M & A Roundup – Big Investor Draws Line on Prices

Look for institutional investing titans to flex their muscles more often and more aggressively in the m&a market, especially if miffed over allegedly low-ball acquisition prices for companies in their portfolios. Never shrinking violets to begin with, well-heeled investment heavyweights are being further emboldened by a partial victory in the Delaware courts by the State of Wisconsin Investment Board (SWIB), which tried to a bust a deal over what it considered an inadequate price. Investment and corporate governance experts projected more litigation centered on m&a pricing but they also opined that the legal threat could force more pricing discipline on dealmakers on both sides of a transaction. SWIB attacked in Delaware Chancery Court the stock-swap acquisition of Medco Research Inc., Research Triangle, N.C., by King Pharmaceuticals Inc., Bristol, Tenn. The fund ultimately couldn’t stop the deal but in a decision on February 10, the pension fund, with an 11.6% stake in Medco, won a 15-day postponement of the company’s stockholders meeting called to vote on the transaction. However, in a related February 24 ruling, the court rejected SWIB’s request to block the merger of the pharmaceuticals producers altogether and the deal was quickly completed after the delayed shareholders vote the following day. SWIB and Medco said the two-week delay boosted the deal value. Patrick S. McGurn, director of corporate programs at Institutional Shareholder Services, said that institutions have been willing to “go toe to toe with managements” in proxy contests and showdowns at shareholders meetings but that expanding the battlefield to the courts raises the confrontational stakes. “Clearly, we are going to see more trench warfare on m&a,” he stated. “The day is over when a bad deal is better than no deal at all.” Richard Bennett, director of corporate governance at Lens Investment Management, said that while the courts may not be the best place to settle pricing disputes they are “the last resort for people who don’t get justice elsewhere.” Although judges historically have been reluctant to decide on economic issues like business values, Bennett expects more litigation because “this is a legitimate place to pursue justice.” “Obviously, the courts represent a route to pursue, especially in an egregious circumstance,” he said. A “hearing” for the heavy-hitters In the view of Charles Elson, a Stetson University law professor and corporate governance authority, SWIB’s muscle in the King-Medco price hassle signals managements to work more closely with institutional giants to see if they are satisfied with deal values. Institutions may not need a “seat at the table,” he said, but they should at least be given “a hearing” to present their views. “When a large holder gets involved, the judge gives the case more substance,” he said. Any time the plaintiff has more skin in the game it gets listened to more. The individual does not get that kind of reception.” SWIB attacked the aggregate deal value and a collar arrangement that capped the amount of stock Medco shareholders could receive at $34 a share. John Nelson, SWIB’s director of its small-company stock portfolio, said in a January statement that Medco should have been selling in the market above $35 a share, given a run-up in medical technology stocks. The apparent increase in the deal’s value stems from a familiar but complex method for determining final terms of stock swaps. Under the King-Medco agreement, the ultimate share exchange ratio was pegged to the average closing price of King stock for a 20-day period prior to the stockholder meeting. As a result of the court-ordered delay, that span was reset to begin January 25 and end February 22. King stock jumped in December and January but leveled off in February. Nelson noted that the calculations for the later 20-day period removed “a spike” in King’s stock price. After the court’s February 24 decision, Medco calculated the deal value at $32.64 a share compared with $31.45 when the merger agreement was announced last December. McGurn said litigation by SWIB, which has a well-honed reputation as an activist investor, was a natural because the fund’s investment philosophy includes buying larger stakes than many other institutions in investee companies. That puts more money on the line. “It’s not unusual for them to take 10% or even 20% stakes versus 1% to 2% for other institutions,” he noted. “The size of the principal position tends to influence activism. They felt they weren’t getting full value. And they will get into small-cap stocks more than the others will. It pays SWIB to pursue these things, and that is why they are going to the mat on this.” Elson advised merging companies with large institutional investments to respect their clout and the resources they can bring to a messy lawsuit. “This should force the parties to spend some time with the institutions before closing,” he said. “After the deal is announced, it suggests a much more active process. They have to sit down and listen to the large holders.”