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2 Big Deals and the Search for an M.&A. Market
November 3, 2009, 1:16 pm
[The Deal Professor by Steven M. Davidoff]
Updated with clarification | Nov. 4, 10:00 a.m. What a difference a day makes. Just on Monday in “Searching for Themes in the M.&A. Market,” I reviewed the dreary figures and transactions in the mergers and acquisitions market last month and noted the absence of discernable trends.
That was Monday, before the stock market closed. In the last 24 hours, we have had announcements of two big strategic transactions. The first, announced late Monday afternoon, was Stanley Works’ acquisition of Black & Decker for $3.5 billion in stock. The second, announced Tuesday morning, is truly a blockbuster deal: Berkshire Hathaway’s acquisition of the remaining 77.4 percent of Burlington Northern Santa Fe for $26 billion in cash and stock.
Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the legal aspects of mergers, private equity and corporate governance. A former corporate lawyer at Shearman & Sterling, he is a professor at the University of Connecticut School of Law. He is the author of a new book, “Gods at War: Shotgun Takeovers, Government by Deal and the Private Equity Implosion,” that explores modern-day deals and deal-making.
While both deals may or may not be the sign of a new trend, and two deals certainly do not make a trend, both are notable for their similarities. Both are strategic investments in America. Burlington Northern is a railroad; its success or failure depends on the state of the American economy. Stanley Works and Black & Decker are American icons in the tool-making business that derive substantial portions of their revenue from American sales and are merging to further fight off global competition.
The deals represent the creative consolidation going on in the distressed M.&A. market and that market’s strengths, a few of which I highlighted in my piece on Monday. The billionaire Warren E. Buffett, the head of Berkshire Hathaway, is taking advantage of a still-weak economy to acquire a strategic partner in a troubled industry. Stanley Works and Black & Decker are consummating a combination that they talked about for almost three decades to achieve cost savings and synergies, positioning themselves for any recovery in the American construction market.
The deals themselves are also structured similarly.
The Stanley Works-Black & Decker transaction is a stock deal. Stanley works is offering 1.275 shares of common stock for each Black & Decker share, a premium of about 22.1 percent as of close of stock market last Friday. The premium is a bit surprising since this is akin to a merger-of-equals transaction. Black & Decker shareholders will own 49.5 percent of the combined corporation; Stanley shareholders the other 50.5 percent. In these types of transactions, there is typically no premium.
Still, perhaps a shareholder premium is somewhat justified because of the deal’s change in management, which is arguably equivalent to a change in control. Stanley’s management will maintain a dominant position. The nine-member Stanley board will also be in the majority. It will add six members from the Black & Decker board to its membership expanding to an unwieldy 15-member board.
Befitting a merger of equals, there is no collar on the stock consideration. A collar comes in a variety of forms, but a floating collar can provide protection to both target and acquirer shareholders. In a floating collar, the exchange ratio for the stock offered fluctuates within a specified range providing the same per-share price — say, for example, $100 a share in stock. The upper end of the collar protects the bidder from share dilution — issuing out too many shares if its stock falls sharply. The lower end protects the target from receiving a reduced share of the corporate enterprise.
In 2008, according to Factset MergerMetrics, 34 percent of transactions offered stock consideration either alone or with cash, but only 9.2 percent of those had a collar. But collars appear to be becoming more common in the distressed market environment because of the protections from volatility they provide. In the case of Stanley and Black & Decker, however, this really is a combination of two similar enterprises, so the parties most likely expected their stocks to trade in tandem, so a collar would be unnecessary.
Meanwhile, Berkshire’s acquisition of the 77.4 percent of Burlington that it does not already own is a pure acquisition. This is a stock-and-cash election transaction with a 31 percent premium. Stockholders can choose to convert their shares into $100 of cash or a number of Berkshire class A shares equivalent to $100 a share. A maximum of 60 percent of the consideration will be cash and 40 percent will be stock, and shareholders will be prorated in these amounts.
In addition, there is a floating collar on the class A stock. The collar is between approximately $80,000.00 and approximately $125,000.00 per Berkshire class A share. If the value of Berkshire stock is outside of this collar range at closing, then the number of shares received of Berkshire Hathaway class A stock will be fixed at either 0.001253489 per Burlington Northern share for values below the collar range, or 0.000802233 per Burlington Northern share for values above the collar range. In this case, the collar is more appropriate since this really is an acquisition and Burlington Northern shareholders are looking for a set amount, while both parties want to minimize the risk from stock market volatility.
