Deal Journal - WSJ.com - December 1, 2008, 10:51 am
Postmortem: Nearly as Many Cancelled Mergers as New Ones
Posted by Heidi N. Moore
Deal Journal readers, welcome back from the Thanksgiving weekend. Let us catch you up on things in the deal world.
Monday’s disheartening statistic du jour comes from Thomson Reuters, which totted up the effect of last week’s abandoned $188 billion offer for Rio Tinto by BHP Billiton. (Deal Journal puts the acquisition price of that deal at $66 billion, but Thomson Reuters includes in the price the Rio Tinto debt BHP would have assumed in a deal as well as the value under the original share price.)
By that counting, the collapse of the BHP-Rio Tinto deal pushed the seesaw of merger volume to a rarely-seen balance: the value of busted mergers in the fourth quarter is nearly equal to the value of the mergers that were signed.
According to Thomson Reuters data, there have been $322 billion of withdrawn M&A deals in the fourth quarter, compared with $362 billion of announced deals. For every 100 mergers or acquisitions announced in the fourth quarter, seven were called off.
It probably won’t stop there. There are some gigantic proposed deals still very much on the wire. The squeeze in the credit markets has made it highly unlikely that Swiss pharmaceuticals giant Roche Holding will find banks willing to underwrite the $45 billion loan it needs to buy the majority of Genentech it doesn’t already own. The $42 billion takeover of BCE may be scuttled by an accounting firm’s preliminary opinion that the parent of Bell Canada wouldn’t be solvent after the deal.
Investment banks are already awash in losses and will dearly miss the accompanying lost merger fees. The BHP-Rio deal alone would have meant $304 million in fees spread out across a coterie of 16 banks including UBS, BNP Paribas, Goldman Sachs Group, Gresham Partners, Lazard, HSBC Holdings, Merrill Lynch and Citigroup, Rothschild, Deutsche Bank, Macquarie Group, Societe Generale, Morgan Stanley, JP Morgan Cazenove, Credit Suisse Group and Royal Bank of Scotland Group.
Of course, what the banks lose in merger fees on busted deals they often gain in peace of mind. A dead deal, after all, means that the banks don’t have to underwrite tens of billions of dollars of loans for which there are few buyers.
Monday, December 01, 2008
Wednesday, November 19, 2008
Broken Deals: Who’s to Blame?
Posted by Holger Spamann, co-editor, Harvard Law School Corporate Governance Blog, on Wednesday November 19, 2008 at 12:13 pm
Insights from Practice, Mergers and Acquisitions, Program Events -->
Who’s to blame when a signed deal falls through? This question is especially relevant with respect to LBO buyers these days. Deals negotiated when times were good and credit was easy look much less appealing if not disastrous now that the short term economic outlook is bleak and the credit environment has soured. In particular, banks are weary of lending into LBOs when their ability to securitize and sell off the loans has waned. Private equity buyers may want to extricate themselves from signed deals, or be forced to do so because debt financing is not forthcoming. What contractual rights do sellers, buyers, and financiers have against one another in such a situation? What reputational effects, if any, constrain them from exercising those rights? And how should a seller’s board trade off deal certainty against price when choosing between competing transactions? Isaac Corré of Eton Park, Steven Davidoff a/k/a The Deal Professor, John Finley of Simpson Thacher, and Jim Morphy of Sullivan & Cromwell debated these questions with Vice Chancellor Leo Strine, Jr. and Professor Robert C. Clark in their Mergers, Acquisitions, and Split-Ups class here at Harvard Law School last week.
The video of the event is available here.
Insights from Practice, Mergers and Acquisitions, Program Events -->
Who’s to blame when a signed deal falls through? This question is especially relevant with respect to LBO buyers these days. Deals negotiated when times were good and credit was easy look much less appealing if not disastrous now that the short term economic outlook is bleak and the credit environment has soured. In particular, banks are weary of lending into LBOs when their ability to securitize and sell off the loans has waned. Private equity buyers may want to extricate themselves from signed deals, or be forced to do so because debt financing is not forthcoming. What contractual rights do sellers, buyers, and financiers have against one another in such a situation? What reputational effects, if any, constrain them from exercising those rights? And how should a seller’s board trade off deal certainty against price when choosing between competing transactions? Isaac Corré of Eton Park, Steven Davidoff a/k/a The Deal Professor, John Finley of Simpson Thacher, and Jim Morphy of Sullivan & Cromwell debated these questions with Vice Chancellor Leo Strine, Jr. and Professor Robert C. Clark in their Mergers, Acquisitions, and Split-Ups class here at Harvard Law School last week.
The video of the event is available here.
Tuesday, November 11, 2008
More Oversight for Private Players?
Hedge funds and private equity firms may come in for more regulatory oversight, if Senator Charles Schumer has his way.
The Deal.com noted that the New York Democrat, speaking at the Securities Industry and Financial Markets Association’s Summit on the Troubled Asset Relief Program Monday, predicts that any regulatory reform would include more oversight of private capital players such as hedge funds or buyout shops, whose failure could present a systemic threat.
“All market participants [regulated and unregulated] are linked as counterparties,” he said.
Go to Article from The Deal.com »
The Deal.com noted that the New York Democrat, speaking at the Securities Industry and Financial Markets Association’s Summit on the Troubled Asset Relief Program Monday, predicts that any regulatory reform would include more oversight of private capital players such as hedge funds or buyout shops, whose failure could present a systemic threat.
“All market participants [regulated and unregulated] are linked as counterparties,” he said.
Go to Article from The Deal.com »
Tuesday, November 04, 2008
Middle-market tech deals getting done
Posted on November 4, 2008 at 10:39 AM, The Deal.com:
M&A activity slowed considerably over the past three months, and most analysts we've talked with, including Booz & Co.'s Gerald Adolph and Cravath, Swaine & Moore's Jim Woolery, expect more slowing through the end of the year. But our colleague Alain Sherter over at Tech Confidential reports Tuesday on one industry segment that's maintaining respectable levels of M&A: the middle-market technology sector.Referencing a report from the boutique investment bank TM Capital, Sherter writes that:
Providers of enterprise application software, infrastructure management tools and information technology services saw 439 deals in the third quarter, roughly level with deal activity in the previous quarter and slightly ahead of totals in the year-ago period.The total value of tech deals, however, is off from last year, as strategic acquirers focus on smaller deals. - Suzanne Stevens
M&A activity slowed considerably over the past three months, and most analysts we've talked with, including Booz & Co.'s Gerald Adolph and Cravath, Swaine & Moore's Jim Woolery, expect more slowing through the end of the year. But our colleague Alain Sherter over at Tech Confidential reports Tuesday on one industry segment that's maintaining respectable levels of M&A: the middle-market technology sector.Referencing a report from the boutique investment bank TM Capital, Sherter writes that:
Providers of enterprise application software, infrastructure management tools and information technology services saw 439 deals in the third quarter, roughly level with deal activity in the previous quarter and slightly ahead of totals in the year-ago period.The total value of tech deals, however, is off from last year, as strategic acquirers focus on smaller deals. - Suzanne Stevens
Friday, October 24, 2008
Lipton, Friedman and Rice on the Future of M&A
NYT DealBook, October 24, 2008
Three high-powered figures in the financial industry gathered at New York University’s law school on Thursday to discuss the future of mergers and acquisitions in the post-credit-bubble world.
The panelists — Stephen Friedman, the retired chairman of Goldman Sachs and the current Chairman of the Federal Reserve Bank of New York; Martin Lipton, the founding partner of the law firm Wachtell, Lipton, Rosen & Katz; and Joseph Rice III, the founder and chairman of private equity firm Clayton Dubilier & Rice — took turns discussing the challenges and opportunities ahead, as well as reflecting on the current economic crisis.
Mr. Rice said he was convinced that “human greed” took control of the system. But the bubble was egged on, he added, because “there was clearly too much capital around” and “people needed to find something to do with it.” He went on to say that “there is no question that there will be more regulation.”
As for the future of private equity, Mr. Rice sounded optimistic and expressed no doubt that it would make a comeback. “As respect to the buyout business, it is not going away — it’s comatose right now,” he said. “We will see a series of small deals next year and then they will grow in size… It is a perfectly good business, and it’s going to be around as long as there is a financial institution.”
