2017 Tulane Corporate Law Institute Current Issues in Private Equity. March 31, 2017

Transcription

1 2017 Tulane Corporate Law Institute Current Issues in Private Equity March 31, 2017

2 U.S. M&A Deal Value Sponsor-related vs. Strategic (US$ in Billions) $2,000 $1,800 $1,600 $1,400 $602 $399 $1,200 $326* $1,000 $426 $800 $600 $235 $239 $247 $304 $896* $400 $200 $0 $72 $646 $666 $629 $679 $993 $1,342 $1,276 $ Strategic Sponsor-related $72 Source: Dealogic. As of March 22, * indicates annualized figures for

3 Number of U.S. M&A Deals Sponsor-related vs. Strategic 14,000 12,000 10,000 2,305 1,712* 8,000 1,818 1,967 1,977 2,359 2,313 1,834 9,071* 6,000 4,000 2, ,303 8,558 9,947 8,113 8,307 8,139 7,627 2, Strategic Sponsor-related Source: Dealogic. As of March 22, * indicates annualized figures for

4 Appraisal Risk Current Landscape More Cases Appraisal Lawsuits in the Delaware Court of Chancery Source: Bloomberg Law # of Petitions Filed # of Transactions Challenged 267% increase in appraisal petitions since % increase in deals subject to appraisal petitions since 2012 Role of hedge funds and appraisal arbitrage 4

5 Appraisal Risk Current Landscape More (Not Total) Reliance on Deal Price Delaware Public Company Appraisal Cases Since CKx (% of Deal Value) Deal Price Respondent Petitioner Fair Value 50 Source: Deal Points (Jan. 24, 2017) Dell and DFC Global are notable exceptions to what otherwise has been a pattern of increasing deference to merger price in public company appraisal cases since Huff Fund v. CKx (Nov. 2013) 5

6 Appraisal Risk in Private Equity Transactions Competing with Other Bidders Do certain decisions increase appraisal risk for private equity buyers? Select judicial perspectives on differences between strategic and PE bidders: Strategic bidders Absent distorted market conditions, strategic bidders are systematically willing to pay more than financial bidders. Lender Processing [Strategic] acquirers pay full value for targets, inclusive of the benefits of control and synergies. Financial buyers, by contrast, generally pay lower premiums and are hampered by limitations on leverage and the need to achieve their internal hurdle rates. Lender Processing [T]he price negotiations during the pre-signing phase were driven by the financial sponsors willingness to pay based on their LBO pricing models, rather than the fair value of the Company. In re Appraisal of Dell Inc. Private equity bidders MBOs in which a management team has affiliated with an incumbent financial sponsor rarely generate topping bids, particularly from other financial sponsors. Lender Processing [T]he the outcome of competition between financial sponsors primarily depends on their relative willingness to sacrifice potential IRR. It does not lead to intrinsic value. In re Appraisal of Dell Inc. 6

7 Appraisal Risk in Private Equity Transactions Competing with Other Bidders (cont d) Does evidence support less deference to merger price paid by a private equity buyer compared with a strategic? Select judicial and academic perspectives: The fact that a transaction price was forged in the crucible of objective market reality (as distinguished from the unavoidably subjective thought process of a valuation expert) is viewed as strong evidence that the price is fair. Van de Walle v. Unimation, Inc. (Del Ch. 1991) Gorbenko & Malenko, Strategic & Financial Bidders in Takeover Auctions, Journal of Finance (2014) Found that 22.4% of targets are valued more by an average financial bidder than by an average strategic bidder. [F]inancial bidders have an advantage over strategic bidders in dealing with poorly performing mature targets, reflecting segmentation of the takeover market, whereby different targets appeal to different bidders. The advantage of financial bidders can come from different sources, for example, from having expertise in restructuring targets or from having access to debt at a lower cost than strategic bidders. Practical considerations Do LBO models make a PE firm s price less indicative of fair value than a strategic buyer s price? Where does LBO modeling variability on the same given transaction originate different angles, judgments, plans? Can a buyer achieve target returns by leverage and operational changes without underpayment? How common are topping bids among strategics? 7

8 Appraisal Risk in Private Equity Transactions Other Appraisal Litigation Issues Should a reasonable Revlon process be respected for appraisal purposes? Because the two inquiries are different, a sale process might pass muster for purposes of a breach of fiduciary claim and yet still constitute a sub-optimal process of an appraisal. Lender Processing [T]he circumstances through which Lone Star purchased DFC are relevant to assessing whether the transaction was the product of a robust competitive bidding process with potential buyers who understood DFC s intrinsic value DFC Global The best sale process can be exclusivity does this undermine merger price for appraisal purposes? Does lack of pre-signing shopping (either no shopping or no outreach to strategics) doom a private equity buyer to a battle of the experts? Probative value of go-shops can absence of topping bids be indicative of fair value? ( On the facts presented, the probative value of the go-shop is inconclusive. Lender Processing) Reliance on deal price is an expensive litigation strategy Puts the quality of the process at issue, increasing discovery burden post-corwin, is sale process litigation shifting over to infect the appraisal process? Court might still want to see a battle of the experts, either as backup support (Lender Processing) or for weighted/blended reliance with other analyses (DFC Global) 8

