RiskMetrics Group Webcast: M&A and Risk Perspective into the Bear Stearns Fallout
Submitted by: Sarah Cohn, Marketing and Communications
Adding to an already turbulent market environment, the impact of Bear Stearns’ collapse shines a bright light on residual credit risk embedded in the financial markets and yet another opportunistic bid in the M&A landscape. RiskMetrics Group analysts will share their collective insights in a webcast, M&A and Risk Perspective into the Bear Stearns Fallout, on Tuesday, March 25, 2008 at 11 a.m.
The forum will cover:
• The merger terms from the shareholder’s perspective;
• The potential standard of review of director actions under Delaware law; and
• Continuing risk in the financial system
To register for the webcast, please visit here.
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Tuesday, November 13, 2007 |
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Extreme Value Hedging: How Activist Hedge Fund Managers are Taking on the World
Submitted by: Sarah Cohn, Marketing and Communications
A new book by Ron Orol of The Deal titled, Extreme Value Hedging: How Activist Hedge Fund Managers are Taking on the World, is fresh off the presses.
Orol examines how activist investors are impacting corporate boards through interviews with activist investors, money managers and corporate executives. He also predicts activist investors and corporate executives will soon be taking their battles online.
Chris Young, Head of M&A Research at RiskMetrics Group, provides commentary for the book on activist tactics. Overall, the book is an excellent read for anyone wishing to learn more about how the world of activist investing operates.
As a reminder, RiskMetrics Group is holding a webcast on Wednesday, November 14 at 1 p.m. EST on the current M&A and activism landscape. To register for the webcast, please visit here.
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Monday, November 12, 2007 |
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2007 Review: M&A, Proxy Fights
Submitted by: Chris Young, Head of M&A Research, and Ted Allen, Head of Publications
RiskMetrics Group will host a webcast on trends in mergers and acquisitions on Nov. 14. For more details on that webcast, click here.
This year has been a tale of two M&A markets.
Before the credit crunch of August, U.S. investors demonstrated a greater willingness this year to oppose going-private transactions and other deals.
During the first half of 2007, companies announced a record $2.5 trillion in transactions, including $616 billion in purchases by private equity firms, according to Bloomberg News. The availability of inexpensive and abundant credit allowed private equity firms to pursue bigger targets, including First Data, Equity Office Properties Trust, and TXU--the largest-ever U.S. leveraged buyout.
Facing pressure from hedge funds, boards at Acxiom, Applebee’s, and other companies agreed to put their firms up for sale. After watching more boards approve private equity sales, investors became more skeptical of the fairness of initial offers and more willing to hold out for a better price.
Traditionally, target company shareholders have rarely turned down transactions. This year, however, investors rejected buyouts at Cornell Cos., Eddie Bauer, Lear, and Cablevision. The vote at Eddie Bauer in February was particularly noteworthy because no dissident investor had filed a Schedule 13D to publicly oppose the $9.25-per-share deal. In January, Cornell shareholders turned down an $18.25-per-share offer from Veritas Capital. The votes at Cornell and Eddie Bauer were among the first signs this year of an investor backlash against private equity buyouts.
In late October, ClearBridge, Gamco Investors, and other Cablevision investors rejected a $10.6 billion buyout by the firm’s founding Dolan family, which owns a 20 percent stake and has tried unsuccessfully twice before to take the cable television firm private. While the tighter credit markets have reduced the likelihood of other offers, the Cablevision shareholders argued that the Dolan family’s $36.26 per share bid undervalued the company.
In several cases this year, companies repeatedly delayed transaction votes while they tried to build sufficient support from shareholders. One prominent example is Clear Channel Communications, where the investor vote on a buyout by Thomas H. Lee Partners and Bain Capital Partners was delayed four times amid opposition from Fidelity Management and Highfields Capital Management. The buyout firms eventually raised their bid from $37.60 to $39.20 per share and won 98 percent support.
Other examples of delayed transaction votes include OSI Partners and Genesis Healthcare. In June, Inter-Tel postponed a vote on its sale to Mitel Networks amid fears that investors would reject the deal. Inter-Tel shareholders approved the sale in August after the company posted disappointing second-quarter results.
In the Clear Channel transaction, the private equity acquirers sought to win over skeptical investors by offering the opportunity to obtain up to a 30 percent “stub equity” stake, so they could share in the future profits of the privatized company. Similarly, the acquirers of Harman International Industries offered a 27 percent stake to Harman’s investors. Investors became more interested in stub equity transactions after watching private equity firms take companies private and then reap substantial profits a few years later through a public offering. While these stub equity stakes generally have limited liquidity and governance rights, the Clear Channel investors have negotiated certain governance rights, including the right to elect two of the new company’s 12 board seats.