Mr. Friedman spoke at length about the current crisis, which he described as the greatest financial panic since the Great Depression. Part of the problem, he said, was that “people will play the way you pay them,” meaning that the incentive structures that were in place encouraged bad lending and faulty business practices. He said he blamed the banks, consumers and the rating agencies for playing a part in the financial debacle.
He also lashed out at Wall Street bonuses, which he described as a “perverse incentive” that were “structured in a sort of way that you don’t have to give it back.”
Mr. Friedman praised regulators for their decisive and strong actions in 2008, calling them “heroic.” But he said that no one can say they had “done a first-rate job before then.”
Mr. Lipton, pictured above, spoke of a new financial order that he said will be dominated by large banks and filled with lots of smaller boutiques. “Capital raising will be in the hands of the big universal bank,” he said. “They will have the capital and the networks to do it.”
He said he believes the current economic crisis will last between three to five years, but was upbeat about the future of M&A.
“There will always be M&A,” he said, but added that “M&A is very psychological, and C.E.O.’s don’t like to go their boards in this type of economy” and ask to do a deal.
Three high-powered figures in the financial industry gathered at New York University’s law school on Thursday to discuss the future of mergers and acquisitions in the post-credit-bubble world.
The panelists — Stephen Friedman, the retired chairman of Goldman Sachs and the current Chairman of the Federal Reserve Bank of New York; Martin Lipton, the founding partner of the law firm Wachtell, Lipton, Rosen & Katz; and Joseph Rice III, the founder and chairman of private equity firm Clayton Dubilier & Rice — took turns discussing the challenges and opportunities ahead, as well as reflecting on the current economic crisis.
Mr. Rice said he was convinced that “human greed” took control of the system. But the bubble was egged on, he added, because “there was clearly too much capital around” and “people needed to find something to do with it.” He went on to say that “there is no question that there will be more regulation.”
As for the future of private equity, Mr. Rice sounded optimistic and expressed no doubt that it would make a comeback. “As respect to the buyout business, it is not going away — it’s comatose right now,” he said. “We will see a series of small deals next year and then they will grow in size… It is a perfectly good business, and it’s going to be around as long as there is a financial institution.”
Mr. Friedman spoke at length about the current crisis, which he described as the greatest financial panic since the Great Depression. Part of the problem, he said, was that “people will play the way you pay them,” meaning that the incentive structures that were in place encouraged bad lending and faulty business practices. He said he blamed the banks, consumers and the rating agencies for playing a part in the financial debacle.
He also lashed out at Wall Street bonuses, which he described as a “perverse incentive” that were “structured in a sort of way that you don’t have to give it back.”
Mr. Friedman praised regulators for their decisive and strong actions in 2008, calling them “heroic.” But he said that no one can say they had “done a first-rate job before then.”
Mr. Lipton, pictured above, spoke of a new financial order that he said will be dominated by large banks and filled with lots of smaller boutiques. “Capital raising will be in the hands of the big universal bank,” he said. “They will have the capital and the networks to do it.”
He said he believes the current economic crisis will last between three to five years, but was upbeat about the future of M&A.
“There will always be M&A,” he said, but added that “M&A is very psychological, and C.E.O.’s don’t like to go their boards in this type of economy” and ask to do a deal.
Tuesday, October 21, 2008
Deal Making Surpasses $3 Trillion
October 21, 2008, 1:12 pm
Posted by Stephen Grocer - DealJournal - WSJ.com
Perhaps you didn’t hear the M&A gong Monday, but global deal volume has passed $3 trillion–the fifth time that has happened though, not surprisingly, it took roughly three months longer than it did last year.
It did so on the backs of the new kings of deal making. No, not Henry Kravis or Stephen Schwarzman or Steve Ballmer or any other titan of industry, for that matter. No, this year’s M&A king makers earn far less, but wield far more power and capital. They are Hank Paulson and Ben Bernanke and, across the pond, Gordon Brown and Alistair Darling.
At a time when the financial crisis is sapping the life out of M&A–$149.1 billion of announced deals have been withdrawn since Sept. 1–the dramatic interventions of the U.S. and British governments have helped propel M&A activity in the financial sector, according to Dealogic.
Government investment in financial institutions has reached $76 billion this year, according to the data. That is almost eight times as much as in all of 2007, the previous high water mark. And this year’s total doesn’t include the planned U.S. investments in nine banks, which will top $120 billion, or the number of deals the federal government had a hand in orchestrating–think J.P. Morgan-Bear Stearns and J.P. Morgan Chase-Washington Mutual.
At the very least, the increased role of governments is representative of numerous issues buffeting the M&A marketplace. With the credit markets and global financial industry both frozen, governments are lenders and buyers of last resort.
Posted by Stephen Grocer - DealJournal - WSJ.com
Perhaps you didn’t hear the M&A gong Monday, but global deal volume has passed $3 trillion–the fifth time that has happened though, not surprisingly, it took roughly three months longer than it did last year.
It did so on the backs of the new kings of deal making. No, not Henry Kravis or Stephen Schwarzman or Steve Ballmer or any other titan of industry, for that matter. No, this year’s M&A king makers earn far less, but wield far more power and capital. They are Hank Paulson and Ben Bernanke and, across the pond, Gordon Brown and Alistair Darling.
At a time when the financial crisis is sapping the life out of M&A–$149.1 billion of announced deals have been withdrawn since Sept. 1–the dramatic interventions of the U.S. and British governments have helped propel M&A activity in the financial sector, according to Dealogic.
Government investment in financial institutions has reached $76 billion this year, according to the data. That is almost eight times as much as in all of 2007, the previous high water mark. And this year’s total doesn’t include the planned U.S. investments in nine banks, which will top $120 billion, or the number of deals the federal government had a hand in orchestrating–think J.P. Morgan-Bear Stearns and J.P. Morgan Chase-Washington Mutual.
At the very least, the increased role of governments is representative of numerous issues buffeting the M&A marketplace. With the credit markets and global financial industry both frozen, governments are lenders and buyers of last resort.
Friday, October 17, 2008
Lehman Brothers Sale
FRI 17 Oct 2008
An auction of Lehman’s Neuberger Berman unit and other investment management bits and pieces moved closer yesterday with bid procedures getting clearance from a New York judge.Private equity groups Bain Capital and Hellman & Friedman agreed last month to purchase Lehman’s prized asset management unit for $2.15 billion, and they will be the lead bidders at an auction for the unit in December.In a status update prior to the judge’s ruling, Lehman’s lead attorney, Harvey Miller, said prosecutors had opened three grand jury investigations into the investment bank’s demise. The New York Post reported that disgraced CEO Dick Fuld is among 12 Lehman executives being subpoenaed. Fuld, questioned by a U.S. congressional panel earlier this month, denied deceiving shareholders.Politicians and the public are calling for heads to roll on Wall Street. Looking into Lehman are federal prosecutors as well as at least one state attorney general. And the FBI is in the early stages of examining mortgage finance companies Fannie Mae and Freddie Mac and insurer American International Group, which were bailed out by the government after getting caught in the credit crunch.Did anyone actually understand the rocket science behind the engineering of the credit default swaps and other complex financial tools that blew up behind the scenes? If not, then it might be a hard sell to convince anyone that investors were intentionally misled.In the brave new financial world that emerges from the chaos of the ‘08 crash, will Wall Street executives be expected to understand everything their firms are doing? Sounds reasonable, if unlikely.
An auction of Lehman’s Neuberger Berman unit and other investment management bits and pieces moved closer yesterday with bid procedures getting clearance from a New York judge.Private equity groups Bain Capital and Hellman & Friedman agreed last month to purchase Lehman’s prized asset management unit for $2.15 billion, and they will be the lead bidders at an auction for the unit in December.In a status update prior to the judge’s ruling, Lehman’s lead attorney, Harvey Miller, said prosecutors had opened three grand jury investigations into the investment bank’s demise. The New York Post reported that disgraced CEO Dick Fuld is among 12 Lehman executives being subpoenaed. Fuld, questioned by a U.S. congressional panel earlier this month, denied deceiving shareholders.Politicians and the public are calling for heads to roll on Wall Street. Looking into Lehman are federal prosecutors as well as at least one state attorney general. And the FBI is in the early stages of examining mortgage finance companies Fannie Mae and Freddie Mac and insurer American International Group, which were bailed out by the government after getting caught in the credit crunch.Did anyone actually understand the rocket science behind the engineering of the credit default swaps and other complex financial tools that blew up behind the scenes? If not, then it might be a hard sell to convince anyone that investors were intentionally misled.In the brave new financial world that emerges from the chaos of the ‘08 crash, will Wall Street executives be expected to understand everything their firms are doing? Sounds reasonable, if unlikely.
