Ronald Coase (1959, 1960)  insightfully noted that with well-defined property rights, resources flow to their highest-valued use. In a recent paper, we apply this view of property rights to the corporate takeover market in the United States. Observers such as Jensen (1993) argue that the major corporate-control activity beginning in the 1980s in the United States emanated from political, economic, and technological shocks that upset the existing structure of American industry. Indeed, innovations in junk bond financing and the relaxation of antitrust laws made large firms targets of corporate takeovers for the first time. In our analysis, … Read more
Antitrust merger enforcement historically has focused on horizontal mergers — consolidation of two firms that compete directly in the same space. This is especially true in the U.S., where antitrust authorities have challenged few vertical mergers — those of a firm with one of its customers or suppliers — and are even less prone to scrutinize conglomerate mergers that marry complementary assets, or transactions that may affect innovation competition that isn’t tied to specific products or markets.
The European Union’s antitrust regulator, the European Commission, has been more apt to examine vertical issues, conglomerate effects and innovation competition, pushing the … Read more
A recent spate of appraisal decisions signals that the Delaware courts will be skeptical of claims that the “fair value” of a company’s stock, as determined in a judicial proceeding brought by a dissenter from the merger, will be higher than the price paid in the transaction. To the contrary, in the context of strategic transactions—which may include synergy value to which dissenting stockholders are not entitled under the appraisal statute—Delaware has made clear that the appraised value may well be less than the deal price.
These decisions follow the important and welcome rulings of the Delaware Supreme Court in … Read more
In 2015, Hewlett Packard acquired Aruba for a negotiated price of $24.67 per share, or about $2.8 billion. Several stockholders sought appraisal. On February 15, the Delaware Court of Chancery found that, for purposes of appraisal, the fair value of the Aruba shares equaled the 30-day average unaffected market price of the shares, prior to announcement of the transaction, which was $17.13, about 30% less than the negotiated price.
The court’s reasoning was driven largely by what the court believed to be directions from the Delaware Supreme Court’s decisions arising from the earlier DFC and Dell acquisitions, including assumptions regarding … Read more
In U.S. and global M&A activity for January 2018, total deal volume by dollar value decreased, while the total number of deals increased. In the U.S., deal volume decreased by 29.3% to $170.57 billion, while the number of deals increased by 42.6% to 884. Globally, deal volume decreased by 31.2% to $324.45 billion, while the number of deals increased by 9.9% to 3,118. The sharp decreases in deal volumes are likely less reflective of any dramatic decline in deal flow, but rather due to the 12-month highs set in December 2017, especially given that January 2018 marked the third-highest global … Read more
The trend of increased securities class action filings in federal courts continued from 2016 to 2017. Federal court filings of class actions related to M&A transactions again contributed to the increase. Foreign issuers remained frequent targets of federal securities class actions.
In 2017, the federal courts issued a number of important securities law decisions. Addressing the application of statutory time-bars applicable to securities law violations, the Supreme Court ruled in CalPERS that the Securities Act’s repose period is not subject to class action tolling and held in Kokesh that disgorgement in SEC proceedings is subject to the … Read more
Evidence shows shareholders’ wealth is protected from self-serving managers, who are often motivated to divert corporate resources, by both internal and external corporate governance mechanisms (Jensen and Meckling, 1976; Fama, 1980; Fama and Jensen, 1983). However, due to high monitoring costs, retail shareholders – unlike institutional investors – cannot prevent potential agency problems. Therefore, filing a securities class action is one of their few ex-post options for recovering loss of wealth (Gillian, 2006). Empirical evidence on agent-shareholder conflict indicates shareholders have used class action lawsuits to express dissatisfaction or to discipline inefficient management.
In 1995, the U.S. Congress passed the … Read more
In an economic environment where technological disruption and regulatory upheaval are the norm, understanding innovation processes is essential to aggregate economic growth and individual companies’ survival. As a result, how innovations are produced in a wide range of markets has attracted a massive amount of scholarly and popular attention. Yet, few have focused upon how the legal infrastructure, to use Gillian Hadfield’s term, underlying those innovations develops over time to meet new market needs. We know more about how our iPhones were developed than how market institutions evolved to make the iPhone possible.
In a new … Read more
2017 was an active year for M&A, though year-end results generally declined relative to 2016. Global deal volume for the year was $3.57 trillion and U.S. deal volume was $1.48 trillion (down 3.2% and 10.5%, respectively, from 2016). Sponsor-related deal volume for the year was $814.35 billion globally and $402.15 billion in the U.S. (up 5.0% and 0.6%, respectively, from 2016). Strategic deal volume was $2.75 trillion globally and $1.08 trillion in the U.S. (down 5.4% and 14.0%, respectively, from 2016). Figure 1. The average value of U.S. public mergers decreased by 21.7% from 2016 levels (from $4.11 billion … Read more
The credit bull market charged through 2017, with many terrific outcomes for opportunistic borrowers. But even in the best of times, borrowers and their advisors should remain nimble and thoughtful, and 2018 brings much to consider, including the impact on the acquisition financing markets of the most significant business tax reform in a generation, and the continued rise of the net-short debt investor.
