Recently, in the Mergers and Acquisitions course at Harvard Law School, three preeminent mergers and acquisitions practitioners discussed private equity transactions with Vice Chancellor Leo Strine, Jr., who teaches the class.
The panel consisted of Eileen T. Nugent, a mergers and acquisitions partner and Co-Head, Private Equity Group at Skadden, Arp, Slate, Meagher & Flom LLP; Robert B. Schumer, the chair of the Corporate Department at Paul, Weiss, Rifkind, Wharton & Garrison LLP and co-head of the firm’s Mergers and Acquisitions Group; and John G. Finley, a senior partner in the mergers and acquisitions group of Simpson Thacher & Bartlett LLP. Eileen and John are also members of the Advisory Board of the Program on Corporate Governance.
John took the class through the pre-2005 “traditional” structure of private equity transactions. The panel expressed their view that there was very little optionality in this structure, because of “corporate veil piercing” concerns that the sponsor may be liable, and also because of reputational factors in an environment in which neither sponsors nor banks tried to escape from transactions.
John explained how the situation changed with the SunGard transaction in 2005, with the advent of reverse termination fees, though there was also a reduction in the prevalence of financing outs. The panel then discussed how these changes in deal structure played out when the debt market crashed. The panel also made some comments about how deal terms have chnaged in strategic transactions since then, including the increasing use of reverse termination fees or liquidated damages in strategic transactions.
Vice Chancellor Strine provoked a spirited argument among the panel on the question of whether over-leveraging from private equity trends helped or damaged companies involved in those transactions.
The video of this discussion is available here. (.mov format – click here to get the latest version of Quicktime)