9 Carly Fiorina, Tough Choices: A Memoir (2007).
10 Consolidated Edison, Inc. v. Northeast Utilities, 426 F.3d 524 (2d Cir. 2005).
11 See Agreement and Plan of Merger among Wm. Wrigley Jr. Company, Mars, Inc., New Uno Holdings Corp. and New Uno Acquisition Corp., dated April 28, 2008, exhibit 2.1 to Wm. Wrigley Jr. Co. Current Report (Form 8-K), 54-56, filed on Apr. 30, 2008.
12 See Wm. Wrigley Jr. Co. Current Report (Form 8-K), filed on Apr. 30, 2008. See also Colin Barr, “Buffett’s Help Seems Over for Now,” Fortune, Sept. 24, 2008.
13 These provisions were based on the private equity structure negotiated in the Alliance Data Systems, Inc. and Penn National Gaming, Inc. acquisitions discussed in Chapter 4.
14 See Agreement and Plan of Merger by and among Third Wave Technologies, Inc. Hologic, Inc. and Thunder Tech Corp., dated June 8, 2008, ex. 2.1 to Hologic, Inc. Current Report (Form 8-K), filed on June 9, 2008; Agreement and Plan of Merger among Brocade Commc’ns Sys., Inc., Falcon Acquisition Sub, Inc., and Foundry Networks, Inc., dated July 21, 2008, ex. 2.1 to Foundry Networks, Inc. Current Report (Form 8-K), filed on July 23, 2008; Agreement and Plan of Merger, Dated as of July 10, 2008, among Ashland Inc., Ashland Sub One, Inc. and Hercules Incorporated, ex. 2.1 to Hercules Inc. Current Report (Form 8-K), filed on July 4, 2008.
15 See i2 press release, dated Dec. 4, 2008; Foundry Networks, Inc. Amendment No. 1 to Definitive Proxy Statement (Schedule 14A), 25-30, filed on Nov. 14, 2008.
16 See Agreement and Plan of Merger among Pfizer Inc., Wagner Acquisition Corp. and Wyeth, dated as of January 25, 2009, ex. 2.1 to Wyeth Current Report (Form 8-K), filed on Jan. 29, 2009.
17 See Agreement and Plan of Merger by and among Merck &Co., Inc., Schering-Plough Corporation, Blue, Inc. and Purple, Inc., dated as of March 8, 2009, ex 2.1 to Schering-Plough Corp. Current Report (Form 8-K), filed on Mar. 11, 2009.
18 See Joint Press Release Issued by Altria Group, Inc. and UST Inc., Oct. 3, 2008, ex. 2.1 to UST, Inc. Current Report (Form 8-K), filed on Oct. 3, 2008.
19 See Answer of Defendants, Rohm and Haas Co. v. The Dow Chemical Co. and Ramses Acquisition Corp., C.A. No. 4309-CC (Del.Ch. Feb. 3, 2009).
20 See Steven M. Davidoff, “Lessons from the Dow-Rohm Battle,” New York Times DealBook, Mar. 10, 2009.
21 Susanne Craig et al., “The Weekend That Wall Street Died,” Wall Street Journal, Dec. 29, 2008.
22 The terms of the Constellation and MidAmerican transaction are taken from the Constellation Energy Group, Inc. Current Report (Form 8-K), filed on Sept. 22, 2008; Agreement & Plan of Merger by and among Constellation Energy Group, Inc., MidAmerican Energy Holdings Co., and MEHC Merger Sub Inc., dated Sept. 19, 2008, ex. 2.1 to Constellation Energy Group, Inc. Current Report (Form 8-K), filed on Sept. 22, 2008.
23 David Gauthier-Villars and Rebecca Smith, “EDF Beats Out Buffett in Energy Deal,” Wall Street Journal, Dec. 18, 2008, B1.
24 Constellation was organized under the laws of Maryland. Maryland has statutorily rejected Delaware’s heightened review of takeover transactions. See Maryland C. Corp. & Assoc. § 2.405.1 (2009). MidAmerican no doubt negotiated these extreme lockups aware that it was unlikely to be challenged by a Maryland court under this lower standard of review.
25 Stock Option Agreement by and between Merrill Lynch &Co., Inc. and Bank of America Corp., filed as an exhibit to the Bank of America Corp. Current Report (Form 8-K), §16(b), filed on Sept. 18, 2008.
