involving “major” companies averaged $621,880 in 2008, up from $488,847 for 15 cases in 2004.
Some U.S. lawmakers are seeking a return to the old, less restrictive standard. Pennsylvania Senator Arlen Specter’s bill, S. 1504, specifically mentions Conley. New York Representative Jerrold Nadler’s, H.R. 4115, refers to the “no set of facts” standard. Both Democrats’ bills are in committee.
Dollar General
In August 2009, U.S. District Judge Norman K. Moon in Lynchburg, Virginia, threw out a complaint brought by Holly Branham for injuries she allegedly sustained after slipping on liquid in a Dollar General Corp. store in Amherst, Virginia, while shopping for clothespins. Branham sought $300,000.
Citing Twombly and Iqbal, Moon said Branham “failed to allege any facts that show how the liquid came to be on the floor, whether the defendant knew or should have known of the presence of the liquid or how the plaintiff’s accident occurred.”
The judge let Branham amend the complaint to add the fact that an assistant manager had just mopped the floor. Dollar General, based in Goodlettsville, Tennessee, didn’t seek dismissal and the parties settled.
“It clearly does push forward the cost for the plaintiff side to look into a situation that might give rise to a claim, but I just have not seen that quantified,” said Richard A. Nagareda, a professor at Vanderbilt University Law School in Nashville, Tennessee, who discusses Twombly and Iqbal in an article due to be published in the DePaul Law Review next year.
Monitoring Consequences
The Advisory Committee on Civil Rules of the Judicial Conference of the U.S., the federal courts’ policy-making group, is monitoring the consequences of Twombly and Iqbal.
The effects of the decisions were debated at a May conference at Duke Law School in Durham, North Carolina, and the committee plans to present a report on the discussion to U.S. Chief Justice John Roberts before the Judicial Conference meets Sept. 14, said John Rabiej, chief of the Rules Committee Support Office.
Patricia W. Hatamyar, a professor at the St. Thomas University School of Law in Miami Gardens, Florida, analyzed a sample of federal cases and found it four times more likely for a motion to dismiss to be granted under Iqbal than under Conley.
Sample of Cases
In another sample of cases, dismissals were granted 38 percent of the time they were requested in both the four months before Twombly and the four months after Iqbal, according to an Aug. 12 report by the Administrative Office of the U.S. Courts, the support agency for the federal system.
“The case law to date does not appear to indicate that Iqbal has dramatically changed the application of the standards used to determine pleading sufficiency,” according to a July 26 Judicial Conference public memorandum.
The cases include Stenger v. Deffenbaugh Industries Inc., 09-cv-2422, U.S. District Court, District of Kansas (Kansas City); and Branham v. Dolgencorp Inc., 09-cv-00037, U.S. District Court, Western District of Virginia (Lynchburg).
To contact the reporter on this story: Thom Weidlich in Brooklyn, New York, federal court at

Wednesday, September 01, 2010

August Deal Activity

August’s unseasonable burst of dealmaking — the busiest in over a decade — could herald a wider rebound in M&A for the remainder of the year as low interest rates, record cash piles and low stock-market values encourage chief executives to strike deals, Reuters writes.
Previously deal-starved bankers and lawyers canceled holiday plans and worked through vacations in August, as companies had the gusto to launch hostile bids or fight over target companies.
Announced deals and offers during the typically slow month of August surged to $262 billion worldwide, according to Thomson Reuters data.
It is the highest value of deals and offers announced during an August since 1999 when the value reached $275 billion. Still, by number of deals, it ranks lower than last August.
The nascent mergers and acquisitions rebound, already spanning various sectors and countries, could pick up further when the traditional busy period starts, after the U.S. Labor Day holiday and the United Kingdom’s August bank holiday, bankers predict.
“What you have seen in August, that took people by surprise, is that there are some CEOs that have the confidence to pull the trigger and embark on a hostile transaction, or jump an agreed transaction,” said Chris Young, head of takeover defense at Credit Suisse in New York. “It is a bullish sign for the rest of the year.”
Go to Article from Reuters via The New York Times »