If you own stock in a company that announces it’s being acquired, and you think the acquisition price undervalues the company, there are three things you can do about it: you can vote down the deal, you can find or propose an alternate deal, or you can sue. No I’m kidding of course you can’t do any of those things: you don’t have enough shares to vote down anything, you don’t have the money to propose something else, and you aren’t a plaintiff’s lawyer (are you?) so you aren’t in the business of suing companies, which turns out to be the sort of specialized skill you can’t just acquire in a fit of pique. Those are the tools, but they can only be wielded by specific people.
Steven Davidoff has a delightful piece in DealBook today about the state of the M&A lawsuit market and it is sobering reading:
[L]ast year, 92 percent of all transactions with a value greater than $100 million experienced litigation. The average deal brought five different lawsuits. In addition, half of all transactions experienced multi-jurisdictional litigation, typically litigation in Delaware and another state.
Left out of that description is what percentage of last year’s mergers were agreed to by lazy corrupt self-dealing boards of directors who were putting their own interests above those of shareholders. I submit that it’s strictly between 0 and 92%.
Take the recently announced buyout of Dell. There are already 21 lawsuits pending in Delaware Court of Chancery, and three more pending in Texas state court.
Meanwhile, in another part of town, someone else thinks that the Dell buyout is bullshit, and is actually doing something about it. Davidoff goes on: Read more »
There’s a small cause-and-effect mystery in the interaction between share prices and share buybacks. On the one hand, when a company buys back stock, that should make the remaining shares more valuable, on reasoning both fundamental-ish (EPS is up!) and technical-ish (more buyers than sellers!). On the other hand, issuers seem to view their own shares as Veblen goods: the higher the price, the more they want to buy.1 So it’s a little hard to know whether the market is reaching record highs (in part) because companies are spending record amounts of money buying back their stock, or vice versa. The first explanation mostly makes sense, and the second mostly doesn’t, which is a good argument for the second being right.
The first explanation is more popular though. Today the Journal noted that “U.S. companies are showering investors with a record windfall in the form of dividends and share buybacks, helping to propel the stock market’s rally,” and FT Alphaville and others have been talking about de-equitization, as well as the declining attractiveness of listed public equity. So have I, come to think of it.
One possibly relevant question you could ask is: how much is the market shrinking? That seems susceptible to various sorts of answers, as well as various possibly relevant time periods. As it happens, tomorrow marks the four-year anniversary of the market’s hitting a 15-year low, so mazel tov everyone on that. Here’s perhaps a place to start measuring U.S. equity market shrinkage over those four years:
Read more »
The Big Board will not, after all, be selling
itself its tiny minority stake in an Indian commodities exchange. It seems, like the Euronext part of NYSE Euronext, nobody wanted it. Read more »
Dell reported earnings today and they feel a little pointless, as Dell is no longer particularly an earnings play, unless of course it is. Dan Primack is mad because of the irrelevancy of the exercise:
What Dell did not want to talk about, however, was its pending $28 billion buyout by company CEO Michael Dell and private equity firm Silver Lake Partners. It also chose not to provide guidance for further quarters, or even make Michael Dell available to analysts.
Apparently the company already thinks it’s been taken private. … Dell is asking shareholders to approve a $13.65 per share deal (plus a $0.16 per share dividend) that is being opposed by the company’s two largest outside shareholders. Wouldn’t such shareholders benefit from knowing how the company views its future financial prospects, before casting their ballots?
Ha, sure they would. But they can’t because it’s illegal. Not “illegal” in the sense of “against the law,” but “illegal” in the sense of “if they did it, Dell’s lawyers would have heart attacks and die, and then they’d have no lawyers, and they’d probably go do things that are against the law, so it ends up in the same place.” The thing is: Read more »
One way in which my deep personal laziness manifests itself is my fascination with ways of getting paid not to do things.1 Contested M&A deals turn out to be full of such opportunities, from greenmail to don’t-work-for-a-hostile-bidder law-firm retainers. Break-up fees are a favorite of mine, and a place where I really feel mystified by the financial world. I have seen people lose out on a deal to a topping bid, putting them in line for an eight-figure break-up fee, and I have seen the look on their faces and: they were sad. Sad! To get paid tens of millions of dollars to stop working on the deal! I had to keep working on the deal, and no one was giving me millions of dollars.