26 Robin Sidel et al., “WaMu Is Seized, Sold Off to J.P. Morgan, in Largest Failure in U.S. Banking History,” Wall Street Journal, Sept. 26, 2008.
27 See Peter Lattman, “WaMU Crushes TPG,” Wall Street Journal, Sept. 27, 2008, B1. See also Investment Agreement between Washington Mutual, Inc. and the Investors Party Hereto, ex. 10.1 to Washington Mutual, Inc. Current Report (Form 8-K), filed on Apr. 11, 2008.
28 Share Exchange Agreement by and between Wachovia Corp. and Wells Fargo &Co., dated Oct. 3, 2008, ex. 2.2 to Wells Fargo &Co. Current Report (Form 8-K), filed on Oct. 9, 2008.
29 KPMG, Unlocking Shareholder Value:The Keys to Success (1999), 2.
30 McKinsey &Co., Inc., Valuation: Measuring and Managing the Value of Companies, (3rd ed., 2000), 114-115.
31 See Robert F. Bruner, “Does M&A Pay? A Survey of Evidence for the Decision-Maker,” 12 Journal of Applied Finance 48 (2002).
32 Although Bruner in his study “Does M&A Pay? A Survey of Evidence for the Decision-Maker” finds that takeovers can pay, there are real issues with these studies that make them only partly reliable. The bulk of these studies use time series analysis to measure gains and losses. Essentially, time series analysis analyzes the buyer and target stock prices during a period around the announcement of the transaction. The decline or gain from the acquisition transaction is measured by comparing the decline or gain in the stock prices at the time with a market measure. But this assumes that the market is strongly efficient and publicly reflects all of the public and private information available concerning the transaction. As we know, much of the company information given to the buyer by the target is confidential; the market does not know this information. And despite rules set by the SEC, much of this information is not disclosed at or after the time of the acquisition. Moreover, the public typically does not know the buyer’s specific plans for the target at this time. The result is that these studies are based on a fundamental assumption—the market is calculating perfectly the gain or loss from the acquisition—that is almost surely not true.
Longer-term studies attempt to get around this problem by looking at accounting metrics or comparing returns with comparable companies. But the problem with these studies is that too much noise enters into the picture—events happen that change the comparison and distort it. Ultimately, these studies fail because they don’t look to how the buyer would have done without the acquisition.The buyer may fare poorly in these studies but would have done worse had it not made the acquisition. Think where AOL would be without having bought Time Warner. From that perspective, AOL’s acquisition was brilliant. It didn’t work out as well for Time Warner.
33 See KKR &Co. LP Registration Statement (Form S-1), 133, filed on July 3, 2007; Blackstone Group LP Registration Statement (Form S-1), 5, filed on Mar. 22, 2007.
34 Paramount Comm., Inc. v.Time Inc., 571 A.2d 1140 (Del. 1989).
35 Paramount Comm., Inc. v. QVC Network Inc., 637 A.2d 34 (Del. 1994).
36 John C. Coates IV and Guhan Subramanian, “A Buy-Side Model of M & A Lockups:Theory and Evidence,” 53 Stanford Law Review 307, 310 (2000).
37 Ibid., 391-392.
38 Ibid., 324.
39 Brazen v. Bell Atlantic, 695 A.2d 43 (Del. 1997).
40 In re IXC Comm. Inc. S’holder Litig., 1999 WL 1009174, at ∗10 (Del. Ch. Oct. 27, 1999).
41 But see Energy Partners v. Stone Energy, CA No. 2402-N (Del. Ch. Oct. 11, 2006).
42 Omnicare v. NCS Healthcare, Inc., 818 A.2d 914, 930-931 (Del. 2003).
43 In re Toys “R” Us, Inc. S’holder Litig, 877 A.2d 975, 1016 n. 66 (Del. Ch. 2005). For a further fleshing out of Vice Chancellor Strine’s approach, see Leo E. Strine Jr., “Categorical Confusion: Deal Protection Measures in Stock for Stock Merger Agreements,” 56 Business Law 919, 939 (2001).
