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 a good idea to acquire a successful company run by a talented and dedicated founder-CEO, but then things go pear-shaped because that founder-CEO either (1) departs, voluntarily or otherwise, with his giant bags of loot, or (2) suddenly loses interest in running his or her company when it’s owned by someone else and that someone else is now the founder-CEO’s boss:
Bidder gains are lower for acquisitions that involve targets with a founder CEO than for acquisitions of targets without a founder. The difference in bidder gains between takeovers of targets with founder CEOs and those without a founder is statistically significant, economically material, and robust to several model specifications that include a wide variety of deal- and firm-level control variables, like form of payment, competition, relative size, as well as some characteristics of the target CEO, such as his cash flow and voting stakes, age, and tenure.
That’s from this paper by Nandu J. Nagarajan, Frederik P. Schlingemann, Marieke van der Poel and Mehmet F. Yalin. It doesn’t clear up the whole mystery – non-founder mergers have also destroyed some value here and there, though I guess statistically less so – but I found it kind of fun. Read more »
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 can buy shares, typically in a tender offer, and if you get above 50% then you … sort of own the company. But not exactly, because there are still other people who own 49%. And, generally speaking, those other people don’t like you.
Today some of those other people are suing Carl Icahn because (1) he owns about 80% of independent refiner CVR Energy, (2) they own about 20%, and (3) he is being kind of mean to them. Specifically, after tendering for the company and buying most of the shares at $30, he’s been taking advantage of the fact that no one really wants to be a minority shareholder in a controlled company by buying more shares at around $27.50.*
Some of those minority shareholders want to stop him doing this, claiming that “Once any genuinely independent board of directors learned of Icahn’s scheme, such a board would have adopted a poison pill to stop Icahn from making any more open market purchases unless and until the Board was able to negotiate a cash-out merger that provided the Company’s remaining shareholders with fair value.” And so they’re suing to force Icahn’s board to adopt a poison pill and prevent him from buying at market prices. That is strange: Read more »
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 figure out the price here. Basically they each hire an advisor to value MSSB like a public company, and then get together and see how close they are. If they’re within 10% of each other, they average their prices; if not, they hire a third advisor to figure out who got closer to the right answer. Don’t get too excited about pitching to be one of those advisors, though, at least not in the first round:
Morgan Stanley and Citigroup each will engage one investment bank or financial advisory firm of national standing and with experience in the valuation of securities of financial services companies (an “Appraiser”) for purposes of estimating FMV. All fees and disbursements of the first two Appraisers shall be the responsibility of the party that engaged such Appraiser. Either or both of the first two Appraisers may be an affiliate of the party engaging such Appraiser, and Morgan Stanley has engaged Morgan Stanley Investment Banking as its Appraiser.
MSSB’s net income was about $300mm last year*, and recent Morgan Stanley Investment Banking valuation precedents suggest about a 100x P/E, so I’ll go ahead and predict we’ll see a $30bn-ish valuation from them, no? (Too easy? Actually, ha, it’s not that wildly off; press reports suggest a $15bn bid from MS and a $23bn offer from Citi.) Here’s how they’ll do their math: Read more »
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 bunch of companies to do it, and it became a thing, and academics and industry groups did studies on it, I suspect that they would consistently report that the trade was NPV negative at a 1% level of significance. But maybe not, because, industry groups. Anyway though you can probably imagine some of these things existing outside of silly stylized examples – in hindsight, CDOs of mezz ABS look pretty close to lighting money on fire – but not too many of them. Because if a thing is always bad through the cycle then you’d quickly run out of people to do it, for some value of “quickly.”
Is it possible that mergers are such a thing?
No, it is not!
There, that was easy. Nor, obviously, are they the sort of thing that is unequivocally good – I suppose there are such things?* Instead, mergers are like, I dunno, hedge funds. You can ask the specific question of “will this merger be good for this company?,” and the answer will mostly be “maybe” but said with DCFs and stuff. Or you can ask the general question of “are mergers mostly good or mostly bad?” and the answer will be entertainingly indeterminate. Thus mergers are unequivocally good for academics, QED. Anyway this is a strange paper: Read more »
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 and $300 million in cash. Following the closing of this acquisition, we plan to maintain Instagram’s products as independent mobile applications to enhance our photos product offerings and to enable users to increase their levels of mobile engagement and photo sharing. This acquisition is subject to customary closing conditions, including the expiration or early termination of all applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended (HSR), and is currently expected to close in the second quarter of 2012. We have agreed to pay Instagram a $200 million termination fee if governmental authorities permanently enjoin or otherwise prevent the completion of the merger or if either party terminates the agreement after December 10, 2012.