Monday, October 13, 2008
United Technologies Withdraws Bid for Diebold
United Technologies said on Monday that it has withdrawn its $2.6 billion offer for Diebold, the maker of automated teller machines and electronic voting machines.
It is the second offer withdrawn on Monday, after Waste Management withdrew a hostile offer for fellow garbage collector Republic Services. Waste Management cited the turbulent markets as its reason for pulling its tender offer.
In a short letter sent to Diebold, United Technologies’ chairman, George David, cited Diebold’s continued refusal to hold talks or release financial information to its unwanted suitor. United Technologies had offered $40 a share, after having pursued Diebold for two years.
“We had hoped we could negotiate a transaction that would have created substantial value for both your and our shareholders,” Mr. David wrote in the letter. “It’s unfortunate this won’t happen.”
In Diebold, United Technologies sought to expand its electronic security business with one of the field’s largest players. Last year, United Technologies bought Initial Electronic Security Systems for about $1.2 billion.
It is the second offer withdrawn on Monday, after Waste Management withdrew a hostile offer for fellow garbage collector Republic Services. Waste Management cited the turbulent markets as its reason for pulling its tender offer.
In a short letter sent to Diebold, United Technologies’ chairman, George David, cited Diebold’s continued refusal to hold talks or release financial information to its unwanted suitor. United Technologies had offered $40 a share, after having pursued Diebold for two years.
“We had hoped we could negotiate a transaction that would have created substantial value for both your and our shareholders,” Mr. David wrote in the letter. “It’s unfortunate this won’t happen.”
In Diebold, United Technologies sought to expand its electronic security business with one of the field’s largest players. Last year, United Technologies bought Initial Electronic Security Systems for about $1.2 billion.
Tuesday, October 07, 2008
PE Fund-Raising Still Going Strong. Buyout Shops, Not So Much
October 7, 2008, 6:30 am
Posted by Deal Journal
The investors who give private-equity firms the money to do deals still are plowing cash into the asset class, but increasingly it is being funneled away from buyout funds to more specialized investors.
Three-quarters of the way through the year, fund-raising by North American private-equity firms–a category that includes buyout, venture capital, mezzanine, distressed and several other types of firms–is ahead of last year’s pace. Through the end of September, 264 funds had raked in $222.6 billion, well ahead of the $200.4 billion raised by 298 funds at this time last year, according to data from LPSource.
That may seem a little nutty, given that the freeze-up in credit markets and the slower-growing economy stand to have a big impact on the private-equity asset class. But after the last downturn, in 2001 and 2002, many investors, known as limited partners, stopped investing in private equity, which turned out to be a bad move, as funds raised at that time eventually proved to be big winners. LPs say they have learned that lesson and will keep investing this time around.
That isn’t to say they aren’t hedging their bets. Buyout firms, which have been hardest hit by the credit crunch, raised $103.3 billion across 77 funds, down 12% from 98 funds that raised $118 billion last year. And venture capital fund-raising was flat, with 107 funds raising $19.7 billion compared with 103 funds raising $19 billion a year earlier.
Other types of firms–those perceived as most likely to benefit in the current environment–gained ground. Mezzanine funds, which invest in debt that also carries characteristics of equity, continue to have a strong year, gathering in $36.9 billion across 13 funds, compared with the $3 billion across nine funds through the third quarter of last year. Distressed firms also have well exceeded last year’s total through the third quarter. Eighteen funds have raised $37.9 billion, up 28% from $29.5 billion raised by 16 funds at this time last year.
“Instead of halting or materially decreasing investing in private equity–as was done in 2000 to 2002–this time around investors are looking to be more tactical investing capital in areas which may benefit in the current economic and business cycle,” said Brett Nelson, head of private equity at consulting firm Ennis Knupp + Associates.
–Keenan Skelly is a reporter for Private Equity Analyst, a Dow Jones publication and a contributor to Deal Journal.
Posted by Deal Journal
The investors who give private-equity firms the money to do deals still are plowing cash into the asset class, but increasingly it is being funneled away from buyout funds to more specialized investors.
Three-quarters of the way through the year, fund-raising by North American private-equity firms–a category that includes buyout, venture capital, mezzanine, distressed and several other types of firms–is ahead of last year’s pace. Through the end of September, 264 funds had raked in $222.6 billion, well ahead of the $200.4 billion raised by 298 funds at this time last year, according to data from LPSource.
That may seem a little nutty, given that the freeze-up in credit markets and the slower-growing economy stand to have a big impact on the private-equity asset class. But after the last downturn, in 2001 and 2002, many investors, known as limited partners, stopped investing in private equity, which turned out to be a bad move, as funds raised at that time eventually proved to be big winners. LPs say they have learned that lesson and will keep investing this time around.
That isn’t to say they aren’t hedging their bets. Buyout firms, which have been hardest hit by the credit crunch, raised $103.3 billion across 77 funds, down 12% from 98 funds that raised $118 billion last year. And venture capital fund-raising was flat, with 107 funds raising $19.7 billion compared with 103 funds raising $19 billion a year earlier.
Other types of firms–those perceived as most likely to benefit in the current environment–gained ground. Mezzanine funds, which invest in debt that also carries characteristics of equity, continue to have a strong year, gathering in $36.9 billion across 13 funds, compared with the $3 billion across nine funds through the third quarter of last year. Distressed firms also have well exceeded last year’s total through the third quarter. Eighteen funds have raised $37.9 billion, up 28% from $29.5 billion raised by 16 funds at this time last year.
“Instead of halting or materially decreasing investing in private equity–as was done in 2000 to 2002–this time around investors are looking to be more tactical investing capital in areas which may benefit in the current economic and business cycle,” said Brett Nelson, head of private equity at consulting firm Ennis Knupp + Associates.
–Keenan Skelly is a reporter for Private Equity Analyst, a Dow Jones publication and a contributor to Deal Journal.
Thursday, October 02, 2008
CD Forum: Dealmakers take a measure of the market
From The Deal.com, October 2, 2008:
The opening panel at The Deal's Corporate Dealmaker Forum reviewed the current state of an M&A market going through one of its most turbulent times in years.
Dealmakers Kenneth R. Meyers, the vice president of mergers and acquisitions at Siemens Corp.; David Drake, president of Georgeson Inc.; and Douglas L. Braunstein, J.P. Morgan Chase & Co.'s head of investment banking discussed the raft of opportunities opening up to corporate buyers.
"Debt is more expansive," said Drake, "but the prices are cheaper."
"Capital on balance sheet and liquidity are critical," Braunstein added. "Having access to liquidity and cash creates a great opportunity for certain corporate buyers. Those that are prepared for this are going to have some great buying opportunities."
Siemens' Meyers agreed, commenting, "These are the kinds of times that it paid off to be conservative and have a strong balance sheet. There are structural advantages to being a large corporate now."
All of the panelists agreed that the best opportunities for acquirers lay in the future since valuations will likely continue to fall, although the mindset of shareholders at target companies is proving resistant to change.
"Over the past year we've seen old habits dying hard," said Georgeson's Drake. "A lot of arbs and hedge funds are really getting burned as private equity firms and others walk away from deals." Citing the Microsoft Corp.-Yahoo! Inc. and Take-Two Interactive Software Inc.-Electronic Arts Inc. cases, he said, "In both cases some investors lost a lot. I do think it's going to be a game of chicken between the buyer's and the target's shareholders now that prices are coming down." "Pricing hasn't come down enough for people to take advantage of opportunities, but I think we're only about three to four months away from that," Braunstein added. "The buying power of strategics are eventually going to align [with valuations]. The problem is that prices haven't yet fallen enough for that to happen. When those align, I think you're going to see a lot more activity at that point." - George White
The opening panel at The Deal's Corporate Dealmaker Forum reviewed the current state of an M&A market going through one of its most turbulent times in years.
