Broken M&A Transactions Lessons Learned January 2009 Mike Ringler & Larry Chu
Agenda <ul><li>A Changed Deal Landscape </li></ul><ul><li>Why M&A Transactions Fail </li></ul><ul><li>Macro Trends in the ...
A Changed Deal Landscape (Sources:  Financial Times; Dealogic; The Daily Deal) <ul><li>M&A activity slowed significantly i...
Agenda <ul><li>A Changed Deal Landscape </li></ul><ul><li>Why M&A Transactions Fail </li></ul><ul><li>Macro Trends in the ...
Why M&A Transactions Fail <ul><li>Regulatory impediments and objections </li></ul><ul><ul><li>U.S. and foreign antitrust  ...
Why M&A Transactions Fail <ul><li>Stockholder objections </li></ul><ul><ul><li>Price / strategy / timing objections  ( e.g...
Agenda <ul><li>A Changed Deal Landscape </li></ul><ul><li>Why M&A Transactions Fail </li></ul><ul><li>Macro Trends in the ...
Macro Trends in the Marketplace <ul><li>Last three years (through at least some of 2008)... </li></ul><ul><ul><li>Largely ...
Agenda <ul><li>A Changed Deal Landscape </li></ul><ul><li>Why M&A Transactions Fail </li></ul><ul><li>Macro Trends in the ...
Cerberus/United Rentals <ul><li>The Deal:   $4 billion LBO of United Rentals by Cerberus Capital Management. The merger ag...
Bain, Huawei Consortium/3Com <ul><li>The Deal:  $2.7 billion LBO of 3Com corporation by Bain and Huawei (a Chinese custome...
Hexion/Huntsman <ul><li>The Deal:   Huntsman terminated an agreed merger with Basell for $25.25 per share to accept a twic...
Bunge/Corn Products <ul><li>The Deal:   Stock-for-stock deal in which Bunge would acquire Corn Products valued at $4.1 bil...
Agenda <ul><li>A Changed Deal Landscape </li></ul><ul><li>Why M&A Transactions Fail </li></ul><ul><li>Macro Trends in the ...
Pre-Signing Considerations <ul><li>Carefully consider and draft contractual provisions    that impact deal certainty and r...
Pre-Signing Considerations <ul><li>Contractual provisions (continued)... </li></ul><ul><ul><li>Reverse break-fees </li></u...
Pre-Signing Considerations <ul><li>Private equity deals – carefully consider structure </li></ul><ul><ul><li>Contractual p...
Pre-Signing Considerations <ul><li>Other practical considerations </li></ul><ul><ul><li>Be sure to do your due diligence o...
Agenda <ul><li>A Changed Deal Landscape </li></ul><ul><li>Why M&A Transactions Fail </li></ul><ul><li>Macro Trends in the ...
Post-Signing Considerations <ul><li>Continue to comply with acquisition agreement </li></ul><ul><li>Realistically asses wh...
Post-Signing Considerations <ul><li>Evaluate consequences of broken transaction </li></ul><ul><ul><li>Stock price </li></u...
Post-Signing Considerations: Buyer <ul><li>Evaluate options (continued)... </li></ul><ul><ul><li>Target:  </li></ul></ul><...
Agenda <ul><li>A Changed Deal Landscape </li></ul><ul><li>Why M&A Transactions Fail </li></ul><ul><li>Macro Trends in the ...
THE END <ul><li>If you have any questions, please contact one of us: </li></ul><ul><ul><li>Michael S. Ringler Wilson Sonsi...
