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 […]
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 […]
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 […]
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 […]
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 […]
I remain fascinated by this Carl Icahn – CVR Energy situation and wanted to add two curlicues to my conspiracy theory for why he dropped his bid. First: while it’s fun to think that he may be unable to pay above $30 for a CVR merger due to let’s say imperfections in his tender offer […]
Carl Icahn’s strangely halfhearted takeover of CVR Energy got even stranger and more halfhearted last night: after acquiring an 82% stake at $30 in a tender offer, and suggesting to the board that they think about selling him the rest of the company at $29, he withdrew that suggestion last night. He gets sort of […]
If you were Best Buy founder Richard Schulze, how much would you pay to acquire the shares of Best Buy that you don’t already own? $24 a share? $26? $30? Surely it’d get too expensive for you above $30 or so?* Nope! The more expensive it is for him the more money he saves, or […]
It can’t be a coincidence that perhaps the greatest 8-K ever filed was filed at 5:07pm on July 3: In connection with the Merger described in Item 2.01 of this Current Report on Form 8-K and pursuant to the terms of the Merger Agreement, effective as of the effective time of the Merger, William D. […]
And so he’s not paying them on principle, the principle being I suppose “don’t fuck with Carl Icahn”: Carl Icahn says he isn’t paying a bill from Goldman Sachs Group Inc., on principle. … “These guys were hired to keep me from buying the company at $30 and they failed,” Mr. Icahn said in an […]
Sell-side M&A work is mostly a pretty good and lucrative business model but it has a few flaws. Try to spot a key one here:
(1) you represent a target;
(2) you spend your days fighting tooth and nail with the buyer to try to make them pay more and give up optionality, and generally to get more of the benefits of the deal for the target than for the buyer;
(3) then the buyer acquires the target, fires all the directors and officers, changes the locks, and replaces the stationery;
(4) then you get paid.
Did you spot the problem? Carl Icahn did:
One of the more fertile areas of academic finance is explaining why M&A is so bad – mergers seem to be on average value destructive, so why do they keep happening? Are CEOs just stupid? Are bankers just evil and persuasive? Here’s one answer that may be worth considering, which is that it looks like […]
If you want to buy a company you can do it in one of two ways: you can negotiate a merger with the board, put it to a shareholder vote, and if you get above 50% then all the other shareholders are basically forced into the deal and you pay the merger price. Or you […]
Morgan Stanley has announced that it will be buying 14% of its Morgan Stanley Smith Barney joint venture from Citi in a sort of glacially negotiated way. MS currently owns 51% of MSSB (plus $5.5bn of preferred interests), and Citi owns the other 49% (plus $2bn of preferred). You can read how they’re going to […]
There was a time in my life when I negotiated, I’m going to say, 100 confidentiality agreements in three months. I got what I thought was good at it, by which I mean I knew about a lot of issues and tricks and things and could often get the – often pretty junior – lawyer […]
There are probably some things that bankers could advise companies to do that are unequivocally bad. Obviously if I were Bank X’s Executive Director and Global Head of Lighting Money on Fire, and I went around showing companies a pitch book that was all “signalling benefits of lighting money on fire,” and I got a […]
Happy Facebook filed an amended S-1 day! Or something. Anyway Facebook filed an amended S-1, which will change everything you thought you knew about Instagram. Like: In April 2012, we entered into an agreement to acquire Instagram, Inc., which has built a mobile phone-based photo-sharing service, for approximately 23 million shares of our common stock […]
This thing about new Avon CEO Sheri McCoy is sort of a good corporate-governance-exam question. You’re the board of a public company. You’ve got a cash offer on the table from a rival but blah blah blah opportunistic offer doesn’t reflect fundamental value and standalone prospects and contingent etc. etc., all of which is more […]
Felix Salmon put up a great note from a reader about investment banking conflicts; it’s fantastic so go read it. But this is a tiny bit unfair:
You and many other commentators seem to have some misconceptions about what exactly large, sophisticated clients such as El Paso’s board hire investment bankers to do.
Its always funny how, in the minds of pundits everywhere, those conniving and all-powerful one-percenters who sit on corporate boards become impotent and completely incapable of independent decision-making once an investment banker walks into the room.
