In the paper, Takeover Defenses as Drivers of Innovation and Value-Creation, forthcoming in the Strategic Management Journal, I analyze the role of anti-takeover provisions in ameliorating agency conflicts of managerial risk aversion in certain types of companies.

The desirability of anti-takeover provisions (ATPs) is a contentious issue. ATPs can lead to shareholder wealth-destruction by insulating managers from disciplinary takeovers and enabling them to engage in empire building. However, without ATPs, managers of hard-to-value (HTV) firms, which might trade at a discount due to valuation-difficulties, are exposed to ‘opportunistic takeovers’ (which aim to take advantage of low stock prices), potentially causing managerial myopia and under-investment in innovative projects. Thus, in HTV firms, ATPs might serve as credible commitments to encourage managers to make value-creating investments, but in easier-to-value firms, they might lead to inefficient governance.

…continue reading: Takeover Defenses as Drivers of Innovation and Value-Creation

Overview

Schulte Roth & Zabel regularly conducts studies on private equity buyer acquisitions of U.S. public companies with enterprise values in the $100 million to $500 million range (“middle market” deals) and greater than $500 million (“large market” deals) to monitor market practice and deal trends reflected by these transactions. During the period from January 2010 to Dec. 31, 2012, there were a total of 40 middle market deals and 50 large market deals that met these parameters.

…continue reading: Large and Middle Market PE/Public Target Deals: 2012 Review

In late 2011, I had the privilege of chairing a panel presentation in New York City on negotiating acquisitions of public companies in transactions structured as friendly tender offers. In September 2012, I chaired a follow-up panel presentation on the same topic. Both presentations took place at the annual Institute on Corporate, Securities, and Related Aspects of Mergers & Acquisitions, sponsored jointly by the Penn State Center for the Study of Mergers and Acquisitions and the New York City Bar Association. Several of the other panelists – including Gar Bason of Davis Polk, Joel Greenberg of Kaye Scholer, and Fred Green of Weil – are widely considered among the top M&A practitioners in the nation. For much of our presentations, we utilized the format of an interactive, “mock” negotiation of key issues, with various panelists playing the roles of outside counsel for the buyer, outside counsel for the target company, and special Delaware counsel.

The other panelists and I edited the transcripts of both presentations and added comprehensive footnotes. Our goal was to create a teaching tool that would be useful to students, practitioners, and others seeking to learn about the negotiating dynamics in friendly acquisitions structured as tender offers.

Both edited transcripts have been published in the Penn State Law Review. The edited transcript of the 2011 presentation is part of the Symposium Issue of the Penn State Law Review titled “The Deal Lawyers’ Guide to Public and Private Company Acquisitions.” The edited transcripts can be accessed here (Climan et al., Negotiating Acquisitions of Public Companies in Transactions Structured as Friendly Tender Offers, 116 Penn St. L. Rev. 615 (2012)) and here (Climan et al., Negotiating Acquisitions of Public Companies—A Follow-Up, 117 Penn St. L. Rev. 647 (2013)).

…continue reading: Friendly Tender Offers and Related Issues – A Teaching Tool

What motivates minority acquisitions? We study the trade-off between minority acquisitions, involving less than 50% of the target, and majority acquisitions in the forthcoming Review of Financial Studies paper, “What Motivates Minority Acquisitions? The Trade-Offs between a Partial Equity Stake and Complete Integration.” Minority acquisitions have been shown to facilitate cooperation between two independent firms. For example, Allen and Phillips (2000) and Fee, Hadlock, and Thomas (2006) show that a minority acquisition can align the incentives of the acquirer with those of the target. However, similar benefits can also be achieved with a majority acquisition, suggesting that minority stakes are also motivated as a means to avoid certain costs associated with majority control.

Using a sample of 2,166 deals, we identify several key predictors in the choice between a minority or majority acquisition. The key insight provided in this paper is the importance of costs associated with the dilution to target managerial incentives following a majority acquisition in selecting the mode of acquisition. Evidence that firms are willing to forgo benefits to control to preserve target incentives speaks to the value of these incentives.

…continue reading: What Motivates Minority Acquisitions?

Venture capitalists (VCs) play a significant role in the financing of high-risk, technology-based business ventures. VC exits usually take one of three forms: an initial public offering (IPO) of a portfolio company’s shares, followed by the sale of the VC’s shares into the public market; a “trade sale” of the company to another firm; or dissolution and liquidation of the company.

Of these three types of exits, IPOs have received the most scrutiny. This attention is not surprising. IPO exits tend to involve the largest and most visible VC-backed firms. And, perhaps just as importantly, the IPO process triggers public-disclosure requirements under the securities laws, making data on IPO exits easily accessible to researchers.

But trade sales are actually much more common than IPOs and, in aggregate, are more financially important to VCs. Unlike IPOs, however, trade sales do not trigger the intense public-disclosure requirements of the securities laws; they take place in the shadows. Thus, although trade sales play a critical role in the venture capital cycle, relatively little is known about them.

In our paper, Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups recently made public on SSRN, Brian Broughman and I seek to shine more light on intra-firm dynamics around trade sales. In particular, we investigate how VCs induce the “entrepreneurial team” – the founder, other executives, and common shareholders – to go along with a trade sale that they might have an incentive to resist.