Upcoming SlideShare
Loading in …5
×

Broken Deals - Lessons Learned

2,813 views
2,641 views

Published on

Published in: Economy & Finance, Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
2,813
On SlideShare
0
From Embeds
0
Number of Embeds
124
Actions
Shares
0
Downloads
25
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Broken Deals - Lessons Learned

  1. 1. Broken M&A Transactions Lessons Learned January 2009 Mike Ringler & Larry Chu
  2. 2. Agenda <ul><li>A Changed Deal Landscape </li></ul><ul><li>Why M&A Transactions Fail </li></ul><ul><li>Macro Trends in the Marketplace </li></ul><ul><li>Market Examples of Recent Broken Deals </li></ul><ul><li>Pre-Signing Considerations </li></ul><ul><li>Post-Signing Considerations </li></ul><ul><li>Q&A </li></ul>
  3. 3. A Changed Deal Landscape (Sources: Financial Times; Dealogic; The Daily Deal) <ul><li>M&A activity slowed significantly in 2008 </li></ul><ul><ul><li>Worldwide volume was down 29% from 2007 </li></ul></ul><ul><li>Broken and abandoned deals at an all time high in the last two years </li></ul><ul><ul><li>1,309 and 870 transactions abandoned in 2008 and 2007, respectively </li></ul></ul><ul><li>Credit markets move deeper into a deep freeze </li></ul><ul><ul><li>Currently approximately $300 billion in “backlog” loan commitments </li></ul></ul><ul><li>Stock markets are exhibiting extreme volatility </li></ul><ul><ul><li>One result of this – valuations have fluctuated significantly and become hard to accurately pin down </li></ul></ul>
  4. 4. Agenda <ul><li>A Changed Deal Landscape </li></ul><ul><li>Why M&A Transactions Fail </li></ul><ul><li>Macro Trends in the Marketplace </li></ul><ul><li>Market Examples of Recent Broken Deals </li></ul><ul><li>Pre-Signing Considerations </li></ul><ul><li>Post-Signing Considerations </li></ul><ul><li>Q&A </li></ul>
  5. 5. Why M&A Transactions Fail <ul><li>Regulatory impediments and objections </li></ul><ul><ul><li>U.S. and foreign antitrust ( e.g. GE/Honeywell ) </li></ul></ul><ul><ul><li>CFIUS and foreign equivalents ( e.g. Bain/3Com ) </li></ul></ul><ul><ul><li>Banking and financial services issues ( e.g. JC Flowers/Sallie Mae ) </li></ul></ul><ul><li>Buyer financing problems </li></ul><ul><ul><li>Target specific concerns / solvency ( e.g. OTPP Consortium/BCE ) </li></ul></ul><ul><ul><li>Credit market and syndication difficulties ( e.g. Dow Chemical/ Rohm & Haas ) </li></ul></ul><ul><li>Material adverse change (MAC) claims </li></ul><ul><ul><li>Target MAC ( e.g. Hexion/Huntsman; Harmon Kardon; IBP/Tyson ) </li></ul></ul><ul><ul><li>Market MAC ( e.g. Solutia Exit Financing ) </li></ul></ul><ul><ul><li>Buyer MAC ( e.g. Bunge/Corn Products ) </li></ul></ul><ul><li>Target fraud ( e.g. Providence/F&W Publications (ABRY) ) </li></ul>
  6. 6. Why M&A Transactions Fail <ul><li>Stockholder objections </li></ul><ul><ul><li>Price / strategy / timing objections ( e.g. Icahn/Lear; Bain/Clear Channel ) </li></ul></ul><ul><ul><li>Appraisal claims ( e.g. AXA Financial/MONY Group ) </li></ul></ul><ul><ul><li>Stockholder lawsuits ( e.g. Bain/Clear Channel ) </li></ul></ul><ul><li>Buyer remorse </li></ul><ul><ul><li>Volatility in Target valuation ( e.g. Landry’s MBO; Harmon Kardon ) </li></ul></ul><ul><ul><li>Private equity buyer considerations – pressure on returns model; fund fiduciary duties ( e.g. Cerberus/United Rentals ) </li></ul></ul><ul><li>Target remorse </li></ul><ul><ul><li>Buyer condition and/or stock price ( e.g. Frontier Oil/Holly Corp. ) </li></ul></ul><ul><ul><li>Improvements in Target valuation and prospects ( e.g. Frontier Oil/Holly Corp. ) </li></ul></ul>
  7. 7. Agenda <ul><li>A Changed Deal Landscape </li></ul><ul><li>Why M&A Transactions Fail </li></ul><ul><li>Macro Trends in the Marketplace </li></ul><ul><li>Market Examples of Recent Broken Deals </li></ul><ul><li>Pre-Signing Considerations </li></ul><ul><li>Post-Signing Considerations </li></ul><ul><li>Q&A </li></ul>
