By Steven Davidoff Solomon
IT’S time to call 2016 to a close and hand out grades for good and bad deal-making. In a fitful and contentious year, it is perhaps no surprise that this year there are more bad grades than good.
• LOST IN THE VALLEY: Whether it was Tesla Motors’ acquisition of SolarCity, Facebook’s attempt to cement Mark Zuckerberg’s control of the company or the continuing implosion of Theranos, Silicon Valley seemed to gloss over substantive points of governance in the pursuit of founders’ dreams and control.
Corporate governance is often rightly criticized for emphasizing meaningless metrics and the peculiar social whims of stockholders, but in these cases, the Valley glossed over big issues about who controlled the corporation—the founder or the owners?—earning an F.
• JUST SAY NO: Time Warner turned down an offer from 21st Century Fox, waiting two more years for a higher bid of $85.4 billion from AT&T. NCR, meanwhile, held out against pressure from activist investors to take a $820-million investment from the Blackstone Group. NCR’s share price has rocketed up more than 60 percent this year.
To further underscore the benefits of holding out, look at a deal from 2015, when Allergan was sold to Actavis for $220 a share, after Allergan resisted a bid from Valeant Pharmaceuticals International for $185 a share. Now, consider the kind of year Valeant has had, with its stock plummeting and criminal charges being brought against some former executives. While saying no to deal offers can be risky, in these cases, it turned into success. A’s.
• DECISIVE DELAWARE: The Delaware courts receive an A for cracking down on merger litigation. In years past, a deal announcement would seemingly trigger a lawsuit automatically. Litigation rates rose to as high as 96 percent of all deals. This remarkable statistic had long been the subject of criticism, and Delaware has acted to try and reduce the volume of these suits, following up on a late 2015 decision in Trulia that refused to award attorneys’ fees for many of these cases. Such litigation will be impossible to stamp out, but Delaware deserves an A for effort as well as for capably handling many other corporate disputes over the year. Chief among these was Energy Transfer Equity’s Houdini-like escape from the merger with the Williams Cos., which came down to the nuances of when a tax opinion can and cannot be given.
• THE MAC IS BACK: Litigation alleging a material adverse change, or a MAC, to justify walking away from a deal, returned to the fore this year. Abbott Laboratories sought to escape its $5.8 billion acquisition of the medical test maker Alere with a lawsuit in Delaware Chancery Court. Verizon Communications, meanwhile, is reconsidering its acquisition of Yahoo, after cyberattacks affected more than 1.5 billion Yahoo accounts.
A MAC is a contractual claim that the business has suffered a material adverse affect. Abbott is citing a government investigation into possible bribery at Alere’s foreign operations. Verizion would presumably base a case on the hacks. Alere is in court fighting Abbott’s claims, while Yahoo waits to find out whether it can simply recut its deal and avoid litigation ending its long national nightmare. It all shows that the conventional wisdom that a MAC claim is a loser may not always be true. An incomplete.
• CHINA’S BUYING SPREE: Chinese buyers hit the United States in full force this year, pushing hard-to-move cash abroad and spreading their wings. The national security concerns stopped some deals, including Philips’ $2.9 billion sale of a controlling stake in its LED light business to GO Scale Capital, and Fujian Grand Chip Investment Fund’s acquisition of the chip equipment manufacturer Aixtron.
But the biggest barrier for some Chinese buyers has been inexperience and opaqueness, amply illustrated by the Anbang Insurance Group’s $14 billion offer for Starwood Hotels and Resorts. No one had heard of the insurer and yet it challenged Marriott International in a surprising bidding war. And then, even more mysteriously, Anbang quietly walked away, possibly because Chinese regulators had balked. An F.
• SHAREHOLDER ACTIVISM 2.0: Bill Gates’s family office and foundation jumped headfirst into shareholder activism, challenging a controlling family’s attempt to sell its stake in the Swiss chemical maker Sika. Gates’s funds pressed the media- and the minority-friendly provisions of Swiss law to stand up for the governance rights of minority shareholders and the right to share in any sale premium. Now, if only we saw more of that among American shareholders, rather than fights over meaningless issues. An A.
• THE EDGES OF ANTITRUST ENFORCEMENT: Antitrust enforcers blocked a number of enormous deals, including those between Halliburton and Baker Hughes and between Office Depot and Staples. The surge in enforcement reflected in large part a move by companies to consolidate more aggressively. A number of large deals will be taken up by the Trump administration at a time when there is an increasing unsettledness about the degree of concentration. As a candidate, Donald Trump spoke out against the Time Warner-AT&T merger, which would be a vertical merger, raising fewer issues. Yet it is unclear what his administration will do. A third incomplete.
© 2017 The New York Times
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