2017: A Good Year to Be a Borrower
2017 was another banner year for borrowers. Corporate debt yields were low, gross issuance of syndicated loans and investment grade bonds each hit new records, and high-yield bond issuance, … Read more
The process of determining whether big mergers comply with antitrust laws is careful and intensive. The Federal Trade Commission and the Department of Justice reported that in 2011 they examined in detail 40 percent, and initiated second request investigations in 15 percent, of all deals over $1 billion. For example, after an extensive investigation that year, the Department of Justice blocked AT&T’s $39 billion acquisition of T-Mobile USA. AT&T had to pay a $4 billion reverse break fee, and its stock price dropped significantly.
The case shows how costly the antitrust review process can be for merging ﬁrms. Some … Read more
Global M&A accelerated in the fourth quarter of 2017, driven in part by tech expansion and strong economies in several key markets, and there are many signals pointing to a continued strong pace of transactions, including in the U.S. Overall M&A volume in 2017 continued to be robust, reaching $3.6 trillion, approximately 35% of which involved cross-border deals. Four of the ten largest non-hostile deals announced in 2017 were cross-border transactions.
U.S. targets accounted for approximately $1.4 trillion (approximately 40%) of last year’s deal volume, with approximately 18% of U.S. deals involving non-U.S. acquirors. German, French, Canadian, Japanese and U.K. … Read more
A number of companies have recently gone public with dual-class share structures, allowing founders to retain control. Most of these companies’ articles of incorporation contain a provision that requires any merger consideration to be distributed pro rata among all shareholders. These equal treatment clauses, in effect, give away founders’ control premium to minority shareholders. On first glance, these clauses seem to provide some protection to minority shareholders, who know that, in the event of a change-of-control, they will be compensated at the same rate as founders. But, as my recent paper explores, there are agency costs lurking beneath the surface … Read more
In a new paper, “Worthless Companies,” I explain how companies with worthless assets can have substantial equity value on efficient markets and debt that trades near par, so long as an irrational bidder may acquire the company.
Consider a firm with a market value of more than $1 billion. The firm has sales under $1 billion and has never been profitable. The firm describes its mission as, “to make incredible home cooking accessible to everyone,” and its business is to sell ready-to-prepare meals. Or consider a firm with a market value of more than $8 billion with revenues of just … Read more
On December 14, the Delaware Supreme Court issued its much-anticipated opinion in the appraisal proceeding from the 2013 acquisition of Dell Inc. Along with August’s DFC Global opinion, the court’s pronouncements in Dell will have lasting effects on the way that appraisal valuations play out for years to come. In particular, the case(s) will have a durable impact on (a) how courts weigh competing financial methodologies for assessing fair value, (b) how to scrutinize the bidding process and procedures, and (c) whether courts should distinguish among strategic bidders, financial bidders, and management bidders in making fair-value assessments.
The … Read more
In U.S. and global M&A activity for November 2017, total deal volume by dollar value increased to a 12-month high, while the total number of deals decreased to a 12-month low. In the U.S., deal volume increased by 179.0% to $236.40 billion while the number of deals decreased by 15.6% to 712. Globally, deal volume increased by 43.7% to $390.00 billion while the number of deals decreased by 12.9% to 2,839. These large increases in deal volume were, however, driven by one transaction in particular, Broadcom Ltd.’s $130 billion (including assumed debt) unsolicited offer for Qualcomm, Inc. If we excluded … Read more
Over the past two years, the deal litigation landscape has changed dramatically. In early 2016, the Delaware Court of Chancery announced a new rule for evaluating disclosure-based settlements in deal litigation — the “plainly material” standard — and expressed a preference for disclosure claims either to be litigated or mooted, rather than settled. In re Trulia, Inc. Stockholder Litigation, C.A. No. 10020-CB (Del. Ch. Jan. 22, 2016). Trulia created a ripple effect across deal litigation in Delaware and beyond, with some interesting, and perhaps unforeseen, results.1
Disclosure-based settlements before the Court of Chancery are all but extinct. Litigation … Read more
Post-merger appraisal rights have attracted more than their fair share of controversy in recent years. When activated, appraisal rights give the shareholders of a Delaware target corporation the option to eschew the consideration of the proposed deal, pursuing instead a judicial determination of the “fair value” of their shares. By statutory requirement, this judicially-crafted valuation imposes no explicit burden of proof on the parties, and it must be based on all relevant factors (excluding buyer side synergies).
Although historically a sleepy corner of mergers and acquisitions litigation, appraisal proceedings have awoken dramatically in the last decade. An important … Read more
There were more than $1 trillion worth of cross-border mergers and acquisitions in 2016, according to the United Nations Conference on Trade and Development, making them a prominent form of foreign direct investment and an important way for multinational entities (MNEs) to invest and restructure. When MNEs from various countries bid for a foreign target, each country’s system for taxing foreign dividends and capital gains affects deal prices and may determine who wins the bid.
A big question in the theoretical tax literature on capital ownership neutrality (CON) has been how to neutrally tax M&A (e.g., Desai and Hines (2003), … Read more
Following the Great Recession, low interest rates coupled with high levels of cash reserves propelled companies to grow through mergers and acquisitions rather than organically through capital investments. The year 2015 saw a record number of M&A deals totaling $4.9 trillion.
Firms merge for a variety of sound reasons, such as to create synergies, to consolidate in response to industry shocks like deregulation, to deal with increased competition, or to take advantage of developments in how acquisitions are financed. But companies also merge for more questionable reasons: because an overconfident chief executive overestimates a target firm’s value or seeks to … Read more