44 Coates and Subramanian, “A Buy-Side Model,” 310.
45 Ibid., 389.
46 Thomas W. Bates and Michael L. Lemmon, “Breaking Up Is Hard to Do? An Analysis of Termination Fee Provisions and Merger Outcomes,” 69 Journal of Financial Economics 469, 470 (2003); Micah S. Officer, “Termination Fees in Mergers and Acquisitions,” 69 Journal of Financial Economics 431, 442 (2003). Coates and Subramanian (“A Buy-Side Model,” 331) have argued that this increase was the result of the Delaware courts rulings in QVC and Brazen.
47 Omnicare v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003).
48 Orman v. Cullman, 2004 WL 2348395 (Del. Ch. Oct 20, 2004).
49 Transcript of Oral Argument on Plaintiffs’ Motion for Prelimi
nary Injunction and Ruling of the Court at 117-144, Optima Int’l of Miami, Inc. v. WCI Steel, Inc., C.A. No. 3833-VCL (Del. Ch. June 27, 2008).
50 Ibid., 127.
51 Factset Mergermetrics Database (all friendly public acquisitions with a transaction value greater than $100 million for which an agreement was available).
52 Coates and Subramanian, “A Buy-Side Model,” 335.
53 Factset Mergermetrics Database.
54 The Delaware Supreme Court recently confirmed that Revlon duties only come into effect once the company decides to engage in a change of control transaction. See Ryan v. Lyondell Chemical Co., No. 401, 2008 (Del. Mar. 25, 2009).
55 In re Pennaco Energy, Inc. S’holders Litig., 787 A.2d 691, 702-707 (Del. Ch. 2001).
56 In re MONY Group S’holder Litig., 852 A.2d 9, 18-24 (Del. Ch. 2004).
57 In re Toys “R” Us, Inc. S’holder Litig., 877 A.2d 975 (Del. Ch. 2005).
58 Ibid., 1014-1015.
59 See Guhan Subramanian, “Go-Shops vs. No-Shops in Private Equity Deals: Evidence and Implications,” 63 Business Law 729, 730-731 (2008). See also Christina M. Sautter, “Shopping during Extended Store Hours: From No Shops to Go-Shops—the Development, Effectiveness, and Implications of Go-Shop Provisions in Change of Control Transactions,” 73 Brooklyn Law Review 525 (2008).
60 In re Netsmart Tech. Inc. S’holders Litig., 924 A.2d 171 (Del. Ch. 2007).
61 See Louise Story and Julie Creswell, “Love Was Blind,” New York Times, Feb. 8, 2009; Dan Fitzpatrick et al., “In Merrill Deal, U.S. Played Hardball,” Wall Street Journal, Feb. 5, 2009.
62 Factset Mergermetrics Database.
63 Ibid.
64 See Adam H. Golden, “The CVR Alternative,” The Deal, Oct. 17, 2008.
Chapter 10: AIG, Citigroup, Fannie Mae, Freddie Mac, Lehman, and Government by Deal
1 This is aptly illustrated by Robert F. Bruner and Sean D. Carr in their book The Panic of 1907: Lessons Learned from the Market’s Perfect Storm (2007).
2 See Louise Story, “Regulators Seize Mortgage Lender,” New York Times, July 12, 2008; E. Scott Reckard and Andrea Chang, “Banks Hit by Fallout from the Crisis at IndyMac,” Los Angeles Times, July 15, 2008.
3 See James R. Hagerty and Serena Ng, “Banks Hit as Fannie Mae, Freddie Mac Get Downgrade,” Wall Street Journal, Aug. 23, 2008, A1.
4 Ibid.
5 See Gretchen Morgenson and Charles Duhigg, “Mortgage Giant Overstated the Size of Its Capital Base,” NewYork Times, Sept. 6, 2008, A1; Charles Duhigg et al., “As Crisis Grew, a Few Options Shrank to One,” New York Times, Sept. 8, 2008, A1.
6 See James R. Hagerty, “Regulator Plans to Bar Big Severance,” Wall Street Journal, Sept. 15, 2008, A19.
7 See Federal National Mortgage Association, Current Report (Form 8-K), filed on Sept. 11, 2008 (hereinafter FNMA Form 8-K); Federal Home Loan Mortgage Corp., Current Report (Form 8-K), filed on Sept. 11, 2008 (hereinafter FHLM Form 8-K). These would later be increased to $200 billion each. See Statement by Secretary Tim Geithner on Treasury’s Commitment to Fannie Mae and Freddie Mac, Feb. 18, 2009.
