Updated Private Equity Buyer/Public Target M&A Deal Study

This study updates our firm’s Summer 2011 Deal Study in three important ways:

• First, we have supplemented our Deal Study by taking into account the relevant deal terms from the 5 private equity buyer/public company target all-cash merger transactions involving consideration of at least $500 million in enterprise value [1] entered into during the third calendar quarter of 2011.
• Second, we have added a comparative element to our Deal Study by comparing the treatment of certain key deal terms in the 20 transactions entered into between Jan. 1, 2010 and Dec. 31, 2010, which we refer to as the “2010 Transactions,” with the treatment of the same key deal terms in the 11 transactions entered into between Jan. 1, 2011 and Sept. 30, 2011, which we refer to as the “2011 YTD Transactions.”
• Finally, we have added several new topics to this Deal Study, including a more detailed analysis of “go shop” provisions.

Please note that: (i) our findings described in this survey are not intended to be an exhaustive review of all transaction terms in the surveyed transactions — instead, we report only on those matters that we believe would be most interesting to the deal community; (ii) our observations are based on a review of publicly available information for the surveyed transactions — the surveyed transactions accounted for only a portion of M&A activity during the survey period and may not be representative of the broader M&A market; and (iii) our observations from the comparative analysis are affected by the two data sets not being of the same sample size (11 transactions in 2011 to date vs. 20 transactions in 2010) or average deal size ($2.0 billion mean for 2011 YTD Transactions vs. $1.6 billion mean for the 2010 Transactions).

Key Observations

“Market Practice” Remains Unchanged

The key observations from our Summer 2011 Deal Study remain the same — this is driven by the fact that the treatment of key deal terms in the 5 transactions entered into in the third quarter of 2011 were consistent with those in the transactions we previously reviewed. [2]

• As expected, we continue to observe a “market practice” based on the treatment/inclusion of a number of the key deal terms. For example:
  • None of the 31 transactions included a traditional “force the vote” provision or provided the buyer with a closing condition regarding appraisal rights.
  • None of the transactions structured as single-step mergers provided the buyer with a financing closing condition.
  • Approximately 90% of the transactions:
    • Provided the buyer with matching rights and “last look” matching rights;
    • Included a “tail provision” that applied in the event the merger agreement was terminated under certain circumstances; and
    • Had “marketing period” provisions.
  • Approximately 80% of the transactions:
    • Were structured as one-step mergers;
    • Permitted the target board to make a change in recommendation other than specifically in connection with a superior proposal; and
    • Gave the target company a limited specific performance right that was only available if (i) the buyer’s closing conditions to the merger agreement were satisfied and (ii) the buyer’s debt financing was available.

• The range of the reverse termination fee (“RTF”) payable by a buyer (as a percentage of target’s equity value) varied dramatically. Unlike the much tighter range we observed for target break-up fees (the upper bound of which is limited by fiduciary concerns and related case law), the range of RTFs payable by buyers varied dramatically in certain instances (e.g., 5.51% to 38% in the event of a willful breach (the highest was the GTCR/Protection One deal)).
• While “go-shop” provisions are not standard, they continue to be widely used. Of the 31 transactions, over 50% included a “go-shop” provision. This trend appears to be continuing, as 2 of the 5 transactions entered into in the third quarter of 2011 included a “go-shop” provision.

2011 YTD Transactions vs. 2010 Transactions:

• Two-step tender offers are becoming more prevalent. The two-step tender offer/ back-end merger structure was used almost twice as frequently in 2011 YTD Transactions than in 2010 Transactions (27% of the 2011 YTD Transactions vs. 15% of the 2010 Transactions). In the near term, we expect this trend to continue, at least for targets with sufficient authorized but unissued shares to make the top-up option effective and in transactions that do not involve significant regulatory or antitrust issues.
• Specific Performance provisions are converging on a market standard. All of the 2011 YTD Transactions provided the target with a limited specific performance right against the buyer that requires the buyer’s debt financing to be available rather than full or no specific performance rights. This suggests that the limited specific performance right is now “market practice.”

New Observations on “Go Shop” Provisions

Because negotiations concerning “go shop” provisions can be highly contentious (which is to be expected since this provision empowers a target company to find an alternative suitor to top the target’s agreed-upon deal with the buyer) and these provisions have garnered significant media attention and market commentary, we conducted a closer review of the usage of these provisions.

• As expected, “go shop” provisions were more prevalent in those transactions where the target did not conduct a pre-signing market check prior to signing the merger agreement. Transactions without a pre-signing market check contained “go shop” provisions nearly twice as often as transactions with a pre-signing market check. [3]
• Transactions involving “go shop” provisions had significantly higher deal premia based on the target’s stock price 30 days prior to announcement. When deal premia are calculated comparing the stock price 30 days prior to the announcement of the applicable transaction to the price paid by the acquiror, the 16 deals that contained “go-shop” provisions had a mean deal premium of 35.3%, with a median of 34.2%; whereas the other 15 transactions without this provision had a mean premium of 21.0%, with a median of 14.3%. Interestingly, if deal premia are calculated based on the target’s stock price one day or 60 days prior to announcement, the difference in mean deal premia is negligible.

The complete study is available for download here.

Endnotes

[1] The equity values of the 31 transactions ranged from $322 million to $5.0 billion (calculated based on outstanding stock, excluding options, warrants and other securities convertible into or exercisable for common stock).
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[2] Note that the TPG/PRIMEDIA transaction was entered into too close to the publication date of our previous study and, therefore, was not included. For the purposes of the comparisons contained in this study, the terms of the PRIMEDIA merger are added to those of the 25 deals covered in our summer publication.
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[3] For purposes of this Deal Study, we characterized a deal as involving a “pre-signing market check” if, as per the “background of the merger” discussion in the applicable proxy statement or Schedule 14D-9, (i) the target solicited interest from at least 25 possible bidders pursuant to an active process prior to execution of the applicable merger agreement; (ii) the target was in discussion with five or more possible bidders without engaging in a broader solicitation of interest; or (iii) the target issued a public announcement to the effect that it was exploring “strategic alternatives.” We did not count the Apollo/CKE merger as having a pre-signing market check because this transaction was the result of a topping bid made during the “go-shop” period of the merger agreement between Thomas H. Lee Partners and CKE.
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