So, first: is anyone else sort of tickled that there’s a $200mm termination fee for failure to get through antitrust review? I am no antitrust expert and I know that HSR filings are automatically required if your purchase is over $68.2mm but I feel like I’d be betting on this one getting through antitrust review, no? These are, after all, two companies that give away their products? Perhaps I do not understand antitrust and/or Instagram; either is quite plausible.
But the fun in this is of course in the valuation, and here I feel like I need to walk back my praise of Mark Zuckerberg’s dabbling in paradox when he did his valuation analysis. Dan Primack explains: Read more »
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 plausible than it usually is. Also you need a new CEO. For some reason, CEOs who could plausibly run your business independently don’t like to be hired to just do three months of work and then be kicked out with just their $1.9mm signing bonus and $1.2mm base salary, so to lure a good CEO you need some sort of promise of independence.* How do you make promises in business? With money of course! So you say something along the lines of “no, really, we’re not going to sell out and leave you high and dry, and to prove it we will pay you three years’ worth of salary and bonus on a change of control, which is (a) more than our change in control policy generally provides because these are special times what with a hostile bid actually being on the table, (b) $9mm in cash salary and bonus plus it looks to me like $7.2mm of LTIP awards** so y’know that’s kind of a lot, and (c) objectively better than working for three years to get paid the same amount of money, right?”
But here’s the thing: let’s say Coty comes back tomorrow and offers a 150% premium, minimal-diligence, all-cash bid for AVP. What do you do now, as a board? Well, if you do sell, then your new CEO cashes out that payment that you just got done telling her was vastly more attractive than actually working at Avon for three years. And this is a bit of a problem because hey remember how every merger ends up getting everyone involved sued for conflicts of interest? Remember how that Goldman banker got scolded for a conflict of interest where he indirectly owned $340k of bidder stock in his PA and that stock might go up slightly if the bidder underpaid? Well here accepting pretty much any bid from Coty makes Sheri McCoy $9mm+ of pretty much free money, which seems like a bigger conflict than that. Read 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: Read more »
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? Read more »
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: Read more »
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 at the uptick in news coverage after those mergers were announced – and, far more interestingly, before they were announced but after negotiations had started (which they found out by reading the “Background” in the merger proxy) . Then they divided those mergers into (1) fixed exchange ratio mergers, where the acquirer could minimize the price it paid by pumping up its stock just before signing the merger (because buying a $540mm company for AAPL shares requires 1mm shares now, but would require many more/fewer if AAPL were not so over/underpriced, take your pick), and (2) variable exchange ratio mergers (“we’ll give you $540mm worth of stock based on whatever our stock price at closing” or more complicated versions thereof), where the acquirer could minimize the price it paid by pumping up its stock just before closing the merger. Then they charted where there were more – largely positive, company-driven, press-release-based – articles than usual. And lookit that!
Or if you like, like, words and numbers: Read more »
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 other, and ran back and forth between them to negotiate a deal. I was all “hey this is like that book!”
Occasionally you can watch a deal from afar that tickles some of the same fancies. The Vulcan / Martin Marietta fight, though it’s early yet, is pretty fun. You’ve got the long negotiation process that seems to have bogged down over who got to be the boss, and ended in tears and recriminations after the Vulcan CEO never called back his Martin Marietta counterpart. You’ve got the pretty fake “hostile” exchange offer – if it’s contingent on the target board approving, it’s not really hostile – alongside the real hostility of two court cases, a brewing proxy fight, and a public war of words.
Now there’s Vulcan’s reply to one of those lawsuits, which is predictably feisty and paranoid, as well as the WSJ Deal Journal’s claim that “Vulcan may be even more unhappy that Martin Marietta launched its hostile bid in December. (Some lawyer’s holiday trip was ruined, perhaps?)” Which I thought was kind of BS; having worked for Vulcan’s law firm here, I can tell you that they pretty much plan their holiday trips around having them ruined and are bitterly disappointed if they have to spend Christmas break skiing or whatever rather than dictating 425s from Chamonix. But then I read the filing: Read more »