Dealmakers Kenneth R. Meyers, the vice president of mergers and acquisitions at Siemens Corp.; David Drake, president of Georgeson Inc.; and Douglas L. Braunstein, J.P. Morgan Chase & Co.'s head of investment banking discussed the raft of opportunities opening up to corporate buyers.
"Debt is more expansive," said Drake, "but the prices are cheaper."
"Capital on balance sheet and liquidity are critical," Braunstein added. "Having access to liquidity and cash creates a great opportunity for certain corporate buyers. Those that are prepared for this are going to have some great buying opportunities."
Siemens' Meyers agreed, commenting, "These are the kinds of times that it paid off to be conservative and have a strong balance sheet. There are structural advantages to being a large corporate now."
All of the panelists agreed that the best opportunities for acquirers lay in the future since valuations will likely continue to fall, although the mindset of shareholders at target companies is proving resistant to change.
"Over the past year we've seen old habits dying hard," said Georgeson's Drake. "A lot of arbs and hedge funds are really getting burned as private equity firms and others walk away from deals." Citing the Microsoft Corp.-Yahoo! Inc. and Take-Two Interactive Software Inc.-Electronic Arts Inc. cases, he said, "In both cases some investors lost a lot. I do think it's going to be a game of chicken between the buyer's and the target's shareholders now that prices are coming down." "Pricing hasn't come down enough for people to take advantage of opportunities, but I think we're only about three to four months away from that," Braunstein added. "The buying power of strategics are eventually going to align [with valuations]. The problem is that prices haven't yet fallen enough for that to happen. When those align, I think you're going to see a lot more activity at that point." - George White
Wednesday, September 24, 2008
What We Really Need from a Bailout Bill: 58 Trillion Reasons
The CorporateCounsel.Net blog, Sept. 24, 2008:
Predictably, the bare-boned Treasury proposal for a bailout bill - frought with Constitutional problems - is receiving backlash on the Hill. Also predictable - given that elections are coming up - many key Republicans have come around to the notion that the bailout bill should include limits on executive pay (see this Washington Post article and NY Times' article).
However, the bailout plan is missing a strategy to fix the problems that caused all the problems that the market faces. Without a going-forward plan, I don't see an end to shoveling money to the bailout. Simply banning short sales ain't gonna do it. Yesterday, SEC Chairman Cox testified about some of these problems before the Senate Banking Committee - here is an excerpt:
"The failure of the Gramm-Leach-Bliley Act to give regulatory authority over investment bank holding companies to any agency of government was, based on the experience of the last several months, a costly mistake. There is another similar regulatory hole that must be immediately addressed to avoid similar consequences. The $58 trillion notional market in credit default swaps - double the amount outstanding in 2006 - is regulated by no one. Neither the SEC nor any regulator has authority over the CDS market, even to require minimal disclosure to the market.
Economically, a CDS buyer is tantamount to a short seller of the bond underlying the CDS. Whereas a person who owns a bond profits when its issuer is in a position to repay the bond, a short seller profits when, among other things, the bond goes into default. Importantly, CDS buyers do not have to own the bond or other debt instrument upon which a CDS contract is based. This means CDS buyers can “naked short” the debt of companies without restriction. This potential for unfettered naked shorting and the lack of regulation in this market are cause for great concern. As the Congress considers fundamental reform of the financial system, I urge you to provide in statute the authority to regulate these products to enhance investor protection and ensure the operation of fair and orderly markets."
Predictably, the bare-boned Treasury proposal for a bailout bill - frought with Constitutional problems - is receiving backlash on the Hill. Also predictable - given that elections are coming up - many key Republicans have come around to the notion that the bailout bill should include limits on executive pay (see this Washington Post article and NY Times' article).
However, the bailout plan is missing a strategy to fix the problems that caused all the problems that the market faces. Without a going-forward plan, I don't see an end to shoveling money to the bailout. Simply banning short sales ain't gonna do it. Yesterday, SEC Chairman Cox testified about some of these problems before the Senate Banking Committee - here is an excerpt:
"The failure of the Gramm-Leach-Bliley Act to give regulatory authority over investment bank holding companies to any agency of government was, based on the experience of the last several months, a costly mistake. There is another similar regulatory hole that must be immediately addressed to avoid similar consequences. The $58 trillion notional market in credit default swaps - double the amount outstanding in 2006 - is regulated by no one. Neither the SEC nor any regulator has authority over the CDS market, even to require minimal disclosure to the market.
Economically, a CDS buyer is tantamount to a short seller of the bond underlying the CDS. Whereas a person who owns a bond profits when its issuer is in a position to repay the bond, a short seller profits when, among other things, the bond goes into default. Importantly, CDS buyers do not have to own the bond or other debt instrument upon which a CDS contract is based. This means CDS buyers can “naked short” the debt of companies without restriction. This potential for unfettered naked shorting and the lack of regulation in this market are cause for great concern. As the Congress considers fundamental reform of the financial system, I urge you to provide in statute the authority to regulate these products to enhance investor protection and ensure the operation of fair and orderly markets."
Wednesday, September 03, 2008
Sovereign Funds Agree on Voluntary Rules
NYT DealBook, September 3, 2008:
A working group of the International Monetary Fund said it reached a preliminary agreement on guidelines for sovereign wealth funds that invest abroad. It didn’t disclose specifics of the voluntary code of conduct, which is to be presented to I.M.F. members in October.
Government-run funds in the Mideast and Asia have recently stepped up their investments in overseas assets, taking minority stakes in companies — and especially troubled financial firms — in the United States, Europe and elsewhere.
This trend has created concern in some circles, because these sovereign funds generally disclose little information about their strategies or holdings. In some cases, these investments have generated a debate about potential national security implications.
The International Working Group of Sovereign Wealth Funds, whose members include representatives from more than 20 countries, including the United States and the United Arab Emirates, agreed on a set of principles after a two-day meeting in Santiago, Chile, that ended Tuesday.
In a joint statement, the group’s two co-chairs, Hamad al Suwaidi of the Abu Dhabi Investment Authority and Jaime Caruana, director of the International Monetary Funds Monetary and Capital Markets department, said, “These principles and practices will promote a clearer understanding of the institutional framework, governance, and investment operations of SWFs, thereby fostering trust and confidence in the international financial system.”
The details of the new guidelines weren’t revealed, but some are already speculating that they may not address all of the concerns out there.
“A voluntary set of principles and practices goes a long way to help de-mystify the methodology of sovereign wealth funds and how they invest, Debbie Fuller of law firm Eversheds told the BBC News. “However, a voluntary code will not satisfy certain governments who were hoping for some form of compulsory transparency rules.”
Go to Article from BBC News »Go to Press Release from the International Working Group of Sovereign Wealth Funds »
A working group of the International Monetary Fund said it reached a preliminary agreement on guidelines for sovereign wealth funds that invest abroad. It didn’t disclose specifics of the voluntary code of conduct, which is to be presented to I.M.F. members in October.
Government-run funds in the Mideast and Asia have recently stepped up their investments in overseas assets, taking minority stakes in companies — and especially troubled financial firms — in the United States, Europe and elsewhere.
This trend has created concern in some circles, because these sovereign funds generally disclose little information about their strategies or holdings. In some cases, these investments have generated a debate about potential national security implications.
The International Working Group of Sovereign Wealth Funds, whose members include representatives from more than 20 countries, including the United States and the United Arab Emirates, agreed on a set of principles after a two-day meeting in Santiago, Chile, that ended Tuesday.
In a joint statement, the group’s two co-chairs, Hamad al Suwaidi of the Abu Dhabi Investment Authority and Jaime Caruana, director of the International Monetary Funds Monetary and Capital Markets department, said, “These principles and practices will promote a clearer understanding of the institutional framework, governance, and investment operations of SWFs, thereby fostering trust and confidence in the international financial system.”
The details of the new guidelines weren’t revealed, but some are already speculating that they may not address all of the concerns out there.
“A voluntary set of principles and practices goes a long way to help de-mystify the methodology of sovereign wealth funds and how they invest, Debbie Fuller of law firm Eversheds told the BBC News. “However, a voluntary code will not satisfy certain governments who were hoping for some form of compulsory transparency rules.”