In addition, Berkshire, because of its large ownership stake in Burlington, is deemed to be an affiliated shareholder of the railroad under federal securities laws. The transaction will therefore be subject to the going-private rules of the Securities and Exchange Commission.
The substantial position of Berkshire is why the deal requires two-thirds of the Burlington Northern shareholders unaffiliated with Berkshire to approve the transaction. This requirement is imposed under Delaware’s business combination statute DGCL 203. This provision requires that any combination with a stockholder who acquires more than 15 percent but less than 85 percent of a company without prior director approval wait three years before effecting a business combination with the company.
A company can avoid this waiting period if they obtain the approval of two-thirds of the disinterested shareholders. This is what is going on here, and clearly shows that Berkshire is not concerned about obtaining this vote.
Ultimately, despite the differences between the two deals, on the surface either of these transactions could have been entered into prior to the financial crisis. But the acquisition agreements for either deal have not been filed yet.
In the case of Stanley Works and Black & Decker, given the overlap of the companies’ businesses, it will be interesting to know from their acquisition agreement what the parameters are for antitrust dispositions. In other words, to what the lengths will the parties be required to go to satisfy regulators to clear the regulatory reviews.
In the case of Burlington, the question is whether Berkshire will have a financing out or an effective one through a reverse termination fee. The news release did not speak of one, but the last two big public deals in which Mr. Buffet was involved — Wrigley/Mars and MidAmerican Energy Holdings/Constellation Energy Group — did have a financing out. The question is whether the economy has improved enough that Mr. Buffet is willing to self-fund a $15 billion-plus payment of cash if the financing markets close again.
Mr. Buffet’s acquisition may be an endorsement of America, but in the terms of his financing and the acquisition agreement itself will be his current assessment of the state of the American financial system.
Update: This post has been updated to clarify the need for approval by two-thirds of Burlington Northern shareholders.更多精彩文章及讨论，请光临枫下论坛 rolia.net
2 Big Deals and the Search for an M.&A. Market
November 3, 2009, 1:16 pm
[The Deal Professor by Steven M. Davidoff]
Updated with clarification | Nov. 4, 10:00 a.m. What a difference a day makes. Just on Monday in “Searching for Themes in the M.&A. Market,” I reviewed the dreary figures and transactions in the mergers and acquisitions market last month and noted the absence of discernable trends.
That was Monday, before the stock market closed. In the last 24 hours, we have had announcements of two big strategic transactions. The first, announced late Monday afternoon, was Stanley Works’ acquisition of Black & Decker for $3.5 billion in stock. The second, announced Tuesday morning, is truly a blockbuster deal: Berkshire Hathaway’s acquisition of the remaining 77.4 percent of Burlington Northern Santa Fe for $26 billion in cash and stock.
Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the legal aspects of mergers, private equity and corporate governance. A former corporate lawyer at Shearman & Sterling, he is a professor at the University of Connecticut School of Law. He is the author of a new book, “Gods at War: Shotgun Takeovers, Government by Deal and the Private Equity Implosion,” that explores modern-day deals and deal-making.
While both deals may or may not be the sign of a new trend, and two deals certainly do not make a trend, both are notable for their similarities. Both are strategic investments in America. Burlington Northern is a railroad; its success or failure depends on the state of the American economy. Stanley Works and Black & Decker are American icons in the tool-making business that derive substantial portions of their revenue from American sales and are merging to further fight off global competition.
The deals represent the creative consolidation going on in the distressed M.&A. market and that market’s strengths, a few of which I highlighted in my piece on Monday. The billionaire Warren E. Buffett, the head of Berkshire Hathaway, is taking advantage of a still-weak economy to acquire a strategic partner in a troubled industry. Stanley Works and Black & Decker are consummating a combination that they talked about for almost three decades to achieve cost savings and synergies, positioning themselves for any recovery in the American construction market.
The deals themselves are also structured similarly.