…continue reading: Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups

Just like 2007… and not much like it at all.

So it was in the financing markets in 2012. Capital flowed to non-investment grade issuers in amounts reminiscent of the earlier time. However, those issuers mainly seized upon rising debt investor confidence in order to consummate refinancings, repricings and dividend recapitalizations, while the banks that arrange leveraged loan and high yield bond deals remained cautious in providing committed financing for acquisitions. Meanwhile, acquisitions, spinoffs and other transactions by investment grade issuers received strong support from arrangers and investors alike, with significant availability of committed financing for complex deals and favorable execution of debt issuances to close transactions. If the first few weeks are a guide, and barring any significant disruption in the interest rate environment, 2013 promises more of the same, but whether committed financing for high yield deals will continue its slow recovery remains to be seen.

…continue reading: Acquisition Financing: The Year Behind and the Year Ahead

More than 40% of global M&A in 2012 involved acquirors and targets in different countries, including $170 billion of acquisitions in the U.S. by non-U.S. acquirors. Given the continuing accumulation of U.S. Dollars in emerging economies, many expect the trend to continue as Dollars are re-invested in the U.S. Natural resources will continue to be an important part of this story, including in the U.S., where substantial non-U.S. investment has been an important trend, as well as in resource-rich developed nations such as Canada and Australia, where non-domestic investment has lately been highly controversial.

Despite the empty election-year protectionist rhetoric in the U.S. last year, and continuing global concern over access to resources and technology by non-domestic actors, U.S. deal markets continue to be some of the most hospitable markets to off-shore acquirors and investors. With careful advance preparation, strategically thoughtful implementation and sophisticated deal structures that anticipate likely concerns, most acquisitions in the U.S. can be successfully achieved. Cross-border deals involving investment into the U.S. are more likely to fail because of poor planning and execution rather than fundamental legal or political restrictions.

Following is our updated checklist of issues that should be carefully considered in advance of an acquisition or strategic investment in the United States. Because each cross-border deal is different, the relative significance of the issues discussed below will depend upon the specific facts, circumstances and dynamics of each particular situation:

…continue reading: Checklist for Successful Acquisitions in the U.S.

Golden parachutes, those packages that reward top executives if their company is acquired, have attracted much attention from investors and public officials for more than two decades. Defenders of golden parachutes believe that they provide executives with incentives to facilitate a sale of their companies. While the evidence confirms this, it indicates that golden parachutes have significant costs as well and might fail to serve the interests of shareholders over all.

Shareholder resolutions opposing golden parachutes have often received substantial support over time. Congress adopted tax rules aimed at discouraging large golden parachutes, and the rules created during the financial crisis precluded companies receiving government support from providing golden parachute payments to top executives. Subsequently, the Dodd-Frank Act mandated advisory shareholder votes on all future adoptions of golden parachutes.

Many companies and financial economists, however, continue to believe that golden parachutes are an important and beneficial element of executive pay. Because top executives typically give up independence and control when their companies are acquired, executives that do not have a golden parachute might be excessively reluctant to sell — and often can impede or even derail an acquisition they dislike.

…continue reading: For Whom Golden Parachutes Shine

Early in the discussions about whether and how to form a joint venture [1] — perhaps as the very first significant issue to be resolved — the potential joint venture partners [2] will try to agree on the scope of the venture’s business. That definition is usually embodied in one or more of the venture agreements, and may circumscribe the nature of the venture’s business, potential future lines of business into which the venture may expand, geographic areas in which the venture will or may operate, and how deviations from the venture’s scope will be determined and approved by the venture partners.

As partners negotiate the scope of the venture’s business, they also need to focus on the key corollary provisions of the venture arrangement impacted by the agreed-upon scope. The terms of those provisions will in turn inform the discussion about scope. This alert focuses on factors to be considered as the venture partners discuss two of the core issues that arise in conjunction with the discussion about scope: the parameters of the non-compete, if any, to be entered into by the partners for the benefit of the venture, and the application of the corporate opportunity doctrine to the venture and the venture partners.

…continue reading: Defining a Joint Venture’s Scope of Business: Key Issues

In the paper, Cherry Picking in Cross-Border Acquisitions, my co-author (Yao Lu of Tsinghua University) and I investigate how investor protection (IP) affects the allocation of foreign capital inflows at the firm level. A simple model provides an explanation for a well documented but little understood phenomenon on international capital flows—the tendency of foreign investors to target better-performing firms in emerging markets.

When a foreign acquirer’s country has stronger IP than a target country, the acquirer’s controlling shareholder values private benefits of control less than controlling shareholders of local firms because stronger IP imposes greater constraints on diversion of corporate resources for private benefits. Within the target country, controlling shareholders of firms with more profitable investments take fewer private benefits and, hence, demand lower control premiums. Foreign acquirers, which value control premiums less, will target firms with more profitable investments. The tendency to cherry pick will intensify (moderate) as the IP gap between the acquirer and target countries increases (decreases).

…continue reading: Cherry Picking in Cross-Border Acquisitions