At some intellectual level I understand this. So, in the Dell deal for instance, Silver Lake want to put $1.4 billion into Dell today and exit in five years and make 5x their money, I get it. But: that’s hard! You have to, like, manage Dell. Seems like a big company, has some problems. Your $1.4 billion is at risk, you have debt covenants to worry about, and, I dunno, wristwatch computers or something to make. Or someone can just write you a check for $450 million and you can not do any of that.2 I mean: go ahead, write me a check for $450 million, and I will happily not manage Dell. 450 dollars, really. Buy me a drink and I will spend as long as you want not running Dell. I’d be at least as good at it as Silver Lake.
On the other hand, if you’re a Dell shareholder, what do you win if you vote down the buyout deal? Read more »
It’s always a little awkward for a company to issue a statement saying “we’re not really that good a company,” but Dell’s Special Committee did a decent job of it today:
In the course of its deliberations, the Special Committee of Dell’s Board considered an array of strategic alternatives. In addition to working through financial and capital allocation issues with its independent financial advisors, the Committee retained a prominent management consultant to help it assess the Company’s strategic position. Based on that work, the Board concluded that the proposed all-cash transaction is in the best interests of stockholders. The transaction offers an attractive and immediate premium for stockholders and shifts the risks facing the business to the buyer group.
I think that this says that the board hired McKinsey1 to figure out how to improve Dell’s business, and they looked around and said: “It’s hopeless, burn the place down, or take whatever you can get for it.” And they did, agreeing to an LBO led by Michael Dell and Silver Lake at $13.65 a share, which some shareholders find a bit light.
One question you might ask is: who knows Dell’s strategic position better, Michael Dell or McKinsey (or whoever)? I don’t know that there’s an obvious answer. You could very reasonably take the view that Michael Dell, chairman and CEO and founder and namesake of the company, really is stealing it away from shareholders at a low valuation and taking all of the upside for himself and his private equity sponsors. On this view the board has no particular choice but to sell to him – he’s offering a premium and no other buyer is likely to compete with the CEO and founder’s offer – and so has brought in McKinsey to provide litigation-friendly rubber-stamping for that decision. This fits nicely with the notion that management buyouts always sort of screw public shareholders, as well as with the notion that management consulting is always just a highly-credentialed rubber stamp for whatever an executive was planning to do anyway. Read more »
The Dell deal documents are out and they are short of juicy details; we’ll have to wait for the proxy for details on things like just how much of a discount Michael Dell is taking on his shares or what exactly the terms of Microsoft’s loan are. There is, though, the information that that loan will take the form of $2 billion of subordinated debt, and that the total cash equity investments from Silver Lake, Michael Dell and MSD will total $2.25bn. This seems pretty sensible; Microsoft is effectively writing half of the equity check, though for a fixed-but-subordinated return, plus emotional benefits or what have you. And if you’re worried about how easily debt markets will swallow some $3.25bn of bonds, $5.5bn of Term B/C, and billions of assorted other secured financing,1 which with $4bn of existing bonds brings Dell to around 4x total leverage, making $2 billion – almost half a turn – of the debt subordinated, long-term, and emotionally committed can’t hurt.
But for most of the fun stuff we’ll have to look forward to the proxy. And that isn’t good enough for some people. Reuters reports that the first shareholder lawsuit over the deal has already been filed, one day after announcement, which I assume means it was in the works before the deal was announced. This sort of amazed me: Read more »
What do you think of this?
Meanwhile, the most controversial banker involved in the HP-Autonomy deal, Frank Quattrone of Qatalyst, represented Autonomy and played a key role in getting HP to pay a high price. … Analysts almost uniformly deemed the $11.1 billion he got HP to pay for Autonomy as overly rich – a compliment to him at the time, but possibly a hollow success if HP’s allegations prove true.
True or false, re: “hollow success”? The article is about how the eight zillion bankers and lawyers and auditors and, I dunno, PR firms swarming around the HP-Autonomy deal failed to notice that Autonomy was a giant fraud due to (1) it not being a giant fraud, (2) it not being their job to notice that it was a giant fraud, and/or (3) their not being good at their jobs.1 Was it Quattrone’s job?2 The capital-markets gatekeeping function, whether in sell-side M&A or in IPOs, exists in irresolvable tension between “getting the best possible price for your client” and “maintaining some credibility with the buy side.” If I were selling my company – fraud or otherwise! – I’d be pretty psyched to hire someone talented enough to get $11 billion for a giant fraud; on the other hand, once you get a reputation for getting top dollar for giant frauds, it becomes hard for you to get any dollar for anything.3
A while back we talked about a sort of amusing article saying that M&A lawyers provide no value because (1) their job is to negotiate the conditions in which a merger will and will not close, (2) mergers always close, so (3) their job is purely decorative. You could take issue with that for a number of reasons; at the time I suggested that one of those reasons would be “well they also add value by doing due diligence” and, heh, so much for that. Read more »
I don’t know much about this Autonomy thing – in brief, Hewlett-Packard acquired British software company Autonomy last year for $10.3 billion and today wrote that investment down by $8.8 billion, blaming $5 billion of that on “accounting improprieties, misrepresentations and disclosure failures” at Autonomy – but this sure sounds fake doesn’t it?