The basic argument is that repeat-player investment bankers provide value not by telling brainless executives whether to accept or reject a merger, but by providing intelligent decisionmakers with access and relationships, and relationships come with conflicts. As he says:
When sophisticated clients (management teams, company boards, PE funds, etc) hire M&A bankers, they typically hire them for two main reasons (in addition to the legally required shams referred to as “fairness opinions”): Execution and Connections.
Of those things, connections are higher-value and inextricable from conflicts. If you’re hiring someone to sell you to Company X, a bank who has done work for Company X – heck, who owns 20% of Company X – is the bank you want. And sure maybe their “conflict” will cause them to advise you to sell for a lowball price so that Company X appreciates them more but, hey, nobody’s forcing you to take their advice.
So, yes, this is all true. But he’s maybe a little too harsh on the commentators and their misconceptions.
The shareholder meeting to approve the sale of a public company is always a special occasion, both intense and bittersweet. Shareholders who have loyally stood by the target through its ups and downs over the years want to take some time to say goodbye, but they also know that the debate will be lively and spontaneous and that anything can happen: one passionate orator can sway the crowd for or against the deal. With so much riding on the meeting, space is at a premium; smart shareholders book their flights early, and I would not be surprised if El Paso shareholders camped out outside the Hyatt Regency Houston*, 1200 Louisiana Street, Houston, Texas 77002, far in advance of the shareholder meeting scheduled for 9 a.m. tomorrow. And they will be distraught to learn that the meeting was just moved to Friday.
No, just kidding, nobody goes to these** and they’re pointless formalities. You can tell because:
El Paso today said it was adjourning the shareholder vote on its proposed sale to Kinder Morgan until Friday, instead of Tuesday, following a judge’s criticism of the company’s sale negotiations.
But at the same time, El Paso said as of Friday it has received votes from 70% of the outstanding shares, with 98.5% of those shares voting in favor of the deal. That tally is not official and could change. Shareholders that had already cast their ballots now have until Friday’s deadline to change their votes. A simple majority is all that is needed for the vote to be approved.
Votes could change until Friday. ARE YOU DYING OF SUSPENSE?
I guess everyone already knows this but here we are with an internet so it bears repeating:
Shareholder litigation challenging merger and acquisition (M&A) deals has increased substantially in recent years. To study this increase and characterize the recent litigation, Cornerstone Research and Professor Robert Daines of the Stanford Law School reviewed reports of M&A shareholder litigation in Securities and Exchange Commission (SEC) filings related to acquisitions of U.S. public companies valued over $100 million and announced in 2010 or 2011. We found that almost every acquisition of that size elicited multiple lawsuits, which were filed shortly after the deal’s announcement and often settled before the deal’s closing. Only a small fraction of these lawsuits resulted in payments to shareholders; the majority settled for additional disclosures or, less frequently, changes in merger terms, such as deal protection provisions. Interestingly, while requiring additional disclosures is a common outcome, we have not encountered a case in which shareholders rejected the deal after the additional disclosures were provided.
That’s from this blog post; the slightly longer paper is here. The emphasis is mine and, y’know, look at it: every M&A deal is challenged (actually 96% of deals over $1bn), virtually none (5%) of the challenges result in any improved payment to shareholders, and all the terrible information about conflicts that plaintiffs’ lawyers discover somehow never convinces shareholders to change their votes.
The one constant is that plaintiffs’ lawyers get paid – an average of $1.2mm in the settlements that Cornerstone and Daines looked at. These suits often focus on incentives of the target’s investment bankers, who are paid only if a deal is completed; I suspect those bankers would love to be in an industry where they could be paid on 100% of assignments while only succeeding at 5% of them.
The El Paso case is interesting because judge is pretty pissed at the conflicts there and how they were handled, and sort of made known that he was thinking about awarding damages to El Paso shareholders – possibly in the form of judicially raising the deal price by 68 cents or so. (That’s the difference between, roughly, the price that KMI and EP ultimately agreed on and the higher price of $27.55 in cash that KMI had initially offered.)
That’s pretty rough justice. Your model of merger negotiations could be that you negotiate to the one market-clearing price where, for a penny more, the acquirer would say no, and for a penny less, the target would say no, but that of course isn’t the case. There’s just a range of plausible prices and you sort of hope that the deal shakes out in that range based on negotiating acumen or whatever on either side. You sort of hope – I do, anyway – that it doesn’t shake out based on a judge picking a number out of a hat.