In the Clear Channel, Lear, and Topps transactions, companies were ordered by Delaware judges to delay votes after shareholders filed lawsuits alleging that directors had breached their fiduciary duties. In the Lear case, a judge ordered the company to provide more information to investors on negotiations over the CEO’s severance package. In the Topps case, the court delayed the vote on a buyout by Madison Dearborn Partners and Tornante after concluding that the board failed to act in good faith to consider a competing offer from rival UpperDeck. The Topps ruling also is notable because the court decided to keep jurisdiction over the case, even though investors sued earlier in New York state court. The case illustrates that Delaware judges want to maintain their important role in overseeing transaction disputes between companies and investors.
Several companies bypassed a shareholder vote by agreeing to a friendly tender offer. One example was Laureate Education, which agreed to a $62-per-share offer from a private equity consortium in June after shareholders--including T. Rowe Price and Select Equity Group--objected to a $60.50-per-share bid. Friendly tender offers had been all but extinct until 2006 when the Securities and Exchange Commission amended its “best price” rule to exclude employment agreement payments to insiders. Tender offers can be more advantageous to acquirers because the transactions can close more quickly and there are no record dates to contend with. Also in June, the private equity purchasers of Biomet replaced a $44-per-share buyout with a $46-per-share tender offer.
Among the most contentious deals of the year was CVS’s acquisition of Caremark Rx, a Tennessee-based pharmacy benefits manager. Facing opposition from CtW Investment Group and other Caremark investors and a hostile bid from Express Scripts, CVS eventually increased its offer by $7.50 per share. Caremark investors, who received an additional $3.3 billion in value, approved the deal in March after a Delaware judge delayed the vote twice and ordered the company to provide more disclosure on investment bank fees and investors’ appraisal rights.
Another development this year was the greater activism by large mutual fund companies, which historically have taken a passive role. For instance, OppenheimerFunds helped lead a successful investor revolt in March at video game maker Take-Two Interactive, where the company’s former CEO had pleaded guilty to stock option backdating. Fidelity opposed the Clear Channel buyout, while T. Rowe Price made 13D filings to challenge Laureate Education’s buyout and Diversa’s going-private transaction.
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Tuesday, December 19, 2006 |
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Japan M&A Boom Expected for 2007
Submitted by: Sarah Cohn, Director of Communications
According to a Dow Jones article from last week, the M&A landscape in Japan looks like it will be busy in 2007, likely driven by corporate Japan's need to restructure, its hunger for foreign acquisitions and a push by foreign firms to take advantage of opportunities in the world's second biggest economy.
Corporate Japan, with stronger balance sheets, flush with cash and in need of larger markets, is showing a renewed desire to venture overseas for acquisitions. Foreign private equity firms, which have cut few major deals in Japan despite blockbuster acquisitions in almost every other major market in the world, are also building up their presence in Japan.
Faced with such threats, many companies have been buying back shares, hiking dividends or trying to communicate more effectively with their shareholders in an effort to increase their market capitalization. According to ISS, others have been putting in place defense schemes, such as poison pills. 15 Japanese firms adopted poison pills in 2005, and the tally for 2006 is likely to top 140.
To read the entire article, please Download file
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Monday, October 9, 2006 |
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Surge in Proxy Contests in 2006
Submitted by: Chris Young, Director of M&A Research
So far, it appears that 2006 will be a record year for proxy fights. According to FactSet Research Systems' SharkRepellent.net Web site, there were 80 proxy fights during the first six months of the year. That exceeds the 54 fights in all of 2005, the 40 contests in 2004, and 74 contests in 2003. (SharkRepellent counts a proxy contest once an investor files a notice of an intent to submit proxy materials, so its numbers are higher than other firms that track only fights where actual materials are filed.) In addition to proxy fights, there have been 122 other activist campaigns this year where shareholders have advocated for stock buybacks, increased dividends, sale of the company, or other change, according to SharkRepellent.
Another factor that has led to more proxy fights has been the gradual erosion of poison pill plans, classified boards, and other takeover defenses. Fifty-four percent of S&P 500 companies don't have poison pills, while a majority of S&P 500 directors likely will be subject to annual elections by the end of 2006, according to ISS data.
This season, hedge funds have been successful in many of their dissident campaigns. According to investment bank Morgan Joseph, hedge funds have won board representation in 35 percent of their campaigns.
While the Heinz proxy fight generated significant attention from investors, many proxy fights have settled before going to a vote. By mid-August, 31 proxy fights tracked by ISS had culminated in a settlement. So far this year, 21 proxy contests have gone to a vote, as compared with 18 in all of 2005, according to ISS data.