  8. 8. Macro Trends in the Marketplace <ul><li>Last three years (through at least some of 2008)... </li></ul><ul><ul><li>Largely a seller’s market – economic conditions were good, valuations increased and competition was plentiful (in no small part driven by the rise of private equity and plentiful credit) </li></ul></ul><ul><ul><li>Bigger deals (especially LBOs), signed quickly </li></ul></ul><ul><ul><li>Elimination of the financing condition </li></ul></ul><ul><ul><li>Rise of the reverse break fee (recently, by strategics as well) </li></ul></ul><ul><ul><li>Continued tug-of-war regarding remedies, MAC clauses and other provisions </li></ul></ul><ul><ul><li>Litigation around transactions (in some form) now commonplace </li></ul></ul><ul><ul><li>Tide has quickly turned in 2008 – with buyers (both strategic and private equity) readily willing to walk from deals despite the reputational risk </li></ul></ul><ul><li>Looking ahead to 2009 and beyond...TBD </li></ul>
  9. 9. Agenda <ul><li>A Changed Deal Landscape </li></ul><ul><li>Why M&A Transactions Fail </li></ul><ul><li>Macro Trends in the Marketplace </li></ul><ul><li>Market Examples of Recent Broken Deals </li></ul><ul><li>Pre-Signing Considerations </li></ul><ul><li>Post-Signing Considerations </li></ul><ul><li>Q&A </li></ul>
  10. 10. Cerberus/United Rentals <ul><li>The Deal: $4 billion LBO of United Rentals by Cerberus Capital Management. The merger agreement contains no financing condition. </li></ul><ul><li>The Breakup: United Rentals reports a great quarter and shortly after, Cerberus informs United Rentals that is has elected not to consummate the transaction and offers to either (i) pay the $100mm reverse break-up fee or (ii) renegotiate the deal. </li></ul><ul><li>The Fallout: United Rentals sues the Cerberus shell companies that are party to the merger agreement for specific performance. The agreement’s provisions are convoluted; one section provides that specific performance is available as a remedy and another provides that the $100mm fee is a cap on equitable relief as well as damages. </li></ul><ul><li>The Ending: Under the “forthright negotiator” principle, based on its factual findings, the court denied United Rentals specific performance and Cerberus paid the break fee. </li></ul>
  11. 11. Bain, Huawei Consortium/3Com <ul><li>The Deal: $2.7 billion LBO of 3Com corporation by Bain and Huawei (a Chinese customer/competitor of 3Com). The merger agreement contained a reverse break-up fee as 3Com’s sole remedy for a buyer breach and no 3Com specific performance rights. CFIUS approval was not a condition to closing. </li></ul><ul><li>The Breakup: At the request of CFIUS, the parties submitted to a CFIUS review. After an extensive review, CFIUS indicated that it intended to recommend that the President take action to block the merger. Bain attempted to terminate the merger agreement, and 3Com terminated the merger agreement after Bain refused to close. </li></ul><ul><li>The Fallout: 3Com’s stock fell from $5.70 to approximately $2.50, and 3Com has sued Bain to recover a $66 million break-up fee. Bain is contesting the lawsuit. </li></ul><ul><li>The Ending: Unclear how the litigation will be resolved. </li></ul>
  12. 12. Hexion/Huntsman <ul><li>The Deal: Huntsman terminated an agreed merger with Basell for $25.25 per share to accept a twice-increased offer from Hexion at $28.00 per share ($10.5 billion). No financing out; clear specific performance clause; $325mm reverse break fee. </li></ul><ul><li>The Breakup: Hexion reported a bad quarter and Apollo Management (Hexion’s 92% owner) engaged a valuation firm to determine whether the combined company would be solvent. Hexion then filed suit for a declaratory judgment that either (i) it would not have close (and capping its damages at $325mm) or (ii) Huntsman had suffered a MAC. </li></ul><ul><li>The Fallout: Court determined that Hexion committed a knowing and intentional breach (and therefore its damages were not capped at the reverse break fee), and that its self-serving solvency opinion was unreliable as it was prepared in contemplation of litigation. </li></ul><ul><li>The Ending: After all this, Hexion elected to proceed but the banks refused to fund and Huntsman let Hexion off the hook in exchange for a settlement of $1 billion. </li></ul>