Go to Article from BBC News »Go to Press Release from the International Working Group of Sovereign Wealth Funds »
Tuesday, September 02, 2008
With Much Applause: DOJ Revises Attorney-Client Privilege Guidelines
Last Thursday, the DOJ released a new set of guidelines regarding how it would charge companies. The new guidelines are effective immediately and they revoke earlier - and heavily criticized - guidelines issued under then-Deputy Attorney General Larry Thompson, which were then subsequently revised by then-Deputy Attorney General Paul McNulty. Here is the DOJ press release - and remarks from Deputy Attorney General Mark Filip.
The new guidelines parallel the legislative proposals contained in the reborn "Attorney-Client Privilege Protection Act of 2008," which has passed in the House and pending in the Senate. So we ponder the big question: whether the new guidance sufficently protects the attorney-client privilege and work product protection, or whether congressional legislation is still desirable?
Apparently, the sponsor of the legislation thinks so. Sen. Arlen Specter issued a statement Thursday that says: “The revised guidelines are a step in the right direction but they leave many problems unresolved so that legislation will still be necessary. For example, there is no change in the benefit to corporations to waive the privilege by giving facts obtained by the corporate attorneys from the individuals in order to escape prosecution or to have a deferred prosecution agreement. The new guidelines expressly encourage corporations to comply with the waiver and disclosure programs of other agencies including the SEC and EPA. Legislation, of course, would bind all federal agencies and could not be changed except by an Act of Congress.”
The new guidelines parallel the legislative proposals contained in the reborn "Attorney-Client Privilege Protection Act of 2008," which has passed in the House and pending in the Senate. So we ponder the big question: whether the new guidance sufficently protects the attorney-client privilege and work product protection, or whether congressional legislation is still desirable?
Apparently, the sponsor of the legislation thinks so. Sen. Arlen Specter issued a statement Thursday that says: “The revised guidelines are a step in the right direction but they leave many problems unresolved so that legislation will still be necessary. For example, there is no change in the benefit to corporations to waive the privilege by giving facts obtained by the corporate attorneys from the individuals in order to escape prosecution or to have a deferred prosecution agreement. The new guidelines expressly encourage corporations to comply with the waiver and disclosure programs of other agencies including the SEC and EPA. Legislation, of course, would bind all federal agencies and could not be changed except by an Act of Congress.”
Wednesday, August 27, 2008
How Tightening Credit Is Hitting Venture Debt Firms
DealJournal, WSJ.com, August 27, 2008:
Providers of loans to start-up and other venture-backed companies are feeling the pinch of the credit problems plaguing Wall Street.
The latest is publicly traded venture debt provider Hercules Technology Growth Capital, which on Monday said it secured a $50 million line of credit from Wells Fargo–much smaller than the $250 million in available credit it secured from Citigroup and Deutsche Bank last year. “We’ve been in discussions, and continue to be in discussions [with Citigroup and Deutsche Bank] about continuing the existing facility, but their appetite to expand the facility we have with them is somewhat limited,” said Scott Harvey, Hercules Technology’s chief legal officer.
Most venture debt providers use a combination of equity and debt to provide loans to small, privately held life science and technology businesses. These firms will still be able to make loans from their own equity, but expect fewer venture-backed companies to be on the receiving end of those loans. “The best companies can still find credit at attractive terms, but as the available credit shrinks, the marginal companies are having more trouble getting deals done,” as are those companies looking for bigger financings, said Maurice Werdegar, an investment partner with Western Technology.
But even the highest-quality venture-backed companies might begin to see tougher terms and higher interest rates as the credit crunch continues. “It’s fair to say that this is starting to trickle down into the borrowing base. As the cost of capital goes up, that has to get passed along,” said Harvey, who added that he expects to begin seeing higher rates in the next three to six months.
Harvey said $50 million is adequate to meet the firm’s needs, and Hercules won’t be looking to add to the facility for at least another three months, but could raise as much as $300 million over the next two years. Harvey added that the company is being cautious about expanding the line of credit because there is a nonuse fee built into it.
Hercules, which has made about $1.3 billion in commitments to life science and technology companies since its inception in 2003, isn’t alone. This month, Western Technology Investment disclosed that its $125 million credit facility is being pulled by J.P. Morgan Chase and Deutsche Bank. “This is not isolated to us or our industry. Basically, the banks are unwinding the lending process,” said Ron Swenson, Western Technology’s chief executive.
Western Technology still has $220 million in equity remaining in its twelfth and most recent fund, which closed in February 2007.
–Scott Denne is a reporter at VentureWire, a Dow Jones publication and a contributor to Deal Journal.
Providers of loans to start-up and other venture-backed companies are feeling the pinch of the credit problems plaguing Wall Street.
The latest is publicly traded venture debt provider Hercules Technology Growth Capital, which on Monday said it secured a $50 million line of credit from Wells Fargo–much smaller than the $250 million in available credit it secured from Citigroup and Deutsche Bank last year. “We’ve been in discussions, and continue to be in discussions [with Citigroup and Deutsche Bank] about continuing the existing facility, but their appetite to expand the facility we have with them is somewhat limited,” said Scott Harvey, Hercules Technology’s chief legal officer.
Most venture debt providers use a combination of equity and debt to provide loans to small, privately held life science and technology businesses. These firms will still be able to make loans from their own equity, but expect fewer venture-backed companies to be on the receiving end of those loans. “The best companies can still find credit at attractive terms, but as the available credit shrinks, the marginal companies are having more trouble getting deals done,” as are those companies looking for bigger financings, said Maurice Werdegar, an investment partner with Western Technology.
But even the highest-quality venture-backed companies might begin to see tougher terms and higher interest rates as the credit crunch continues. “It’s fair to say that this is starting to trickle down into the borrowing base. As the cost of capital goes up, that has to get passed along,” said Harvey, who added that he expects to begin seeing higher rates in the next three to six months.
Harvey said $50 million is adequate to meet the firm’s needs, and Hercules won’t be looking to add to the facility for at least another three months, but could raise as much as $300 million over the next two years. Harvey added that the company is being cautious about expanding the line of credit because there is a nonuse fee built into it.
Hercules, which has made about $1.3 billion in commitments to life science and technology companies since its inception in 2003, isn’t alone. This month, Western Technology Investment disclosed that its $125 million credit facility is being pulled by J.P. Morgan Chase and Deutsche Bank. “This is not isolated to us or our industry. Basically, the banks are unwinding the lending process,” said Ron Swenson, Western Technology’s chief executive.
Western Technology still has $220 million in equity remaining in its twelfth and most recent fund, which closed in February 2007.
–Scott Denne is a reporter at VentureWire, a Dow Jones publication and a contributor to Deal Journal.
Tuesday, August 26, 2008
A Record Pace for Buying Minority Stakes in Companies
WSJ DealJournal, August 26, 2008:
Takeover activity may be down in the dumps, but acquisitions of minority stakes in companies are on a record pace, with financial industry purchases dominating the category.
Roughly $496 billion has been spent this year buying minority stakes in companies, the highest year-to-date figure recorded by data provider Dealogic, and 30% more than the $381 million of deals struck in the year-earlier period. The financial sector is the most targeted industry, with acquisitions totaling $88.9 billion, followed by mining sector and oil-and-gas companies, at $49.8 billion and $44.4 billion, respectively.
The largest completed acquisition of a minority stake this year is Aluminium Corp. of China and Alcoa’s spending $14.3 billion to buy a 12% stake in miner Rio Tinto. Last month’s $9.1 billion purchase by German ball-bearing concern Schaeffler Group of a stake in tire maker Continental is the most recent large deal.
U.S. companies have been the most targeted, with deals valued at $83.9 billion completed this year, followed by the U.K. at $60 billion and Germany at $37.1 billion.
Goldman Sachs Group tops the rankings for advising on minority acquisitions, with deal credits totaling $49.5 billion, $6 million ahead of second-place Credit Suisse Group.
–Harry Wilson is investment banking editor at Financial News, a Dow Jones publication and a contributor to Deal Journal.
Takeover activity may be down in the dumps, but acquisitions of minority stakes in companies are on a record pace, with financial industry purchases dominating the category.
