Thursday, December 20, 2007

3 Pictures, 3,033 Words

December 13, 2007: Lufthansa buys a 19% stake in JetBlue (JBLU) for $7.27 per share.

JetBlue CEO Dave Barger said selling the stake to Lufthansa was a "short, quick decision." (Bloomberg)

No shit, really?
* * *

November 14, 2007: Hedge fund Pardus Capital sends a letter to Delta Air Lines (DAL) urging an immediate merger with United Airlines.

“We will do everything we can to kill this merger.” — Lee Moak, head of Delta's pilots' union (DealBook)

So that's what $140 million sounds like when it's flushed down the toilet.

* * *

June 21, 2007: The Blackstone Group (BX) prices its initial public offering at $31.00 per share.

"I think the public markets are over rated." — Stephen Schwarzman (Reuters)

Ya think?

* * *

For those of you who have nothing better to do but check my word count, the total excludes my editorial commentary and the mouseover nuggets hidden in the pictures. You better watch out, though, or you're going to end up like that poor slob at UBS in London who spent two hours looking at this blogsite a couple of days ago: bored and unemployed.

© 2007 The Epicurean Dealmaker. All rights reserved.

Thursday, December 13, 2007


A target company stock price that is depressed.

A weak US dollar.2

Delusional foreign CEOs who never learn.3

All for this one moment.

1 Noun : (head'-en-up-pen-dee-ass-eye-ten) : The condition afflicting any CEO who makes a cross-border minority investment in a passenger airline.
2 John Stewart: "John, in your expert opinion, what has caused this steep decline in the value of the dollar?"
John Hodgman: "I would have to say God. I mean, it's right there on the dollar, 'In God We Trust.' We counted on Him, and we were fooled. I mean, what kind of Benevolent Deity would allow our money to be equal to that of Canada?" — The Daily Show
3 US Airways/British Airways. Northwest/KLM. British Airways/Iberia. Need I go on?

© 2007 The Epicurean Dealmaker. All rights reserved.

Tuesday, December 11, 2007

Frequent Flyer


© 2007 The Epicurean Dealmaker. All rights reserved.

Monday, December 10, 2007

Full Fifty Men

"Follow. But! Follow only if ye be men of valor, for the entrance to this cave is guarded by a creature so foul, so cruel that no man yet has fought with it and lived! Bones of full fifty men lie strewn about its lair ... So, brave knights, if you do doubt your courage or your strength, come no further, for death awaits you all with nasty, big, pointy teeth."

— Monty Python, The Holy Grail

I guess the witch doctors at McKinsey ran out of chickens, so the executive bobsled team at UBS has decided to purify their sins in a bath of their shareholders' blood. So many shoes continue to drop in the global credit system that the financial sector is beginning to look like Imelda Marcos' closet in an earthquake.

Because the announced $10 billion in writedowns at UBS seem to be connected to subprime mortgage exposure, it remains unclear whether McKinsey's advice to push decision making authority for leveraged loans down into the investment bank helped the bank make better lending decisions or worse. Any guesses from the peanut gallery?

The good news is that Our Favorite Consulting Firm now has brand new material to work with, helping the fondue-eating writedown monkeys scour the streets of Zurich for loose change to fund the cash portion of its investment bankers' bonuses. That shouldn't take too long, but I expect compiling the report about it will add another six months to the project billings.

Talk about scope creep.

© 2007 The Epicurean Dealmaker. All rights reserved.

Sunday, December 9, 2007

Sleeping Dogs

If you're gonna dance with the Devil, make sure to wear sturdy shoes.

— Anonymous

In between reading every legal brief on Lexis/Nexis, parsing pending merger agreements into Esperanto and Swahili, and sleeping no more than two hours a day, hyper-prolific law professor and perennial Customer of the Month at the Wayne State University Starbucks Steven Davidoff has apparently found time to produce yet another comprehensive tome on merger practice.

This time, he addresses what he calls the "Do's and Don'ts of Private Equity," from the perspective of corporate executives and Board members, M&A lawyers, and public shareholders. It is a pretty good list, in my view, and worth a gander if you have a fresh Venti Caramel Macchiato and twenty minutes or so to spare. If not, just e-mail the link to your favorite corporate lawyer requesting that he or she read all the merger agreements Davidoff appends for private equity deals which have closed since August. (After all, what fun is it being a big shot corporate exec if you cannot torture your lawyer?)