  13. 13. Bunge/Corn Products <ul><li>The Deal: Stock-for-stock deal in which Bunge would acquire Corn Products valued at $4.1 billion (at the time). Merger agreement contained only an expense reimbursement fee if target terminated due to a change in recommendation. Buyer had the benefit of a force-the-vote provision and a strong specific performance clause. </li></ul><ul><li>The Breakup: Deal was announced in June and during next 6 months, Bunge’s stock dropped 64% and Corn Products stock dropped 43%. Corn Product’s board ultimately determined that the deal was no longer in its stockholders’ best interests and recommended against the deal. </li></ul><ul><li>The Fallout: Although they could have forced the deal to a vote of Corn Products’ stockholders, Bunge walked, issuing a statement that although they still believed in the deal, it was a victim of bad timing. </li></ul><ul><li>The Ending: Corn Products owed Bunge a mere $10 million in expense reimbursement. </li></ul>
  14. 14. Agenda <ul><li>A Changed Deal Landscape </li></ul><ul><li>Why M&A Transactions Fail </li></ul><ul><li>Macro Trends in the Marketplace </li></ul><ul><li>Market Examples of Recent Broken Deals </li></ul><ul><li>Pre-Signing Considerations </li></ul><ul><li>Post-Signing Considerations </li></ul><ul><li>Q&A </li></ul>
  15. 15. Pre-Signing Considerations <ul><li>Carefully consider and draft contractual provisions that impact deal certainty and remedies... </li></ul><ul><ul><li>MAC clauses </li></ul></ul><ul><ul><ul><li>Buyers : expand coverage; consider adding objective tests </li></ul></ul></ul><ul><ul><ul><li>Targets : fight to maintain carveouts; consider effect of ambiguity </li></ul></ul></ul><ul><ul><li>“ Best Efforts” covenants </li></ul></ul><ul><ul><ul><li>Various standards ( e.g. commercially reasonable, reasonable best, etc.) </li></ul></ul></ul><ul><ul><ul><li>Obligations around antitrust, financing, etc. </li></ul></ul></ul><ul><ul><li>Closing conditions and termination provisions </li></ul></ul><ul><ul><ul><li>Consider number, and expansiveness of language </li></ul></ul></ul><ul><ul><ul><li>Beware of re-emergence of financing conditions (or “outs”) </li></ul></ul></ul>
  16. 16. Pre-Signing Considerations <ul><li>Contractual provisions (continued)... </li></ul><ul><ul><li>Reverse break-fees </li></ul></ul><ul><ul><ul><li>Buyers : On-balance, viewed as a good thing if all the other components work to ensure this is a true cap on damages ( e.g. no exceptions, elimination or limitation of specific performance, same range as Target side break fees) </li></ul></ul></ul><ul><ul><ul><li>Targets : No reason, other than custom, that these need to be kept in 2-4% range; make sure purpose/effect of the fee is carefully considered; consider applicability to any failure to close or only a failure to close due to financing failures </li></ul></ul></ul><ul><ul><li>Specific performance and damages clauses </li></ul></ul><ul><ul><ul><li>Automatic entitlement vs . mere ability to seek </li></ul></ul></ul><ul><ul><ul><li>Make sure the availability or unavailability is unambiguous </li></ul></ul></ul><ul><ul><ul><li>Right to sue for lost premium – Con Edison case </li></ul></ul></ul><ul><ul><ul><li>Consider applicability to buyer’s obligation to close or only buyer’s obligation to seek financing and enforce the financing commitments </li></ul></ul></ul>
  17. 17. Pre-Signing Considerations <ul><li>Private equity deals – carefully consider structure </li></ul><ul><ul><li>Contractual parties to merger agreement are often newly formed special purpose vehicles (“shell” companies) </li></ul></ul><ul><ul><li>Recourse will be important to both sides – vis-a-vis actual sources of equity ( i.e. the fund or equity commitment letter) and debt ( i.e. the lenders) </li></ul></ul><ul><ul><li>Different variations – guarantees, subrogation, direct privity </li></ul></ul>
