Monthly Archives: October 2012

Financial vs Strategic Buyers

The following post comes to us from Marc Martos-Vila of the Department of Finance at UCLA, Matthew Rhodes-Kropf of the Entrepreneurial Management Unit at Harvard Business School, and Jarrad Harford, Professor of Finance at the University of Washington.

In our recent HBS working paper, Financial vs. Strategic Buyers, we highlight and then set out to explain the oscillating pattern of financial vs. strategic acquirers within overall merger activity. Mergers and Acquisitions occur in great waves of activity with recent troughs, for example, of only a few thousand deals in 2003 and peaks of over ten thousand deals in 1999 and 2006. Within this oscillation of activity there is another shifting pattern: the percentage of so-called financial sponsors (private equity firms) vs. strategic buyers (operating companies) seems to ebb and flow. Aggregate numbers show that the fraction of total deal value acquired by financial sponsors has varied dramatically over the last 25 years with peaks in the late 80s, 90s and the period of 2005-2007. This same pattern is true across many industries and geographies.

Any particular transaction has many factors that drive the ultimate acquirer’s willingness to pay. And many theories propose reasons why particular firms or industries may be ripe for acquisition activity. However, the broad pattern of financial sponsor activity that spans industries and geographies at a given point in time suggests a broad economic explanation for the coordination. Little research directly considers the competition between financial and strategic buyers. And almost no research offers any broad insights into the rising and falling tides of private equity activity through the different merger waves.

What drives either financial or strategic buyers to have a more dominant position in M&A activity at different points in time? This question is important not only because the economic magnitude of this activity is so large, but also because the balance of power between financial vs. strategic acquirers changes the ownership structure of assets and alters the incentives and governance mechanisms that surround the economic engine of our economy.


Shining Light on Corporate Political Spending

Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. Robert J. Jackson, Jr. is Associate Professor of Law and Milton Handler Fellow at Columbia Law School. This post is based on their forthcoming article, Shining Light on Corporate Political Spending. Bebchuk and Jackson served as co-chairs of the Committee on Disclosure of Corporate Political Spending that filed a rulemaking petition concerning political spending, discussed on the Forum here and here. Their earlier work on corporate political spending, Corporate Political Speech: Who Decides?, is discussed on the forum here, here and here.

In our new paper, Shining Light on Corporate Political Spending, we put forward a comprehensive, empirically-grounded case for SEC rules requiring public companies to disclose their political spending. We provide empirical evidence on the need for such rules and respond to the full range of objections that have been raised to mandatory disclosure in this area. The paper, which will be published by the Georgetown Law Journal, is available here.

Our paper systematically develops the case for the position taken in a rulemaking petition that was submitted to the SEC last year by a committee of ten law professors that we co-chaired. The petition has received unprecedented support, including from comment letters submitted to the SEC by more than a quarter of a million individuals. In addition, the petition has drawn supportive commentary from institutional investors, editorials in the New York Times and Bloomberg News, and a substantial number of members of the U.S. Senate and House of Representatives. At the same time, the petition, and the push for SEC disclosure rules in this area, has attracted opponents, including legal academics, prominent members of Congress, and the Wall Street Journal’s editorial page.


Tying Non-Competes to Sale of Business: California Appellate Court Decision

Eduardo Gallardo is a partner focusing on mergers and acquisitions at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn client alert by Jim Alexander, Frederick Brown, Steven J. Johnson, Jason Schwartz and Katherine V.A. Smith.

On August 24, 2012, in the case of Fillpoint, LLC v. Maas, a California appellate court issued an opinion reinforcing both California’s general public policy against covenants not to compete and the important exceptions to that rule. While California Business and Professions Code § 16600 generally declares void any covenant that restrains an individual from engaging in a lawful profession, trade or business, § 16601 provides an exception to this rule for covenants executed in connection with the sale of a business. The Fillpoint case instructs that, to qualify for § 16601’s sale-of-business exception, employers must thoroughly document and tether any non-compete covenant to the sale of a business.


Canadian Court Addresses Continuing Use of Empty-Voting Tactics

Adam Emmerich is a partner in the corporate department at Wachtell, Lipton, Rosen & Katz focusing primarily on mergers and acquisitions and securities law matters. This post is based on a Wachtell Lipton firm memorandum by Mr. Emmerich, David A. Katz and Trevor S. Norwitz.

Activist investors continue to aggressively exploit a variety of techniques — including hedging, securities borrowing, total return swaps and other contractual arrangements — to avoid public disclosure of their investments and to obtain governance rights out of proportion with their economic stakes. We have long warned against these abuses, which are not confined to the U.S. market but are truly a global phenomenon. Courts, including the Supreme Court of Delaware, have emphasized that corporate voting rights and economic interests should not be “uncoupled” but should travel together. The SEC is considering regulating the use of derivatives in its “proxy plumbing” initiative, and we have encouraged it to focus on “empty voting” abuses.

A recent case in Canada illustrates the problems with the current system. In TELUS Corp. v. CDS Clearing and Depository Services Inc., a U.S.-based hedge fund, Mason Capital, amassed a voting position of almost 20% in TELUS, a Canadian telecommunications provider with a dual-class capitalization. Mason hedged its entire position by shorting TELUS’s non-voting shares. Although Mason was the company’s largest voting shareholder, it would be unaffected whether TELUS shares increased or decreased in value, but rather stood to profit if the price differential between the voting shares and the non-voting shares widened. Mason used its (empty) voting position to defeat TELUS’s plan to collapse its dual class share structure, and sought to call a shareholder meeting to approve resolutions requiring a minimum premium for any conversion of non-voting shares into voting common, which would be advantageous for Mason, but not necessarily for other shareholders whose economic interests are aligned with their voting rights.


Efficient Markets and the Law: Predictable Past and Uncertain Future

The following post comes to us from Henry T. C. Hu, Allan Shivers Chair in the Law of Banking and Finance at the University of Texas School of Law.

My article, Efficient Markets and the Law: A Predictable Past and an Uncertain Future (forthcoming in the Annual Review of Financial Economics (vol. 4, 2012)), analyzes the diverse situations in which the efficient-market hypothesis (EMH) has influenced — or has failed to influence — federal securities regulation and state corporate law, and the prospective roles for the EMH in both federal and state contexts. In federal securities regulation, the EMH has offered a theoretical construct to accompany the general belief in the value of accurate and complete information that has animated the US Securities and Exchange Commission (SEC) since its creation. Applications of the EMH have generally been straightforward and predictable: For instance, EMH concepts of the market processing of public information helped motivate the streamlining of procedural requirements as to corporate disclosures and, more controversially, as to Rule 10b-5-based securities class actions. In state corporate law, the EMH has helped shape thinking as to takeovers and the corporate objective.

However, the EMH and related learning have failed to properly inform governmental actions to address financial illiteracy. This is troubling as a social matter, especially in an era of increased individual responsibility for retirement well-being, inadequate savings, and highly uncertain financial times.


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