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Mergers and acquisitions have surged back during 2014, sparked by renewed corporate confidence and buoyant equity markets.
The value of deals completed globally in 2014 has already passed the $3tn mark and this is on course to be the biggest year since the financial crisis. As the deals returned, US lawyers have been called upon to devise new ways of bringing together companies and overcoming problems with global takeover rules.
Two of the world’s top semiconductor equipment makers, Applied Materials and Tokyo Electron, saw an opportunity to combine their strengths but there was no precedent for a stock-for-stock merger between US and Japanese corporations. Adding complexity, they agreed to use a Dutch holding company as a neutral jurisdiction for their merger of equals.
Weil Gotshal represented Applied Materials in this $29bn deal that stands out on many levels – including dual headquarters and simultaneous listings in the US and Japan.
“This is definitely the coolest deal I’ve ever done,” says Keith Flaum, Weil partner, “because of the structural complexity.”
The biggest difference in many deals is not their structures, but the presence of activist investors.
Activist hedge funds that buy a company’s shares and lobby for changes in the way it is managed have provided the catalyst for scores of deals in 2014. As well as pushing for sale, activists have homed in on companies with businesses that can be divested or spun off. Law firms have been called on time and again to see off these agitators. Primary measures of defence have been the shareholder rights plan or so-called “poison pill” (where a company adopts a mechanism that dilutes the shares if any investor increases its holding above a certain threshold) and the staggered board, which prevents activists from removing large numbers of directors at one time.
Wall Street firms have established strong practices defending clients against attacks by activist investors. Even so, there is a sense among the US legal community that the days of treating activists as an undesirable but small part of the deal landscape are ending. Lawyers are realising that activists are here to stay and, in some cases, can be a useful tool in takeovers.
In the most notable example of how activists can push for a takeover, Valeant, a Canadian drugmaker, teamed up in April with activist Bill Ackman to launch its $53bn tilt at Botox-maker Allergan. This bid was not only extraordinary in its ambition, but also novel in its structure. Mr Ackman revealed that he held a substantial number of Allergan’s shares and would be lobbying the company to sell to the Canadian suitor. Never before had a corporate buyer launched a full-blown attempt to take over a rival with the backing of an activist.
To structure the bid, Valeant turned to law firm Sullivan & Cromwell. “A hedge fund or activist investor working with a strategic buyer has never happened before,” says Alison Ressler, partner at the practice.
Perhaps the biggest difficulty was convincing stock market and regulators that Mr Ackman’s involvement did not constitute insider trading. But Douglas Barnard, lecturer at the University of Chicago law school, says: “You are allowed to trade on knowledge of what you intend to do, and normally by partnering you are just combining that intent.”
The days of treating activists as a small, undesirable part of the landscape are ending
The deal dragged on for seven bruising months, Allergan arguing for its independence and Valeant for its bid ahead of a shareholder vote in December. And in spite of a recent resolution – Valeant lost to a $66bn bid by rival Actavis – the deal has redefined the relationship between activists and corporate buyers.
Another deal took all-but-forgotten tactics off the shelf, dusted them down and used them to good effect. Clothing companies Joseph A Bank Clothiers and Men’s Wearhouse were trading bids as each sought to acquire the other. On the way, Jos A Bank agreed to buy clothing brand Eddie Bauer.
The saga ended when Jos A Bank, advised by Skadden, Arps, Slate, Meagher & Flom, used a buyer’s exit clause to break its deal with Eddie Bauer and accept a significantly higher offer from Men’s Wearhouse, delivering an extra $600m to Jos A Bank shareholders.
Paul Schnell of Skadden is in no doubt that this tactic will be used again, particularly in an era of more hostile approaches. “People will say let’s increase prices by creating competition,” he says. “They’re going to ask if there is an acquisition they can do to increase value.”