  18. 18. Pre-Signing Considerations <ul><li>Other practical considerations </li></ul><ul><ul><li>Be sure to do your due diligence on your counterparty ( e.g. flesh out rationale and commitment to the deal, other sensitivities) </li></ul></ul><ul><ul><li>Carefully weigh the pros and cons of transactions that require a significant amount of financing </li></ul></ul><ul><ul><li>Be sure to be clear in your communications with the other side (particularly as to interpretation of deal terms) </li></ul></ul><ul><ul><li>Carefully choose dispute forum (Delaware vs . others) </li></ul></ul><ul><ul><li>Discuss contingencies – in the event of an asserted termination/abandonment, what is Plan B? </li></ul></ul>
  19. 19. Agenda <ul><li>A Changed Deal Landscape </li></ul><ul><li>Why M&A Transactions Fail </li></ul><ul><li>Macro Trends in the Marketplace </li></ul><ul><li>Market Examples of Recent Broken Deals </li></ul><ul><li>Pre-Signing Considerations </li></ul><ul><li>Post-Signing Considerations </li></ul><ul><li>Q&A </li></ul>
  20. 20. Post-Signing Considerations <ul><li>Continue to comply with acquisition agreement </li></ul><ul><li>Realistically asses why transaction is in trouble </li></ul><ul><ul><li>Regulatory objections </li></ul></ul><ul><ul><li>Financing problems </li></ul></ul><ul><ul><li>Target/Buyer MAC or other Target/Buyer conditions </li></ul></ul><ul><ul><li>Market MAC or other market conditions </li></ul></ul><ul><ul><li>Target (sometimes Buyer): Stockholder objections </li></ul></ul><ul><li>Evaluate legal rights </li></ul><ul><ul><li>Terms of acquisition agreement (conditions / termination provisions / “best efforts” covenants) </li></ul></ul><ul><ul><li>Contract remedies (damages, break fee, specific performance) </li></ul></ul><ul><ul><li>Target: Off-contract rights and claims ( e.g. tort claims) </li></ul></ul>
  21. 21. Post-Signing Considerations <ul><li>Evaluate consequences of broken transaction </li></ul><ul><ul><li>Stock price </li></ul></ul><ul><ul><li>Sales and customer relationships </li></ul></ul><ul><ul><li>Executive and other employee relationships </li></ul></ul><ul><ul><li>Buyer: Reputational considerations </li></ul></ul><ul><li>Evaluate options </li></ul><ul><ul><li>Buyer: </li></ul></ul><ul><ul><ul><li>Claim failure of a condition or assert termination right – keep in mind that MACs are difficult to prove (Delaware has yet to find that one existed at a Target) </li></ul></ul></ul><ul><ul><ul><li>Renegotiate price and/or structure </li></ul></ul></ul><ul><ul><ul><li>Litigate / seek declaratory judgment </li></ul></ul></ul><ul><ul><ul><li>Simply abandon transaction (carefully review litigation exposure with counsel) </li></ul></ul></ul>
  22. 22. Post-Signing Considerations: Buyer <ul><li>Evaluate options (continued)... </li></ul><ul><ul><li>Target: </li></ul></ul><ul><ul><ul><li>Litigate vs . assert pressure via press (or both) </li></ul></ul></ul><ul><ul><ul><li>Renegotiate price and/or structure </li></ul></ul></ul><ul><ul><ul><li>Seek alternative transaction </li></ul></ul></ul><ul><ul><ul><li>Abandon transaction and negotiate a settlement </li></ul></ul></ul><ul><ul><ul><li>Claim failure of a condition or assert termination right (in cases where Target seeks to get out of the deal) </li></ul></ul></ul><ul><li>Other practical considerations </li></ul><ul><ul><li>Quickly consult advisors and do a thorough analysis </li></ul></ul><ul><ul><li>Discussions between the parties will quickly become public – so need to be coordinated and map out a plan (with IR and PR functions as well) </li></ul></ul><ul><ul><li>Consider engaging M&A communications firm </li></ul></ul>
  23. 23. Agenda <ul><li>A Changed Deal Landscape </li></ul><ul><li>Why M&A Transactions Fail </li></ul><ul><li>Macro Trends in the Marketplace </li></ul><ul><li>Market Examples of Recent Broken Deals </li></ul><ul><li>Pre-Signing Considerations </li></ul><ul><li>Post-Signing Considerations </li></ul><ul><li>Q&A </li></ul>
  24. 24. THE END <ul><li>If you have any questions, please contact one of us: </li></ul><ul><ul><li>Michael S. Ringler Wilson Sonsini Goodrich & Rosati One Market, Spear Tower, Suite 3300, SF, CA 94105 DIRECT: 415-947-2011 E-MAIL: mringler@wsgr.com </li></ul></ul><ul><ul><li>Lawrence M. Chu Wilson Sonsini Goodrich & Rosati One Market, Spear Tower, Suite 3300, SF, CA 94105 DIRECT: 415-947-2014 E-MAIL: lawchu@wsgr.com </li></ul></ul>

×