Today, Autonomy is firmly established as the leading provider of Pan-Enterprise Search and Meaning Based Computing (MBC) solutions. Autonomy’s unique Intelligent Data Operating Layer (IDOL) platform enables organisations to harness the full richness of human information by extracting meaning from the mass of unstructured information they handle every day, which analysts estimate to constitute over 80% of all enterprise data.
That’s from Autonomy’s last annual report as an autonomous company1 before HP bought it. Retrospective red flag perhaps? I would be wary of companies whose business involves “extracting meaning.” Meaning doesn’t come from software.2
Now of course HP is going to sue everyone and demand fraud investigations on two continents. Many people look bad here – HP first of all, whether or not its claims are true, then (if they’re true) Autonomy, Deloitte (Autonomy’s auditors), E&Y (HP’s auditors), HP’s bevy of bankers and others involved in due diligence who seem to have been unduly undiligent, and to some extent Autonomy’s bankers who marketed it to HP.3 I have plenty of sympathies with both sets of bankers, of course; their job is mainly to harness the full richness of human information by extracting meaning from the mass of stuff that companies make public, not to know whether that stuff is true.4 Bankers are an intelligent data operating layer; if you give them bad data then their operating layer is less intelligent. It’s possible that some of those words mean things. Read more »
A useful though debatable proposition is that much complexity in the financial world is due to the fact that the people running that world like complexity. It’s good for business. If raising money or doing mergers is super complicated, you need to hire expert advisors to do it. If structured products are opaque, you end up paying your dealer more than they’re worth. Good times.
But this sort of sucks for the people working for the people running the financial world. I mean, sort of sucks: they get to be employed! They get to be paid lots of money for, like, connecting boxes and arrows in CDOs and drafting environmental reps in underwriting agreements.1 But then they have to do that. It’s often unpleasant. And it leads to the cognitive dissonance of analysts updating comp sets in M&A board books at 4am while bitching that the board wants to sell and no one will ever look at the appendix full of comps. Those analysts are wasting precious hours of their young lives doing a pointless thing, and are naturally furious. But the alternative is just not having anyone do that pointless thing, and then what will the analysts do? Get a real job?
Also: M&A lawyers. I was an M&A lawyer once, briefly, and it was awesome and exciting and you get on calls and yell “how can you ask us to schedule these exceptions to our representation about ERISA plans, I’ll show you where you can put your ERISA plans!,” and then you sit at your desk and re-draft reps and warranties until 4am and you’re like, VALUE ADDED.2 Or not: Read more »
When a company does something that corporate-governance activists really don’t like, like adopting a poison pill, typically they announce that “the board decided unanimously to punch you in the face for your own good.” There’s some perception that, if they’re all in it together, the directors can’t be up to anything too unsavory. Forest Labs doesn’t have that option:
Forest Laboratories, Inc. (NYSE: FRX) today announced that its newly constituted Board of Directors adopted a stockholder rights plan and declared a dividend distribution of one Preferred Share Purchase Right on each outstanding share of Forest Laboratories common stock.
The Board adopted the rights plan in response to the recent rapid accumulation of a significant portion of Forest’s outstanding common stock. The rights plan is intended to protect the Company and its stockholders from efforts to obtain control of the Company that are inconsistent with the best interests of the Company and its stockholders. The rights plan also has an exception for an offer for all shares that is accepted by a majority of the Company’s shares and treats all shareholders equally.
That must have been an awkward meeting! For those of you sensibly not following the Forest Labs saga, that “newly constituted Board” was newly constituted with Carl Icahn nominee Pierre Legault, who was elected two weeks ago in a proxy contest, beating out one of the company’s nominees. The other nine directors are still the ones who opposed Icahn in the proxy contest. And the rights plan was designed to keep Icahn from buying any more of the company. Presumably it was approved 9-1. Read more »