The Stanley Works-Black & Decker transaction is a stock deal. Stanley works is offering 1.275 shares of common stock for each Black & Decker share, a premium of about 22.1 percent as of close of stock market last Friday. The premium is a bit surprising since this is akin to a merger-of-equals transaction. Black & Decker shareholders will own 49.5 percent of the combined corporation; Stanley shareholders the other 50.5 percent. In these types of transactions, there is typically no premium.
Still, perhaps a shareholder premium is somewhat justified because of the deal’s change in management, which is arguably equivalent to a change in control. Stanley’s management will maintain a dominant position. The nine-member Stanley board will also be in the majority. It will add six members from the Black & Decker board to its membership expanding to an unwieldy 15-member board.
Befitting a merger of equals, there is no collar on the stock consideration. A collar comes in a variety of forms, but a floating collar can provide protection to both target and acquirer shareholders. In a floating collar, the exchange ratio for the stock offered fluctuates within a specified range providing the same per-share price — say, for example, $100 a share in stock. The upper end of the collar protects the bidder from share dilution — issuing out too many shares if its stock falls sharply. The lower end protects the target from receiving a reduced share of the corporate enterprise.
In 2008, according to Factset MergerMetrics, 34 percent of transactions offered stock consideration either alone or with cash, but only 9.2 percent of those had a collar. But collars appear to be becoming more common in the distressed market environment because of the protections from volatility they provide. In the case of Stanley and Black & Decker, however, this really is a combination of two similar enterprises, so the parties most likely expected their stocks to trade in tandem, so a collar would be unnecessary.
Meanwhile, Berkshire’s acquisition of the 77.4 percent of Burlington that it does not already own is a pure acquisition. This is a stock-and-cash election transaction with a 31 percent premium. Stockholders can choose to convert their shares into $100 of cash or a number of Berkshire class A shares equivalent to $100 a share. A maximum of 60 percent of the consideration will be cash and 40 percent will be stock, and shareholders will be prorated in these amounts.
In addition, there is a floating collar on the class A stock. The collar is between approximately $80,000.00 and approximately $125,000.00 per Berkshire class A share. If the value of Berkshire stock is outside of this collar range at closing, then the number of shares received of Berkshire Hathaway class A stock will be fixed at either 0.001253489 per Burlington Northern share for values below the collar range, or 0.000802233 per Burlington Northern share for values above the collar range. In this case, the collar is more appropriate since this really is an acquisition and Burlington Northern shareholders are looking for a set amount, while both parties want to minimize the risk from stock market volatility.
In addition, Berkshire, because of its large ownership stake in Burlington, is deemed to be an affiliated shareholder of the railroad under federal securities laws. The transaction will therefore be subject to the going-private rules of the Securities and Exchange Commission.
The substantial position of Berkshire is why the deal requires two-thirds of the Burlington Northern shareholders unaffiliated with Berkshire to approve the transaction. This requirement is imposed under Delaware’s business combination statute DGCL 203. This provision requires that any combination with a stockholder who acquires more than 15 percent but less than 85 percent of a company without prior director approval wait three years before effecting a business combination with the company.
A company can avoid this waiting period if they obtain the approval of two-thirds of the disinterested shareholders. This is what is going on here, and clearly shows that Berkshire is not concerned about obtaining this vote.
Ultimately, despite the differences between the two deals, on the surface either of these transactions could have been entered into prior to the financial crisis. But the acquisition agreements for either deal have not been filed yet.
In the case of Stanley Works and Black & Decker, given the overlap of the companies’ businesses, it will be interesting to know from their acquisition agreement what the parameters are for antitrust dispositions. In other words, to what the lengths will the parties be required to go to satisfy regulators to clear the regulatory reviews.
In the case of Burlington, the question is whether Berkshire will have a financing out or an effective one through a reverse termination fee. The news release did not speak of one, but the last two big public deals in which Mr. Buffet was involved — Wrigley/Mars and MidAmerican Energy Holdings/Constellation Energy Group — did have a financing out. The question is whether the economy has improved enough that Mr. Buffet is willing to self-fund a $15 billion-plus payment of cash if the financing markets close again.
Mr. Buffet’s acquisition may be an endorsement of America, but in the terms of his financing and the acquisition agreement itself will be his current assessment of the state of the American financial system.
Update: This post has been updated to clarify the need for approval by two-thirds of Burlington Northern shareholders.更多精彩文章及讨论，请光临枫下论坛 rolia.net