The most notable company to settle a proxy fight this year was Time Warner, which reached an accord with Carl Icahn in February. Icahn, joined by Franklin Mutual Advisors, SAC Capital Advisors, and JANA Partners, raised concerns about the company's strategy to release value for shareholders. In early February, Icahn and his allies presented a report that called for Time Warner to be split into four publicly traded companies and to buy back at least $20 billion of stock. A week later, Icahn and the company announced a settlement, under which Icahn agreed not to run a minority slate, while management committed to increase the size of a share buyback, slash additional costs, and appoint two new directors. The Time Warner case is a prominent example of a recent trend of hedge funds banding together to advocate for governance, strategic, or financial change.
Other recent settlements include Acxiom's settlement with ValueAct Capital, the agreement by Pep Boys to nominate four directors proposed by Barrington Capital Group, and the settlement that Topps reached with Pembridge Capital Management and Crescendo Partners.
Settlements between issuers and activist shareholders are typical of the compromise a target company will "choose" when it becomes clear that it will lose a proxy fight. With a settlement, the issuer may be able to extract some concessions from the dissidents (usually a board seat or two) that it was unlikely to have obtained if the original slates had gone to a vote. Moreover, the company is able to save face by not officially "losing" the contest. At the same time, the dissidents often can get everything they asked for and appear reasonable, which can only enhance their options in future negotiations.
In addition to Heinz and Time Warner, other noteworthy proxy fights included:
BASF's Hostile Tender Offer for Engelhard: German chemical giant BASF launched a proxy contest for five seats on Engelhard's classified board along with a hostile tender offer. Engelhard, a New Jersey-based firm that makes pollution control equipment, countered by offering a recapitalization plan that called for a $45 per share cash self-tender for up to 20 percent of its shares. BASF originally offered $37 per share and then raised its bid to $39. On May 30, three days prior to the scheduled meeting, Engelhard announced a merger agreement with BASF and recommended that investors accept the German firm's $5 billion offer. Shareholders subsequently tendered more than 90 percent of the shares.
Massey Energy's Proxy Fight With Third Point: Massey Energy operates coal mines in West Virginia, Kentucky, and Virginia. Third Point nominated two directors, arguing that the board needed a "new voice." Third Point claimed that the company has "massively" underperformed industry benchmarks and had "lavished" compensation on its CEO. Management argued that its strategic plan has contributed to a significant increase in shareholder value in the past five years and that the board had been responsive to shareholder concerns. After a dispute over vote results, the company agreed in July to allow the dissident nominees to join the board and to reimburse some of their legal fees.
InfoUSA's Proxy Fight With Dolphin: Dolphin LP sought the election of three nominees to infoUSA's board. The dissidents faced an uphill challenge because CEO and Chairman Vinod Gupta and his family owned 43.6 percent of the Nebraska-based mailing list company. Dolphin argued that the company has performed poorly since 2001 and has traded at multiples that are below those of its public peers. Management countered that it delivered 4 percent organic revenue growth in the first quarter of 2006 and was implementing a strategic plan to position the company for continued growth. The incumbent directors narrowly survived, winning at least 50.7 percent approval in May. Dolphin reported that investors not affiliated with management supported the dissident slate by a 13 to 1 margin.
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Monday, August 28, 2006 |
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U.S. Management-Led Buyouts On The Rise
Submitted by: Chris Young, Director of M&A Research
An interesting piece by Caroline Humer ran on the Reuters wire a few days ago titled U.S. Management-Led Buyouts Soar. What's most astounding is her statistic on U.S. management buyouts.
"So far this year, $74.7 billion has been announced in U.S. management buyouts compared with $9.2 billion last year, accounting for more than 9 percent of U.S. merger and acquisition deals, up from 1.2 percent in the year earlier period. That growth also outpaces the growth in U.S. private equity and M&A overall, up151 percent and 25 percent respectively this year."
Leveraged buyouts account for a significant percentage of today's M&A activity. Some of the LBO bidding groups include current management or significant individual shareholders like company founders. For target shareholders, LBOs (and in particular MBOs), create unique factors to consider when weighing whether to vote for or against a proposed deal.
One issue that has been causing investor consternation is the shortened payout period between buyout and monetization event. Historically, private equity buyers put in three to five years of hard work before selling the company or taking it public again. Recently, however, financial sponsors have sometimes paid themselves special dividends within months that allow them to continue to own the portfolio company using "house money." In such cases, shareholders wonder why the company couldn't remain public and allow the value to flow to public shareholders.
MBOs add an additional concern: that insiders who know the company best are somehow taking advantage of that knowledge to buy the company on the cheap. Again, shareholders wonder why incumbent management cannot do for them what it plans to do for the financial sponsors.
What are your thoughts on management-led buyouts? We welcome your comments.