You see that here. Kinder Morgan of course has every incentive now to testify that the final price – call it $26.87, loosely – was as high as it was willing to go, and that it would have walked if El Paso had pushed for any more. But it’s willing to close the deal even though it seems like, I dunno, a 50/50 chance that a judge will in effect force it to $27.55.
And El Paso shareholders – well, maybe they were screwed by missing out on the chance to get paid $27.55. But of course if that was the only price they were willing to sell at, they wouldn’t be selling at $26.87. And 98.5% of them seem fine right there.
El Paso Delays Shareholder Vote, But Early Tally Shows Approval Likely [Deal Journal]
El Paso Delays Vote on Kinder Morgan Deal (by a Few Days) [DealBook]
Developments in M&A Shareholder Litigation [Harvard Law School Monstrosity]
* As it happens I’ve probably spent more time at that hotel than any other in the world, and would be remiss not to recommend the burger at the Shula’s in the lobby..
** I actually went to one once and it was exactly what you’d expect: some executives say nice things about each other for 20 minutes, then about half a dozen retirees get up one at a time to be like “I remember when stamps were a nickel.”
Delaware Chancellor Leo Strine has a bright future in blogging if chancelling doesn’t work out for him. Here’s how he describes Kinder Morgan’s negotiations to buy El Paso, specifically KMI CEO Rich Kinder’s price retrade with EP CEO Doug Foshee:
Kinder said “oops, we made a mistake. We relied on a bullish set of analyst projections in order to make our bid. Our bad. Although we were tough enough to threaten going hostile, we just can’t stand by our bid.”
Instead of telling Kinder where to put his drilling equipment, Foshee backed down.
I umm … I’m pretty sure that that quote from Kinder is approximate.
Anyway, this is from Strine’s opinion refusing to block the KMI-EP merger from proceeding even though he is pretty pissed about some of the apparent conflicts of interest in the deal, including that Goldman Sachs owns almost 20% of KMI while also advising EP, that the lead GS banker owned some KMI stock that he didn’t disclose, and that Foshee negotiated the merger single-handed while also maybe thinking about possibly LBOing EP’s E&P business for his own self.
Lucrative though my current pseudoprofession is, I suspect that if Strine ever leaves the chancelling racket he’d probably prefer to try his hand at merging and/or acquiring. Certainly he is fond of dispensing tactical advice:
I always feel bad bringing you academic papers because inevitably they’ve been on SSRN for, like, two years, but this one is new to me anyway and good glaven are these charts clever: So these guys (Kenneth Ahern and Denis Sosyura of Michigan) went and looked at a bunch of stock-for-stock mergers. And they looked […]
Like many of you, probably, I read Barbarians at the Gate at an impressionable age, and was fascinated by the idea of M&A as a dramatic clash of swashbuckling personalities. Among the highlights of my brief time in the M&A business was the time we kept two competing bidders on different floors, unbeknownst to each […]
You should probably go read Steven Davidoff’s column in DealBook today about yesterday’s hostile bid by Martin Marietta to take over Vulcan Materials. It’s an amazing list of all the reasons that this will not end up actually being done as a hostile deal, including: (1) a New Jersey “constituency statute” designed to, essentially, keep […]
Last week Goldman and Morgan Stanley dropped sneaky hints about maybe changing their accounting so they could lend their way into more M&A deals. But this week we’re back to Barclays lending its way into more M&A deals, and Skip McGee got a little excited about it for DealBook: “We’ve long had a big-boy M.& […]
Here’s a thing that you probably know: acquirers pay a premium to do acquisitions. That tends to be why the target sells, with some exceptions. So it is no surprise that Kinder Morgan is paying a premium to buy El Paso. And, when they announced the merger last month, they talked up that premium pretty […]
Compared to strategic mergers, LBOs – particularly those not led by managers – are relatively easy for target companies to understand and evaluate. Generally speaking, shareholders are paid out in cash, so you don’t need to figure out what the merger currency is worth. You don’t have to negotiate “cultural” issues like whose name and/or […]
A thing I liked about being a banker, but that made me consistently terrible at managing my PA, was that in banking you don’t really get paid to be right about things. Nobody made any money telling AOL and Time Warner that maybe they’d be better off on their own. Instead, your job is telling […]