Roughly $496 billion has been spent this year buying minority stakes in companies, the highest year-to-date figure recorded by data provider Dealogic, and 30% more than the $381 million of deals struck in the year-earlier period. The financial sector is the most targeted industry, with acquisitions totaling $88.9 billion, followed by mining sector and oil-and-gas companies, at $49.8 billion and $44.4 billion, respectively.
The largest completed acquisition of a minority stake this year is Aluminium Corp. of China and Alcoa’s spending $14.3 billion to buy a 12% stake in miner Rio Tinto. Last month’s $9.1 billion purchase by German ball-bearing concern Schaeffler Group of a stake in tire maker Continental is the most recent large deal.
U.S. companies have been the most targeted, with deals valued at $83.9 billion completed this year, followed by the U.K. at $60 billion and Germany at $37.1 billion.
Goldman Sachs Group tops the rankings for advising on minority acquisitions, with deal credits totaling $49.5 billion, $6 million ahead of second-place Credit Suisse Group.
–Harry Wilson is investment banking editor at Financial News, a Dow Jones publication and a contributor to Deal Journal.
When will Lehman Brothers die?
NYT DealBook, by Andrew Ross Sorkin, August 26, 2008:
Judging by the headlines, you’d think the troubled investment bank would go belly up any day now. In fact, it probably never will.
Lehman may not be too big to fail, but it may be too important to fail. Why? Because Richard S. Fuld Jr., Lehman’s chairman and chief executive, is too important. He is a member of an exclusive club: the board of directors of the Federal Reserve Bank of New York.
It’s hard to believe that the Fed would let one of its own fail the way Bear Stearns did. Another member of club Fed, James Dimon, JPMorgan Chase’s chief executive, was handed the deal of a lifetime. Alan D. Schwartz of Bear Stearns? Not a member.
Given Mr. Fuld’s access to Fed chief Ben S. Bernanke and Mr. Bernanke’s man on Wall Street, Timothy F. Geithner, Mr. Fuld is in a much better position than his rivals to keep his firm alive. A prediction: Watch the Fed’s discount window for loans to brokerage firms. It won’t close until Mr. Fuld is out of the woods.
Judging by the headlines, you’d think the troubled investment bank would go belly up any day now. In fact, it probably never will.
Lehman may not be too big to fail, but it may be too important to fail. Why? Because Richard S. Fuld Jr., Lehman’s chairman and chief executive, is too important. He is a member of an exclusive club: the board of directors of the Federal Reserve Bank of New York.
It’s hard to believe that the Fed would let one of its own fail the way Bear Stearns did. Another member of club Fed, James Dimon, JPMorgan Chase’s chief executive, was handed the deal of a lifetime. Alan D. Schwartz of Bear Stearns? Not a member.
Given Mr. Fuld’s access to Fed chief Ben S. Bernanke and Mr. Bernanke’s man on Wall Street, Timothy F. Geithner, Mr. Fuld is in a much better position than his rivals to keep his firm alive. A prediction: Watch the Fed’s discount window for loans to brokerage firms. It won’t close until Mr. Fuld is out of the woods.
Monday, August 25, 2008
PE Sales to Strategic Buyers Defy Weak Exit Market
WSJ DealJournal, August 25, 2008:
With a lackluster IPO market and continued weakness in the appetite of financial buyers, strategic acquirers have been a key source of liquidity for firms that look to sell assets.
U.S. sales to strategic, or corporate, buyers by private-equity firms are up 46% to $63.1 billion through Aug. 20, from $43.1 billion a year earlier, according to data provider Dealogic. though the number of such deals fell to 70 from 88.
This theme is playing out more modestly around the globe. Sales to corporate buyers world-wide are up 8% to $107.5 billion from $99.4 billion, with the number of deals falling to 255 from 356. By contrast, secondary buyouts–or sales to other PE firms–are down 93% in the U.S. and 83% globally.
Buyout shop executives and intermediaries alike say since the credit markets seized up, strategic buyers have come back with a vengeance, after previously losing auctions repeatedly to cash-rich financial sponsors. For PE firms, it is a silver lining in an otherwise bleak exit environment.
Chicago Growth Partners and ClearLight Partners stand to receive more than three times their money when their sale of campus-services company U.S. Education to education concern DeVry for $290 million is complete. while Carlyle Venture Partners, Wachovia Capital Partners and Spire Capital Partners sold security company Sonitrol to Stanley Works last month for $276 million, or about 10 times earnings before interest, taxes, depreciation and amortization. That is more than twice what the PE firms paid for Sonitrol in 2004 and on top of a sonitrol dividend the sponsors paid themselves in 2005.
With a lackluster IPO market and continued weakness in the appetite of financial buyers, strategic acquirers have been a key source of liquidity for firms that look to sell assets.
U.S. sales to strategic, or corporate, buyers by private-equity firms are up 46% to $63.1 billion through Aug. 20, from $43.1 billion a year earlier, according to data provider Dealogic. though the number of such deals fell to 70 from 88.
This theme is playing out more modestly around the globe. Sales to corporate buyers world-wide are up 8% to $107.5 billion from $99.4 billion, with the number of deals falling to 255 from 356. By contrast, secondary buyouts–or sales to other PE firms–are down 93% in the U.S. and 83% globally.
Buyout shop executives and intermediaries alike say since the credit markets seized up, strategic buyers have come back with a vengeance, after previously losing auctions repeatedly to cash-rich financial sponsors. For PE firms, it is a silver lining in an otherwise bleak exit environment.
Chicago Growth Partners and ClearLight Partners stand to receive more than three times their money when their sale of campus-services company U.S. Education to education concern DeVry for $290 million is complete. while Carlyle Venture Partners, Wachovia Capital Partners and Spire Capital Partners sold security company Sonitrol to Stanley Works last month for $276 million, or about 10 times earnings before interest, taxes, depreciation and amortization. That is more than twice what the PE firms paid for Sonitrol in 2004 and on top of a sonitrol dividend the sponsors paid themselves in 2005.
Wednesday, August 20, 2008
Germany backs law to protect firms from foreigners
BERLIN, Aug 20 (Reuters) - Germany's cabinet agreed on Wednesday to bring in rules to protect domestic firms from foreign buyers, notably sovereign wealth funds (SWFs), who could exert political influence, a German government official said.
Under the new rules, the government will be able to review and veto purchases of stakes of 25 percent or more in German firms made by buyers outside the EU or European Free Trade Association if it deems German security is at risk.
The rules, to stop cash-rich SWFs from countries including Russia, China and Gulf states exerting leverage in strategic sectors, extend the law -- which currently applies only to the arms industry -- to all sectors.
SWFs control an estimated $3 trillion in assets globally.
Economists and some industry groups have warned that any signs the government of the world's No.1 goods exporter is taking steps which could be viewed by markets as protectionist may frighten off foreign investors.
The government has stressed it would intervene only in exceptional cases.
The Economy Ministry will be able to look at a purchase up to three months after the acquisition is made or the intention to make an acquisition is made public. It then has two months to decide whether to veto the purchase.
Parliament still has to pass the plans. For a factbox on the rules, please click on [ID:nLJ374737] (Reporting by Madeline Chambers; Editing by Louise Ireland)
Under the new rules, the government will be able to review and veto purchases of stakes of 25 percent or more in German firms made by buyers outside the EU or European Free Trade Association if it deems German security is at risk.
The rules, to stop cash-rich SWFs from countries including Russia, China and Gulf states exerting leverage in strategic sectors, extend the law -- which currently applies only to the arms industry -- to all sectors.
SWFs control an estimated $3 trillion in assets globally.
Economists and some industry groups have warned that any signs the government of the world's No.1 goods exporter is taking steps which could be viewed by markets as protectionist may frighten off foreign investors.
The government has stressed it would intervene only in exceptional cases.
The Economy Ministry will be able to look at a purchase up to three months after the acquisition is made or the intention to make an acquisition is made public. It then has two months to decide whether to veto the purchase.
Parliament still has to pass the plans. For a factbox on the rules, please click on [ID:nLJ374737] (Reporting by Madeline Chambers; Editing by Louise Ireland)
Monday, August 18, 2008
In an Ohio State of Mind
August 15, 2008, NYT Times DealBook, by Steven M. Davidoff, The Deal Professor.
In light of Delaware’s dominance of takeover regulation, it is easy to forget that other states have their own, sometimes very different, takeover laws and procedures.