I will not add overmuch to your Monday morning reading duties, but I do want to offer a few observations on a couple of Professor Davidoff's points.

In the first instance, he advises his fellow lawyers to eschew overly complex wordsmithing in merger agreements and their ancillary documents. He has railed against sloppy, careless, and unnecessarily (and counterproductively) obscure drafting in other contexts, and it is clear that he views an extra hour or so of a lawyer's time to be well spent in cleaning up such messes before they end up in court.

Surely, a great deal of such poor drafting can indeed be attributed to laziness, haste, or sheer incompetence, as Professor Davidoff implies. But I have another theory for you. Based on my experience, I believe a non-trivial amount of such obscure legal drafting is in fact intentional. I believe some lawyers draft clotted legalese or do not attempt to clarify others' scribblings because they realize, at a conscious or subconscious level, that the confusion in the text reflects a fundamental disagreement or misunderstanding between the parties to the agreement in question. Haste, pressure of time or events, or sheer wishful thinking encourages such lawyers to whistle past a particular graveyard, or let a particular sleeping dog lie. After all, virtually no-one—not even most lawyers—actually wants or expects an agreement to end up in litigation, and that is usually where the parties' differing intent and interpretations of sloppy contractual language is aired and ultimately resolved.

You can see this as cowardly, or lazy, but I prefer to view it as reasonably pragmatic. After all, the great majority of merger agreements do not end up in court, and you can bet that is not because they are all drafted to an ABA-approved level of clarity and precision. Furthermore, lawyers understand that they work for businessmen, who want to strike deals, but who themselves may not have a good understanding of all the risks and issues involved in a particular M&A transaction, much less how they feel about them. In such circumstances, is it really so bad to cross your fingers and whistle past that nasty contractual briar patch wherein lie all sorts of differing intentions and interpretations of, e.g., specific performance? Not only is the perfect the enemy of the good in contractual law, but arguably the bad is not necessarily the enemy of the good, either. The intent of M&A dealmaking, after all, is to make deals.

On a second note, Professor Davidoff recommends corporates involved in private equity deals get themselves a good independent financial advisor; that is, one not embedded within an investment or commercial bank which is also offering to finance the deal. This is indeed good advice, since no matter how trustworthy an individual banker may be at Goldman Sachs or Credit Suisse—and believe it or not there are still a few who make Mother Theresa look like a check kiter—the economics of banks with large leveraged finance businesses means that he or she simply cannot deliver the firm in all circumstances.

Even if your banker is working for you, the CEO, or the Special Committee of your Board, if his or her firm makes a lot of money lending to private equity, you're screwed. I don't care whether you run a Fortune 50 company or not, unless you are General Electric or Cisco, KKR, TPG, and Blackstone each pay more money to Wall Street in a year than you have done in a decade. And credit crisis or not, everyone expects that to continue for the indefinite future. Your banker Joe may be your old college pal and godfather to your daughter, but if his bank is not purely focused on M&A, your little old billion dollar buyout is just a sideshow.

So if you are the CEO or Chairman of the Board of a public company, no matter how large and well-banked by the cream of Wall Street, pick up the telephone and arrange to meet some of the independent M&A advisors out there. (Much to my anticompetitive chagrin, there are plenty of them.) It is definitely not stupid to have a few pure advisory bankers you know and trust in your rolodex before Henry Kravis comes knocking on your door.

© 2007 The Epicurean Dealmaker. All rights reserved.

Friday, December 7, 2007

True Story

A recent DealBook article questioning the independence of fairness opinions made me chuckle yesterday. It also made me recall an incident from my halcyon past, when I was a bright-eyed, bushy-tailed young investment banker deeply involved in a rather large and rather prominent merger between two publicly traded companies.

As is sometimes the case, the proposed merger had come about in a rather circuitous fashion. My client had been talking to a smaller third party about acquiring them when the eventual merger partner intervened in an attempt to prevent the acquisition. (They wanted control of the small fry themselves.) The two CEOs met over brandy and cigars to hash out a compromise, one thing led to another, and they both decided they had so much in common they set a wedding date right there. We bankers were called in the next day to paper over the deal and put lipstick on the pig, but the particular porker had already been picked out.

For various reasons I will not bore you with here—just in case the SEC Enforcement Division is still reading—it also happened to be the case that, while the other party was approximately twice the size of my client, my client had the upper hand in negotiating the merger. The exchange ratio was set, the various "social issues" (like who got the CEO title and the cutest personal assistant) were nailed down, and the bankers trundled off to our respective Fairness Opinion Committees to get internal sign off on the deal.