8 The terms of this investment are set forth on the Treasury Preferred Stock Purchase Agreement Fact Sheet (Sept. 7, 2008) (hereinafter Preferred Stock Purchase Agreement Fact Sheet).
9 See FNMA Form 8-K; FHLM Form 8-K.
10 Fannie Mae’s total mortgage portfolio in the consolidated balance sheets as of December 31, 2007, was $2,832 billion with an additional $206.5 billion for other guaranties not recorded in the consolidated balance sheets. Federal National Mortgage Association Annual Report (Form 10-K), filed on Feb. 27, 2008. Freddie Mac’s total mortgage portfolio as of December 31, 2007, was $2,102,676 million. Federal Home Loan Mortgage Association Annual Report, dated Feb. 28, 2008. The combined mortgage portfolios and guarantees of both GSEs amounted to $5,141,969 million. See also James R. Hagerty et al., “U.S. Seizes Mortgage Giants, Government Ousts CEOs of Fannie Mae, Freddie Mac; Promises Up to $200 Billion in Capital,” Wall Street Journal, Sept. 8, 2008, A1.
11 See David M. Dickson and David R. Sands, “Overseas Debt Drives Bailout of Fannie Mae, Freddie Mac; Some U.S. Banks Take Big Loss,” Washington Times, Sept. 9, 2008, A1.
12 For a more detailed look at the possible reasons for the government’s failure to fully nationalize the two GSEs, see Steven M. Davidoff and David Zaring, “Regulation by Deal: The Government’s Response to the Financial Crisis” Administrative Law Review (Forthcoming).
13 See Federal National Mortgage Association Quarterly Report (Form 10-Q), filed on August 8, 2008; Federal Home Loan Mortgage Corp Quarterly Report (Form 10-Q), filed on August 6, 2008.
14 The figure is as of September 20, 2008. See Federal National Mortgage Association Quarterly Report (Form 10-Q), filed on Nov. 10, 2008; Federal Home Loan Mortgage Corp. Quarterly Report (Form 10-Q), filed on Nov. 14, 2008.
15 See Preferred Stock Purchase Agreement Fact Sheet.
16 See Press Release, Henry M. Paulson Jr., “Treasury and Federal Housing Finance Agency Action to Protect Financial Markets and Taxpayers” (Sept. 7, 2008).
17 See Press Release, Federal Reserve Bank (Sept. 16, 2008).
18 Lehman Brothers intended to spin off $25 billion to $30 billion of its commercial real estate portfolio into a separate publicly traded company, Real Estate Investments Global, in the first quarter of 2009. See Lehman Brothers Holdings, Inc. Current Report (Form 8-K), filed on Sept. 10, 2008.
19 See Randall Smith, “Lehman’s Revamp Plan Draws Doubters; Analysts Wonder If Fixes Can Occur in Time to Be of Help,” Wall Street Journal, Sept. 11, 2008, C1.
20 See Carrick Mollenkamp et al., “The Two Faces of Lehman’s Fall; Private Talks of Raising Capital Belied Firm’s Public Optimism,” Wall Street Journal, Oct. 6, 2008, A1. On September 11, JPMorgan demanded from Lehman Brothers $5 billion in additional collateral to cover lending positions that JPMorgan’s clients had with Lehman Brothers.
21 See Merrill Lynch &Co., Inc. Definitive Proxy Statement (Schedule Form 14A), 49-50, filed on Nov. 3, 2008. See also Jonathan Keehner and Bradley Keoun, “Bank of America Said to Reach $44 Billion Deal to Buy Merrill,” Bloomberg, Sept. 14, 2008.
22 See Merrill Lynch & Co., Inc. Current Report (Form 8-K), filed on Sept. 15, 2008.
23 See Carrick Mollenkamp et al., “Crisis on Wall Street as Lehman Totters, Merrill Is Sold, AIG Seeks to Raise Cash; Federal Reserve Will Expand Its Lending Arsenal in a Bid to Calm Markets; Moves Cap a Momentous Weekend for American Finance,” Wall Street Journal, Sept. 15, 2008, A1; “Lehman Brothers Files for Chapter 11 Bankruptcy Protection,” Associated Press, Sept. 15, 2008; Ben White et al., “The Street after Lehman Brothers,” New York Times, Sept. 16, 2008, 1.