California rejects Delaware’s Revlon doctrine, which requires that a board obtain the highest price reasonably available when a break-up or sale of the company is inevitable; Texas requires a two-thirds vote to approve a takeover via a merger; and Pennsylvania has the toughest antitakeover laws in the nation, the result of an attempt in the 1980s to protect its industrial enterprises from out-of-state acquirers.
I was thinking about this in light of Thursday’s moves by Harbinger Capital Management.
Harbinger, a hedge-fund firm much in the headlines these days, has delivered a control share acquisition statement to Cleveland-Cliffs under Ohio’s Control Share Acquisition Statute, proposing to acquire up to one-third of Cleveland-Cliffs.
Cleveland-Cliffs is a mining company incorporated under the laws of Ohio and therefore governed by Ohio’s takeover laws. Harbinger took this step in order to block Cleveland’s pending acquisition of Alpha Natural Resources.
Cleveland is the proposed acquirer of Alpha, but it is required to hold a vote to approve the acquisition under Ohio law (and New York Stock Exchange rules, for that matter).
A quirky Ohio antitakeover statute (Section 1701.83 of the Ohio General Corporate law) requires Cleveland-Cliffs to have a vote of its shareholders to approve any issuance of its shares in an acquisition transaction in which it issues stock representing more than than one-sixth of its voting power.
The vote requirement is not the quirk; NYSE rules require a similar vote if a company issues more than 20 percent of its voting power. But rather the quirk is that two-thirds of Cleveland’s shareholders must approve the acquisition under the statute.
This is a problem for Cleveland. Harbinger already owns 15.57 percent of the company. If it acquires all of the shares it seeks, or even a significant portion of them, it will be able to block Cleveland-Cliffs’ acquisition of Alpha.
But before Harbinger can acquire this position, it must comply with another Ohio law, the Ohio Control Share Acquisition Statute (Section 1701.831 of the Ohio General Corporate Law).
This species of law is common in many states, but is not the law of Delaware. Control share acquisition statutes, along with other state antitakeover laws, were often passed in the 1980s to stem hostile takeovers of local enterprises.
Ohio’s version of the control share acquisition statute requires that shareholders pre-approve any acquisition that, when added to the proposed buyer’s current share ownership, would equal one-fifth or more of the company’s voting power as relates to the election of directors.
So, Harbinger’s delivery of a control share acquisition statement is the first step required in this process.
Ultimately, the statute requires that Harbinger’s acquisition be approved by a majority of those shares that are present at the shareholder meeting voting on this acquisition. However, the count excludes all interested shares; interested shares are defined to include the acquiring person’s shares (in this case Harbinger).
Notably, Ohio, in its infinite wisdom, has also adopted an anti-arbitrageur provision to this statute. This so-called “arb” provision was added in 2003 after Northrop Grumman’s acquisition of TRW, which was based in Ohio. It effectively disenfranchises from voting at the meeting, for the purposes of the control share acquisition statute, any shareholder who acquires a block of shares constituting more than 0.5 percent of the company — in this situation, Cleveland-Cliffs — after the announcement of the control share acquisition.
In Cleveland’s case, that cutoff date was Thursday. Be careful out there.
Now, Cleveland is in a race, with two separate shareholder meetings on the horizon. One is to approve or reject the Alpha Natural Resources acquisition. The second will decide whether or not Harbinger can acquire a sufficient number of shares to block the Alpha transaction.
The question is this: Can Cleveland hold a vote to approve the acquisition of Alpha before the vote to authorize Harbinger’s acquisition of more shares in order to block the transaction?
Or, more appropriately, can Cleveland set the record date for the Alpha meeting — the date on which it counts shareholders eligible to vote — before Harbinger acquires the shares it seeks?
If Cleveland can do so, then Harbinger will need to obtain the votes of other shareholders to block the transaction. Harbinger is stuck until then. Though it can conduct a proxy solicitation against the vote, under the law it can’t acquire more than one-fifth of Cleveland without this shareholder approval.
For those handicapping this race, the determinant of whether or not Cleveland can indeed set this record date before the Alpha meeting will be Cleveland’s ability to clear its pending registration statement with the Securities and Exchange Commission in time.
Under Ohio law, the Harbinger meeting can be set by the Cleveland board on a date any day 50 days after Thursday, and the record date any day in that period.
That is a decent amount of time, and so I am betting that Cleveland will win this race.
Of course, Cleveland could simply cut through all this by adopting a poison pill to block the acquisition.
Ultimately, Harbinger is posturing here: At this point, Harbinger can likely pull together the remaining shares to block this deal even if it cannot purchase them. The Alpha deal is unlikely to be completed and the question is whether or not Cleveland actually pushes this to a vote and Alpha, out of hope or simply because they are furious, requires that Cleveland do so.
In the meantime, Alpha disclosed in the Cleveland registration statement that it had other suitors (Arcelor Mittal?) though not at the right price.
Will those suitors return? Of course, there are other questions too, such as, what does Harbinger really want? And why didn’t Cleveland get better assurances from Harbinger before agreeing to this acquisition?
This battle also points to the absurdity of the Ohio Control Share Acquisition statute and similar laws. They were adopted back in the 1980s, before the poison pill, to provide companies a defense against tender offers.
Putting aside the appropriateness of states protecting inefficient enterprises and their doubtful economic efficiency, the threat the tender offer posed back then no longer exists. A company can adopt a poison pill to stop a tender offer in its tracks.
So at this point, these statutes are a needless procedural formality. Though for companies like Cleveland Cliffs and Diebold, which is the subject of a hostile offer by United Technologies, they’re a nice protective boon.
Harbingers control share acquisition statement is available here.
In light of Delaware’s dominance of takeover regulation, it is easy to forget that other states have their own, sometimes very different, takeover laws and procedures.
California rejects Delaware’s Revlon doctrine, which requires that a board obtain the highest price reasonably available when a break-up or sale of the company is inevitable; Texas requires a two-thirds vote to approve a takeover via a merger; and Pennsylvania has the toughest antitakeover laws in the nation, the result of an attempt in the 1980s to protect its industrial enterprises from out-of-state acquirers.
I was thinking about this in light of Thursday’s moves by Harbinger Capital Management.
Harbinger, a hedge-fund firm much in the headlines these days, has delivered a control share acquisition statement to Cleveland-Cliffs under Ohio’s Control Share Acquisition Statute, proposing to acquire up to one-third of Cleveland-Cliffs.
Cleveland-Cliffs is a mining company incorporated under the laws of Ohio and therefore governed by Ohio’s takeover laws. Harbinger took this step in order to block Cleveland’s pending acquisition of Alpha Natural Resources.
Cleveland is the proposed acquirer of Alpha, but it is required to hold a vote to approve the acquisition under Ohio law (and New York Stock Exchange rules, for that matter).
A quirky Ohio antitakeover statute (Section 1701.83 of the Ohio General Corporate law) requires Cleveland-Cliffs to have a vote of its shareholders to approve any issuance of its shares in an acquisition transaction in which it issues stock representing more than than one-sixth of its voting power.
The vote requirement is not the quirk; NYSE rules require a similar vote if a company issues more than 20 percent of its voting power. But rather the quirk is that two-thirds of Cleveland’s shareholders must approve the acquisition under the statute.
This is a problem for Cleveland. Harbinger already owns 15.57 percent of the company. If it acquires all of the shares it seeks, or even a significant portion of them, it will be able to block Cleveland-Cliffs’ acquisition of Alpha.
But before Harbinger can acquire this position, it must comply with another Ohio law, the Ohio Control Share Acquisition Statute (Section 1701.831 of the Ohio General Corporate Law).
This species of law is common in many states, but is not the law of Delaware. Control share acquisition statutes, along with other state antitakeover laws, were often passed in the 1980s to stem hostile takeovers of local enterprises.
Ohio’s version of the control share acquisition statute requires that shareholders pre-approve any acquisition that, when added to the proposed buyer’s current share ownership, would equal one-fifth or more of the company’s voting power as relates to the election of directors.
So, Harbinger’s delivery of a control share acquisition statement is the first step required in this process.
Ultimately, the statute requires that Harbinger’s acquisition be approved by a majority of those shares that are present at the shareholder meeting voting on this acquisition. However, the count excludes all interested shares; interested shares are defined to include the acquiring person’s shares (in this case Harbinger).
