Private Equity Pulse Check
February 8, 2008 | Filed Under Deals, Private Equity
The New York Times DealBook scored a coup when it landed Prof. Steven Davidoff to write “The Deal Professor.”
This good professor is certainly prolific, and his entry of this past Monday really caught my eye. Entitled “Is M&A Dead?“, quite a few private equity deals gone sideways are explored, deal point by deal point. A few examples:
* Reasonable Best Efforts Clause: The Alliance Data Services litigation has highlighted the legal ambiguity and uncertain meaning in the requirement a buyer use “best efforts” to obtain regulatory approvals and take other steps to complete a deal.
* Contract Drafting generally. URI/Cerberus highlighted the problems of overly-complex and short-hand drafting. The general distrust in the market has led to overparsing and scrutiny of contract wording for fatal ambiguity.
This is great stuff, and topics such as these allow business-inclined readers of the Times into dip a toe into the icy waters of corporate and contract law without the head-first dive of law school. I would imagine they’d be great in the classroom, taking students into the deals of the day and away (for a moment) from the musty cases of yesteryear.
The best part for me, however, was this closing observation of the state of deal forms in general:
But forms are slow to change. The person who typically keeps them is an overworked senior associate. In the interim and even beyond, I would also suspect that the distrust left by private equity firms has caused lawyers to tend towards overnegotiating language on an ad hoc basis. Risk-averseness can do that.
All I can say is amen.
Prof. Davidoff formerly practiced at Shearman & Sterling and Freshfields Bruckhaus Deringer, and now teaches law at my alma mater.
Hedge Funds and In-House Counsel
April 20, 2007 | Filed Under Private Equity, Law Firm Trends
The New York Times profiles an increase in deal flow for law firms related to private equity.
Also noted is the need for GCs and corporate counsel with these new and growing companies:
The “demand for general counsel is multiples higher than it was only three or four years ago,” said Alan D. Hilliker, a partner with the executive search firm Egon Zander in New York. Brian Davis, a recruiter with Major, Lindsey & Africa in New York, said, “Until three years ago, we never did a hedge fund search, and now we have had dozens and dozens.”
The draw is both the work and the compensation, which, for senior associates, typically ranges from $400,000 to $600,000 at hedge funds with $2 billion to $3 billion under management, according to Laurie Becker, the president of E. P. Dine, an executive search firm in New York. Partners, she added, can command even more.
Mr. Davis said: “The hedge fund business is diversifying, and they feel like they need lawyers for all the businesses they’re getting into. Funds are looking for transactional lawyers to help to do the deals, and there’s also a big demand for compliance lawyers.”
The liquidity in these markets is touching a lot of people right now. It is one thing to buy businesses; it is another to build them and run them right.
Private Equity and Regulation
April 9, 2007 | Filed Under Private Equity, Regulation
All big gifts come with some strings attached.
Late last week, TXU Energy was forced to disavow a regulatory filing due to objections from private equity buyers Kohlberg Kravis Roberts and Texas Pacific.
TXU gained notoriety this year when the largest-ever private equity buyout ($32 billion plus) was announced. Recently, TXU received a notice from the Texas Public Utility Commission of a proposed a $210 million penalty over allegations of manipulation of wholesale power prices in the summer of 2005.
The company made a filing last week objecting to the penalty that contained a statement that was interpreted that TXU might shut down some power plants if the penalty is upheld. KKR and Texas Pacific were not amused, said they had not been consulted about the filing and disagreed with it (their statement is here).
TXU CEO John Wilder acknowledged that the situation had been mishandled, although TXU denies any actual intent to shut down power plants.
If you had heard that a problem developed between a private equity buyer and a large regulated business, you’d think that the financiers were pushing too hard and were unsophisticated in the nuance of the utility business.
And in this case you’d be wrong. Not only do KKR and Texas Pacific apparently “get it,” they also took the lead when the deal was announced to agree to build fewer new coal plants, gaining support from environmental groups. The closing of the firms’ statement reads:
“We don’t own the company. The more quickly this transaction can be completed, the sooner that TXU can set a different course and a new direction, one that encourages open and productive dialogue with regulators, elected officials and other stakeholders.”
The very least that the promise of $32 billion should get you is a look at a draft of a regulatory filing…
Shareholders: The Gadfly Becomes a Raptor
January 8, 2007 | Filed Under Private Equity, Governance
Last week we noted how governance expectations are changing with the resignation of Home Depot CEO Robert Nardelli. A prime reason was the growing pressure from an institutional shareholder who wouldn’t take no for an answer.
Now we see a further example of how things are changing. AP’s Rachel Beck reports that the gadfly-like Evelyn Davis may be supplanted by a more potentially raptor-like species. The example given is one Ken Bertsch:
Last month, he was named an executive director and head of corporate governance at Morgan Stanley Investment Management, which has $448 billion in assets under management. His move may signal the mutual funds managed by the investment firm are planning a more aggressive stance on governance issues - a big change given that mutual funds almost always passively allow management to govern the way they want.
That’s probably 448 million reasons why a phone call from Mr. Bertsch gets returned promptly.
To a significant extent, many public companies have enjoyed an almost free pass when it comes to shareholder input over the years. Mutual funds have been involved to some extent; maybe now they will get more active in corporate performance and governance matters. Why? Competition for investors from private equity and hedge funds may be part of the answer.
These newer money managers are not as patient, because their investors expect high returns for the significant fees and upside participation opportunities that these funds enjoy.
All this is a reminder to public company managers that they are stewards, not owners.
This increasing pressure may also tempt more companies to go private, as this New York Times article illustrates today. It also notes that we ought not to feel too sorry for Mr. Nardelli. His phone is already ringing from private equity headhunters.
And for visual types out there; here’s a view of what it looks like when a Raptor is locked on to your company (thanks to Lockheed Martin).
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