24 See Jeffrey McCracken et al., “Lehman in New Talks to Sell Assets to Barclays,” Wall Street Journal, Sept. 16, 2008, C1.
25 See Jeffrey McCracken, “Lehman’s Chaotic Bankruptcy Filing Destroyed Billions in Value,” Wall Street Journal, Dec. 29, 2008.
26 McCracken et al., “Lehman in New Talks.”
27 See Michael J. de la Merced et al., “As Goldman and Morgan Shift, a Wall St. Era Ends,” New York Times, Sept. 21, 2008, A1.
28 As of September 30, 2008, the net unrealized market valuation loss of AIG’s London Subsidiary,AIG Financial Products Corp., from super senior credit default swap portfolio amounted to $21.726 billion. American International Group, Quarterly Report (Form 10-Q), filed on Nov. 10, 2008 (hereinafter AIG Third Quarter Form 10-Q). See also Jeffrey McCracken et al.,“Lehman in New Talks.”
29 For a more detailed discussion of the AIG bailout, see William K. Sjostrom, “The AIG Bailout” (draft dated Feb. 23, 2009).
30 See Hugh Son, “AIG Rating Cuts Threaten Funding Quest, Shares Plunge,” Bloomberg, Sept. 16, 2008.
31 See Matthew Karnitschnig, et al., “AIG Faces Cash Crisis as Stock Dives 61 percent,” Wall Street Journal, Sept. 16, 2008, A1; Mark Pittman, “Goldman, Merrill Collect Billions after Federal Reserve’s AIG Bailout
Loans,” Bloomberg, Sept. 29, 2008
32 See AIG Third Quarter Form 10-Q.
33 See Karnitschnig, “AIG Faces Cash Crisis as Stock Dives 61 Percent.”
34 See American International Group, Inc. Quarterly Report (Form 10-Q), filed on Aug. 6, 2008.
35 American International Group, Inc. Current Report (Form 8-K), filed on Sept. 18, 2008. Initially, AIG stated that the government would only take up to a 79.9 percent interest. This led to speculation that a market loan could be arranged. Rumors were that former AIG CEO Hank Greenberg would arrange an alternative that would prevent shareholders from being wiped out. He never did.
36 See American International Group, Inc. Current Report (Form 8-K), filed on Sept. 26, 2008.
37 The details of this loan are set forth in the Credit Agreement by and between American International Group, Inc. and the Federal Reserve Bank of New York, dated Sept. 22, 2008 (hereinafter AIG Credit Agreement), filed as an exhibit to the American International Group, Inc. Current Report (Form 8-K), filed on Sept. 26, 2008.
38 See AIG Credit Trust Facility Agreement, dated Jan. 16, 2009 (released Jan. 22, 2009).
39 See AIG Credit Agreement.
40 NYSE Listed Company Manual §§312.01, 312.05 (2009).
41 See American International Group, Inc., Notice to Shareholders; JPMorgan Chase & Co. Current Report (Form 8-K), filed on Mar. 24, 2008.
42 See AIG Transcript of Court Proceedings in Delaware Chancery Court, dated Nov. 7, 2008. See also Steven M. Davidoff, “Notes from the Maelstrom,” New York Times DealBook, Sept. 26, 2008.
43 See Joanna Chung, “Former AIG Chief ’s Alternative Rescue Plan,” Financial Times, Oct. 13, 2008.
44 See American International Group, Inc. Current Report (Form 8-K), filed on Oct. 30, 2008.
45 See Federal Reserve Bank, Press Release, Nov. 10, 2008.
46 See generally Edmund L. Andrews and Peter Baker, “AIG Planning Huge Bonuses after $170 Billion Bailout,” New York Times, Mar. 14, 2009; Steven M. Davidoff, “Seven Sad Truths about AIG,” New York Times Dealbook, Mar. 17, 2009; Steven M. Davidoff, “Dissecting the AIG Bonus Contract,” New York Times Dealbook, Mar. 18, 2009.
Gods at War: Shotgun Takeovers, Government by Deal, and the Private Equity Implosion Page 40
