The Triumphs and Failures of Deal Makers in 2012
It is time to award the Deal Professor A’s, the grade for the best deals and deal makers of 2012. Unfortunately, there were also a large number of F’s this year. Here is the top and bottom of the class, in alphabetical order:
APPLE-AUTHENTEC Apple showed its secretive side, forbidding a $ 358 million acquisition, AuthenTec, from announcing the deal through a news release or any other public communication other than a brief statement in a securities filing. Apple also negotiated a “crown jewel” lockup with AuthenTec that scared off other potential bidders by giving the electronics maker the option to license almost all of AuthenTec’s useful technology if another company acquired AuthenTec instead. Apple’s heavy hand earns it an F.
BURGER KING Burger King receives an A by going public not through an initial public offering but by selling itself to a special purpose acquisition company, or SPAC, co-founded by William Ackman’s hedge fund Pershing Square. Burger King showed that SPAC’s can be an alternative to a public offering for even large companies. According to SPAC Analytics, a research service, seven new SPAC’s were announced this last year, raising a combined total of $ 362 million. Not bad for a structure thought to be dead after the financial crisis.
CANADIAN PACIFIC RAILWAY’S PROXY CONTEST Mr. Ackman earns another A by bringing large-scale activist investing to Canada and shaking up the clubby investment community there. Canadian Pacific’s board of old-line Canadians viewed him as a barbarian at the gate and resisted to the bitter end. But the company’s shareholders preferred Mr. Ackman’s money to high society. It is now trading around its all-time high, much better than J. C. Penney, another investment by Mr. Ackman, which has performed poorly.
CHINACAST EDUCATION Perhaps the saddest deal story of the year. Ned L. Sherwood won a proxy contest with the ChinaCast Education Corporation, an education company based in China that is incorporated in the United States, but the ousted executives subsequently transferred all the company’s valuable Asian assets, leaving Mr. Sherwood and the public shareholders with nothing but a lawsuit in China. The deal highlighted the risks of investing in Chinese companies.
Elliot Associates/Argentina The hedge fund and its cohorts earn an A for clever legal arguments and wrangling intended to force Argentina to pay off the country’s defaulted bonds. While it remains to be seen if the fund will succeed, along the way it has managed to seize an Argentinian frigate in Ghana and made the “pari-passu” clause a conversation topic, while also raising fears the sovereign debt market would be thrown into chaos.
GEORGIA GULF-WESTLAKE CHEMICAL Georgia Gulf’s response to Westlake Chemical’s unsolicited offer was, drop dead. Georgia Gulf subsequently agreed to buy the commodity chemical business of PPG Industry for $ 2.1 billion, and its stock price soared, thus earning Georgia Gulf’s board an A. A number of other boards were also smart to just say no to hostile bids, including Prestige Brands’ rejection of an amateurish offer from the Mexican pharmaceutical company Genomma Lab Internacional.
HERTZ-DOLLAR THRIFTY It was a deal over two years in the making and it survived an initial shareholder rejection and a competing bid by Avis Budget Group. Hertz Global Holdings this year finally obtained antitrust clearance to buy Dollar Thrifty Automotive Group for $ 87.50 a share. In its first incarnation, Hertz had agreed to pay about $ 41 a share, meaning that Dollar Thrifty shareholders not only win an A, but a huge premium for waiting.
THE HEWLETT-PACKARD AND YAHOO BOARDS It wasn’t really a good year for either board but after years of F’s, they each escape with an incomplete. The Yahoo board first resisted, and then capitulated, to a bout of shareholder activism by Daniel Loeb’s Third Point hedge fund. The board and executive suite have been cleaned out. The question now is whether the new chief executive, Marissa Mayer, will earn her $ 117 million pay package and, alongside the new board, can turn things around.
As for Hewlett-Packard, I can only shake my head. The H.P. board had already been buffeted by scandal, including the firing of Mark Hurd as chief executive and naming Léo Apotheker as a replacement without meeting him. Then came the news that Mr. Apotheker’s acquisition of Autonomy was being written off to the tune of $ 8.8 billion. But most of this happened before the board had largely turned over. It still remains to be seen if the new chief, Meg Whitman, and her board can make H.P. a Rocky-like comeback story.
KENNETH COLE The stock market correction in May and April let Kenneth Cole, another designer with a big ownership interest (like Millard S. Drexler at J. Crew, a recipient of an F two years ago) take his company private. Mr. Cole had to bump up his initial offer by only a quarter, earning him an F but keeping him very, very rich.
MULTIPLE BIDDER DEALS One of the more interesting developments this year was the emergence of multiple buyers willing to work together to split assets. Bristol-Myers Squibb and AstraZeneca, two strategic bidders, partnered to buy and split Amylin Pharmaceuticals 50-50. Similarly, Collective Brands was sold to three bidders, Wolverine World Wide, Golden Gate Capital and Blum Capital Partners, who divided the company’s multiple shoe and clothing brands. (It was named Collective Brands for a reason.)
Both deals raised complex issues of bidder relationships, and Bristol-Myers and AstraZeneca, in particular, were able to win a hot auction. For navigating these difficulties, the buyers get an A for teamwork.
NEW YORK STOCK EXCHANGE European regulators thwarted a tie-up of Deutsche Börse and NYSE Euronext, shutting down a deal that would have relocated an American institution to Europe. But the A goes for persistence, since last week NYSE agreed to sell itself to the IntercontinentalExchange, thus saving a dying business model.
QUEST SOFTWARE The board of Quest Software wins the shareholder appreciation award and an A for its laserlike focus on shareholder value. Quest had agreed to a takeover by the private equity firm Insight Venture Partners and Quest’s chief executive, Vincent Smith. This would typically end the matter, as an announcement of a management buyout tends to scare away other bidders.
So when Dell showed interest, a special committee of the Quest board gave Dell an incentive to make a competing bid by agreeing to issue an option that would let it acquire a 19.9 percent stake to offset Mr. Smith’s 34 percent stake. This was to help ensure that the highest bidder won. Dell ended up paying more than 20 percent above what Insight and Mr. Smith had offered.
RAILAMERICA-GENESEE & WYOMING Have a problem with your regulator clearing the deal? The two railroads earn an A for problem-solving. Genesee & Wyoming closed the deal by buying RailAmerica and placing it into a trust pending approval of the Surface Transportation Board.
RALCORP It took two public acquisition offers before ConAgra was able to win over Ralcorp. Between the second and third offers, Ralcorp had consummated a value-creating spinoff of its Post cereals division. It gets an A for value creation.
VENOCO Timothy Marquez, chairman and chief executive of Venoco, a California oil company, was able to acquire his publicly traded company with favorable terms and no financing lined up, without resistance from the board. Mr. Marquez did manage to find his financing and complete the acquisition, and in doing so, imitated Tilman J. Fertitta, who took years to take private his own company, Landry’s Restaurants. (Mr. Fertitta earned an F from me for that effort, too.) The board of Venoco earns an F.
Speaking of Mr. Fertitta, he was also busy this year, with Landry’s buying McCormick & Schmick’s, at a price 5 percent lower than his initial bid, as well as Morton’s Steakhouse.
Happy New Year! Eat fish!