9 Appraisal Risk in Private Equity Transactions Addressing Appraisal Risk in Merger Agreements Too early to tell if appraisal outs are increasing, but... Year Agreements w/ Appraisal Outs (Delaware Public Targets) Percent of Total Transactions (Delaware Public Targets) Appraisal Out Condition (Range / Mean) % 1-10% / 6.7% % 5-15% / 8.8% % % / 14.7% Jan.-Feb % 5-20% / 12.5% Source: FactSet MergerMetrics Are appraisal outs effective? In the Dell transaction, approximately 2.2% of the shares demanded (and less perfected) appraisal rights Appraisal out would have been triggered in only one of the above-noted precedents 9

10 Co-Investor Issues Co-invest issues Sponsor liability for co-investor obligations Preventing end-run around PE group Locking down co-investors CFIUS and governance rights Reach of the NDA can affect PE practices and deal terms Disclosure to LPs Disclosure to financing sources 10

11 Engaging with Management & Consultants Engagement with management Talking to management can have benefits, but at what point is it not safe? Risks with talking too early Effect on Revlon Deemed a Rule 13e-3 going private transaction under SEC rules What topics can be discussed? Use of former target insiders as consultants Risks and rewards Methods of controlling liability and injunction risk Disclosure to, or consent from, target for use of consultant? Understanding confidentiality and other agreements between consultant and target 11

12 Conflict Issues with Financial Advisors How to address relationships between sell-side financial advisors and bidder? Is disclosure to the target board enough? What types of disclosures are needed? E.g., disclose relationships with all potential bidders at outset, only most likely bidders at outset, only once there are bids? When should these disclosures be made? Verbally vs. in writing Market practice regarding questionnaires? How can boards mitigate the risk? 12

13 Appendix Notable Delaware Court of Chancery Appraisal Decisions 13

14 Delaware Decisions Involving Non-third Party Transactions YTD Date Case Premium over merger price represented by appraisal award (excluding statutory interest) Number of years from merger date to appraisal decision Sale process included market check with competitive bidding 8/11/16 In re ISN Software 258% 3.6 No 5/31/16 In re Dell 26% 2.6 Yes but major shareholder (founder-ceo) acquired 75% of shares; also, go-shop was limited by size and complexity of company; plus other aggravating factors undermined sale process 6/17/15 Owen v. Cannon 60% 2.1 No used by court/ per share value $98,783 $17.62 $42.17M (shareholders whole interest) 6/25/14 5/12/14 Laidler v. Hesco 86.6% 2.5 No DCCF $ /28/13 Towerview v. Cox 19.8% 3.9 Allegedly weak process $5.75 7/18/12 In re Orchard Entp % 2.0 * $4.67 4/23/10 Global GT v. Golden Telecom 19.5% 2.2 Allegedly weak process 2/15/10 In re Sunbelt 148.8% 12.4 No $ $ used by petitioner/ per share value $241,234 $28.61 $53.46M DCCF $515 $12.12 $5.42 $139 $ used by respondent/ per share value $28,050 $12.68 $21.5M DCCF $ $4.28 / Comparables $1.53 $88 $36.30 * In this case, the amount of the appraisal award depended almost entirely on the court s holding that the liquidation preference on the company s preferred stock was not triggered by the merger. 14

15 Delaware Decisions Involving Third Party Transactions YTD Date Case Premium over merger price represented by appraisal award (excluding statutory interest) Number of years from merger date to appraisal decision Sale process included market check with competitive bidding used by court/ per share value used by petitioner/ per share value used by respondent/ per share value 12/16/16 Merion v. Lender Processing Yes Merger price $37.14 $50.46 $ /14/16 7/8/16 In re DFC Global 8.4% 2.2 Yes but court found that unusual, extreme business uncertainty affected sale process Merger price / / Comparables (1/3 each) $10.30 $19.90 / Comparables $ /21/15 1/5/15 Merion v. BMC Software Yes Merger price $46.25 $67.08 $ /30/15 LongPath v. Ramtron Yes Merger price $3.10 (minus $.03 adjustment for synergies) $4.96 Merger Price $3.10 (minus $.34 adjustment for synergies) 4/26/15 Merlin v. AutoInfo Yes Merger price $1.05 / Comparables $2.60 Merger Price $1.05 (minus $.08 adjustment for synergies) 15

16 Delaware Decisions Involving Third Party Transactions YTD (cont.) Date Case Premium over merger price represented by appraisal award (excluding statutory interest) Number of years from merger date to appraisal decision Sale process included market check with competitive bidding 1/30/15 In re Ancestry Yes 11/1/13 5/19/14 2/12/15 used by court/ per share value Merger price $32 Huff v. CKx 0 2/3 ** Merger price $5.50 7/8/13 Merion v. 3M Cogent 8.5% 2.6 ** 3/18/13 4/30/12 IQ v. Am. Commcl. Lines Gearreald v. Just Care 15.6% 2.3 ** (-14.4%) 2.6 ** $10.87 $38.16 $34.24M (whole company) used by petitioner/ per share value $43.05 $11.02 $16.26 / Comparables $45.0 $55.2M used by respondent/ per share value $30.63 $4.41 / Comparables $10.12 / Comparables $25.17 $33.6M ** In these cases, the court did not address the strength of the sale process but, in each case, the court conducted a analysis that yielded an appraisal result that was within 10-15% of the merger price. 16