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Wednesday, August 16, 2006 |
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Settlement Fever
Submitted by: Chris Young, Director of M&A Research
Despite what readers might anticipate in light of the extensive media coverage of proxy fight votes, more contests settle than actually go to a vote. So far in 2006, 31 of 51 selected fights (61%) culminated in a settlement, thereby avoiding a harsh "winner vs. loser" epitaph.
Settlements between issuers and activist shareholders are typical of the (sometimes last minute) compromise a target company will "choose" when it becomes clear that it will lose a proxy fight. With a settlement, the issuer may be able to extract some concessions from the dissidents (usually a board seat or two) that it was unlikely to have obtained if the original slates had gone to a vote. Moreover, the company is able to save face by not officially "losing" the contest (at least for posterity). In contrast, the dissidents often are able to get everything they asked for and appear reasonable in the bargain, which can only enhance their options in future proxy fight negotiations.
The fact that some companies wait until the eleventh hour to settle indicates: (i) some proxy fights are difficult to handicap, and/or (ii) some companies have a misguided sense of the level of support they will receive from the shareholder base. In many cases, it may be a wiser course to settle with the dissidents at an earlier stage in order to avoid the costly distraction of a fight that is very much in the public eye. Many of the companies who have opted to settle this year have chosen such a course, thereby avoiding the embarrassment of a meeting day loss.
We welcome your thoughts on this year's settlement fever.
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Tuesday, July 25, 2006 |
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Hedge Funds to the Rescue
Submitted by: Chris Young, Director of M&A Research
Below is an article I submitted to BusinessWeek, which talks about why hedge funds can sometimes be a force for good. Please let us know whether you believe hedge fund activism in the current M&A environment has positive or negative consequences.
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BusinessWeek
JULY 31, 2006
IDEAS -- OUTSIDE SHOT
By Chris Young
Hedge Funds to the Rescue
Thanks to Hedge Fund Activists, dealmakers can't rely on shareholder passivity
Back in the day, mergers and acquisitions advisers routinely viewed transactions as "in the bank" immediately upon the announcement of a deal. Indeed, deal conference calls were usually filled with congratulatory back-slapping from stock analysts as junior investment banking staffers planned elaborate closing dinners at tony steakhouses. True, regulatory concerns could occasionally scuttle a deal, but the shareholder vote (yawn) was usually a foregone conclusion.
But today, thanks to leadership provided by hedge fund activists, a shareholder vote can be very much in doubt. Consider the multibillion-dollar Novartis (NVS ) buyout of Chiron (NVS ) earlier this year. Chiron stockholder opposition to the buyer's "best and final" price resulted in hundreds of millions of dollars in incremental value received by target shareholders. Despite the common perception of hedgies as fast-money operators bent on corporate destruction, examples such as Chiron indicate ordinary investors can benefit from activists' "selfish" efforts.
Continue reading "Hedge Funds to the Rescue
Submitted by: Chris Young, Director of M&A Research" »
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Wednesday, March 1, 2006 |
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Banner Year for M&A Activity
Submitted by: Chris Young, M&A Research Director
Interesting AP article out today, in which investment bankers predict a banner year for M&A in 2006, with one of the main catalysts being the efforts of activist investors.
Continue reading "Banner Year for M&A Activity
Submitted by: Chris Young, M&A Research Director" »
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Wednesday, February 22, 2006 |
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Fairness Opinions
Submitted by: Chris Young, M&A Research Director
Conglomerates are not born rather they are created primarily via acquisitions. Many of the acquisitions used to build up conglomerates were undertaken based on the advice of investment bankers and attorneys, the same advisors that now counsel a reversal of course and the sale of "unrelated" businesses. Advisors first trumpet the supposed synergies to be derived from sharing the same roof, and then turn around and sing the praises of the "strategic focus" that comes from going it alone. Of course, the bankers and lawyers make their fees coming and going.
This change of heart phenomena is not limited to the build up and breakdown of conglomerates. On February 13, Merrill Lynch (MER) agreed to swap its mutual fund management business for a major stake in BlackRock Inc. (BLK). This move is in effect a reversal of the "one-stop shop" strategic rationale that was all the rage in the 1990s and which was used to justify a significant amount of M&A activity in the financial services industry.
Of course, hindsight is often 20:20, and no one can ever know for sure if the synergies forecasted for an acquisition will ever by realized. Yet the ease at which advisors apparently are able to "do a 180" should give shareholders pause when evaluating the importance of fairness opinions supporting acquisitions. Advisors may be able to profit twice despite being "wrong," but shareholders do not have that luxury. As such, ISS recommends that shareholders apply a healthy dose of skepticism whenever a company justifies a deal based upon the receipt of a fairness opinion or highlights the participation of a brand name advisor.
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