Now, for those of you who are not in the know, a "fairness opinion" is something a party to an M&A transaction requests from an investment banker. It usually takes the form of a letter, clotted with all sorts of equivocations, qualifications, and other legalese and supported by reams of analysis on the deal, comparable transactions, and the like, which boils down to Investment Bank XYZ representing to the Board of Directors of Client Company ABC that the transaction under consideration is "fair from a financial point of view." The actual origins of this little deal artifact are lost in the mists of time, but its purpose is very clear: it provides yet one more piece of paper for the Board of a public company to cover its ass, usually from attacks by disgruntled shareholders who feel the Board and management have sold their company down the river.

The clever TED reader will have already figured out that, as such, a fairness opinion is not really an investment banking document at all. It is a legal safeguard, pried kicking and screaming out of the investment bank by the client's corporate lawyers to make sure that someone other than their client is at least potentially on the hook if the deal is challenged. You can just imagine the hissing and spitting, biting and gouging, and other lawlerly shenanigans that take place between company lawyers and the investment bankers over the wording of a fairness opinion, with the lawyers wanting the investment bank to say as much as possible and the investment bankers wanting quite the opposite.

Because investment banks realize that they face some (contestable) legal liability from issuing a fairness opinion, they usually require that the bankers working on the deal prove its "fairness"—at least to the standards of a fairness opinion letter—to a committee of senior M&A bankers who are not otherwise involved in the transaction. In theory, at least, if the deal bankers cannot prove the deal is fair to their client's shareholders, the committee will not approve the letter, and the investment bank has to tell its client it cannot issue one. You can just imagine how much fun that conversation is to have with your client.

So, in the case of the big merger I was telling you about, the final deal was so lopsided in my client's favor that the Fairness Committee meeting was actually rather uncomfortable. I mean, there was no question that the deal was "fair" to my client's shareholders—in the same way that Genghis Khan was adept at striking "fair" bargains for food and supplies from villages his ravening hordes galloped through—but my committee bankers were seriously worried that the other party's investment bank would not be able to say the same. They signed off nonetheless, simply warning the deal team that we might face demands to retrade terms once the other party's Board got the bad news.

Well, it turned out their concern was for nought. The deal sailed through the other party's bank's Fairness Committee, and the Boards made a joint announcement of the proposed merger the following Monday. Problem solved.

Oh, and the other party's investment bank issuing the opinion? Goldman Sachs, of course.

Which is why I find all this hoohah about the independence of fairness opinions rather amusing. You do not really think there is some objective measure of "fairness" in an M&A deal, do you? Do you really think Fidelity Investments and Legg Mason derive a great deal of comfort and guidance from the investment banks' fairness opinion letters filed with a merger agreement?

Not being a lawyer myself, I have never really understood the putative value of these pieces of paper. Either a deal was negotiated in good faith, at arms length, with a rigorous price discovery process, or not. If it was, then of course it was fair: it was the best deal the Board could get for their shareholders at the time. If not, well ... And you will be sure to find this out in the legal discovery process should someone with enough standing and enough outrage challenge the deal in court. I can guarantee you that no Delaware judge worth his salt will take a look at a Goldman Sachs fairness opinion letter and say, "Well, that's settled, then."

Certainly the investment banks have never thought fairness opinions had much value. Parse it how you will, a bank which is getting an advisory fee to close a deal has always thrown in the fairness opinion for free. Investment banks will charge for a fairness opinion if they are brought in specifically for that purpose and that purpose alone—an "independent, third party" look—but they'd all much rather have the success fee. And the DealBook article makes that clear.

No truer words were spoken than those offered by the professional shareholder mentioned at the article's close:
Consider this cynical comment from an unnamed buyside equity analyst who took part in Thomson’s survey. Asked if companies should hire an independent third party to render an additional fairness opinion, the analyst said: “It would not introduce additional integrity into an already flawed process. It would only add to the number of pigs feeding at the trough.”

So here is some free advice to all my friends in Corporate America and the lawyers who advise them from someone inside the sausage factory: Skip the "independent" fairness opinion and spend your time and attention running a rigorous M&A process that will stand up to the light of litigation. You'll save some money, and you'll cover your ass in far more effective armor than empty boilerplate.

© 2007 The Epicurean Dealmaker. All rights reserved.