Notably, Ohio, in its infinite wisdom, has also adopted an anti-arbitrageur provision to this statute. This so-called “arb” provision was added in 2003 after Northrop Grumman’s acquisition of TRW, which was based in Ohio. It effectively disenfranchises from voting at the meeting, for the purposes of the control share acquisition statute, any shareholder who acquires a block of shares constituting more than 0.5 percent of the company — in this situation, Cleveland-Cliffs — after the announcement of the control share acquisition.
In Cleveland’s case, that cutoff date was Thursday. Be careful out there.
Now, Cleveland is in a race, with two separate shareholder meetings on the horizon. One is to approve or reject the Alpha Natural Resources acquisition. The second will decide whether or not Harbinger can acquire a sufficient number of shares to block the Alpha transaction.
The question is this: Can Cleveland hold a vote to approve the acquisition of Alpha before the vote to authorize Harbinger’s acquisition of more shares in order to block the transaction?
Or, more appropriately, can Cleveland set the record date for the Alpha meeting — the date on which it counts shareholders eligible to vote — before Harbinger acquires the shares it seeks?
If Cleveland can do so, then Harbinger will need to obtain the votes of other shareholders to block the transaction. Harbinger is stuck until then. Though it can conduct a proxy solicitation against the vote, under the law it can’t acquire more than one-fifth of Cleveland without this shareholder approval.
For those handicapping this race, the determinant of whether or not Cleveland can indeed set this record date before the Alpha meeting will be Cleveland’s ability to clear its pending registration statement with the Securities and Exchange Commission in time.
Under Ohio law, the Harbinger meeting can be set by the Cleveland board on a date any day 50 days after Thursday, and the record date any day in that period.
That is a decent amount of time, and so I am betting that Cleveland will win this race.
Of course, Cleveland could simply cut through all this by adopting a poison pill to block the acquisition.
Ultimately, Harbinger is posturing here: At this point, Harbinger can likely pull together the remaining shares to block this deal even if it cannot purchase them. The Alpha deal is unlikely to be completed and the question is whether or not Cleveland actually pushes this to a vote and Alpha, out of hope or simply because they are furious, requires that Cleveland do so.
In the meantime, Alpha disclosed in the Cleveland registration statement that it had other suitors (Arcelor Mittal?) though not at the right price.
Will those suitors return? Of course, there are other questions too, such as, what does Harbinger really want? And why didn’t Cleveland get better assurances from Harbinger before agreeing to this acquisition?
This battle also points to the absurdity of the Ohio Control Share Acquisition statute and similar laws. They were adopted back in the 1980s, before the poison pill, to provide companies a defense against tender offers.
Putting aside the appropriateness of states protecting inefficient enterprises and their doubtful economic efficiency, the threat the tender offer posed back then no longer exists. A company can adopt a poison pill to stop a tender offer in its tracks.
So at this point, these statutes are a needless procedural formality. Though for companies like Cleveland Cliffs and Diebold, which is the subject of a hostile offer by United Technologies, they’re a nice protective boon.
Harbingers control share acquisition statement is available here.
Friday, August 08, 2008
U.S. Regulations Did Not Hurt Companies, Study Finds
It has become received wisdom on Wall Street that the Sarbanes-Oxley Act has damaged American competitiveness. It made listing in the American market less attractive to foreign companies and drove initial public offerings overseas. It raised costs for American companies without providing any significant benefit.
But do the facts support that wisdom?
The answer, according to The New York Times’s Floyd Norris: No.
A new study of the foreign companies that fled the American market after the Securities and Exchange Commission made it easy for them to do so in 2007 suggests that the companies that left were largely ones whose slow growth, and poor market performance, had reduced their need and ability to attract American capital. There is even some indication that the market punished companies that decided to leave even though they could still use the capital.
What the study shows, said one of the authors, G. Andrew Karolyi, a finance professor at Ohio State, is that the market did not react favorably when companies got out from under American regulation.
Instead, the paper by Mr. Korolyi, along with René M. Stulz, also of Ohio State, and Craig Doidge of the University of Toronto, found that share prices suffered in the few cases where foreign companies with good growth prospects left the American market. “When they choose to leave even though they are benefiting” from the American listing, Mr. Karolyi said in an interview, “shareholders may wonder if there is something sneaky going on.”
There has long been evidence that overseas firms benefit, through a lower cost of capital, when they choose to list their shares in the United States. Their shares trade for higher prices than do those of similar companies that do not choose to list here.
Why is that? The traditional answer is that investors have more faith in companies that comply with American disclosure rules and reconcile their books to United States accounting standards.
The advantage of an American listing faded early in this decade, although it did not vanish. The scandals at Enron and WorldCom did not renew faith in American rules, and it turned out that the American listing premium had soared in the late 1990s in part because foreign technology companies flocked to the United States to take advantage of what turned out to be a bubble. Their collapse made the American premium seem smaller.
The premium hit bottom in 2002, and recovered somewhat after that. Was that a reflection of investor confidence being renewed by passage of Sarbanes-Oxley? Not to hear the critics tell it. The Committee on Capital Markets Regulation, an independent panel whose creation in 2006 was heralded by Treasury Secretary Henry M. Paulson Jr., cited that data as proof that Sarbanes-Oxley hurt the markets. Their logic: The average premium after 2002, when the law passed, was lower than it was before the bubble burst. The committee ignored the fact the premium rose after the law was passed.
There is no question that the costs of complying with Section 404 of the law — requiring audits of corporate internal controls — has scared executives in the United States and abroad. The first year of audits found lots of problems, but for the vast majority of large companies those problems have since been fixed. And the costs of audits, which soared, have stabilized.
That does not prove the audits were worth the cost, although the fact that so many problems were fixed — in some cases requiring substantial accounting restatements — does indicate there was considerable benefit.
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But do the facts support that wisdom?
The answer, according to The New York Times’s Floyd Norris: No.
A new study of the foreign companies that fled the American market after the Securities and Exchange Commission made it easy for them to do so in 2007 suggests that the companies that left were largely ones whose slow growth, and poor market performance, had reduced their need and ability to attract American capital. There is even some indication that the market punished companies that decided to leave even though they could still use the capital.
What the study shows, said one of the authors, G. Andrew Karolyi, a finance professor at Ohio State, is that the market did not react favorably when companies got out from under American regulation.
Instead, the paper by Mr. Korolyi, along with René M. Stulz, also of Ohio State, and Craig Doidge of the University of Toronto, found that share prices suffered in the few cases where foreign companies with good growth prospects left the American market. “When they choose to leave even though they are benefiting” from the American listing, Mr. Karolyi said in an interview, “shareholders may wonder if there is something sneaky going on.”
There has long been evidence that overseas firms benefit, through a lower cost of capital, when they choose to list their shares in the United States. Their shares trade for higher prices than do those of similar companies that do not choose to list here.
Why is that? The traditional answer is that investors have more faith in companies that comply with American disclosure rules and reconcile their books to United States accounting standards.
The advantage of an American listing faded early in this decade, although it did not vanish. The scandals at Enron and WorldCom did not renew faith in American rules, and it turned out that the American listing premium had soared in the late 1990s in part because foreign technology companies flocked to the United States to take advantage of what turned out to be a bubble. Their collapse made the American premium seem smaller.
The premium hit bottom in 2002, and recovered somewhat after that. Was that a reflection of investor confidence being renewed by passage of Sarbanes-Oxley? Not to hear the critics tell it. The Committee on Capital Markets Regulation, an independent panel whose creation in 2006 was heralded by Treasury Secretary Henry M. Paulson Jr., cited that data as proof that Sarbanes-Oxley hurt the markets. Their logic: The average premium after 2002, when the law passed, was lower than it was before the bubble burst. The committee ignored the fact the premium rose after the law was passed.
There is no question that the costs of complying with Section 404 of the law — requiring audits of corporate internal controls — has scared executives in the United States and abroad. The first year of audits found lots of problems, but for the vast majority of large companies those problems have since been fixed. And the costs of audits, which soared, have stabilized.
That does not prove the audits were worth the cost, although the fact that so many problems were fixed — in some cases requiring substantial accounting restatements — does indicate there was considerable benefit.
Go to Article from The New York Times »
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