In the first financial quarter of 2008, a steady trend in M&A activity is patent. The weak dollar, the economic slowdown, banks’ lack of liquidity, or the motivation to add shareholder value are all viable reasons for the trend in M&A activity. Some corporations, in 2007, projected M&A to remain strong until, “private-equity buyers pushed up target prices too high and economic growth slow[ed].” [1] A New York investment bank for media and information industries tracked buyouts in the media world for the first quarter of 2008 and reported 202 transactions that had a total value of $13.4 billion. [2] This figure is in no way a cap on the total dollar value of all M&A activity in the first quarter since the $13.4 billion represents only M&A activity in the media and information industries.
M&A Trend In the Second Quarter
The second quarter of 2008 has seen some great potential in M&A activity. For example, a three-week deadline to Yahoo! given by U.S. giant software maker, Microsoft could result in the largest acquisition so far in the technology industry. [3] Microsoft believes that its proposal, which initially represented a 62 percent above Yahoo!’s share premium is the best step for both companies as well as a great way to add shareholder value. [4]
Another interesting M&A development is Discover Financial Services LLC’s (DFS) agreement to acquire Diners Club International Ltd, a provider of credit card services from Citigroup Inc. for $165 million. [5] DFS, an Illinois corporation, is a credit card issuer and an electronic payment services company. Discover’s CEO said he expects the deal to eventually boost dollar volume and increase payment services segment’s revenue by 60 percent. [6] The deal also comes as Discover hopes to increase their presence abroad and among big corporate spenders. [7] This deal represents acute business savvy because Discover will not only increase its revenue and market share but it will also create synergies that did not exist as an independent company.
As initially stated herein, M&A activity can be attributed to liquidation problems within a bank. Although Bear Sterns CEO Alan Schwartz attempted to dispel any notion that the company had any such problem, the financial facts spoke in the contrary. It was no surprise that a few days after, JP Morgan Chase acquired Bear Sterns for a mere $2 a share, representing less than one-tenth the firm’s market price. [8] Liquidity problems can significantly impair a company’s operation to the extent that it will make business sense for that company to want to become a target-company. The Bear Sterns problem is attributed to the huge financial investment losses linked to mortgage-backed securities. [9] However, that issue is beyond the scope of this article.
Legal Implications
As intricate as most, if not all, M&A deals are; corporate executives are vested with a fiduciary obligation to make sure that their proposed and/or accepted deals are in the best interest of the company. In other words, the law goes so far enough as to impose on each corporate executive a duty of good faith and fair dealing based upon a reasonably informed judgment. [10]
According to The Wall Street Transcript, 70% and 80% of merger and acquisition deals are successful, not failing to realize the synergies between companies. However, between 1998 and 2001, 87 M&A deals lost about $1 billion of shareholder wealth. The difference between the success rate and the lost value has been attributed to due diligence. [11] Due diligence involves the performance of an investigation of a business with a certain standard of care. [12] Due diligence will help reduce M&A failures because the investigation of a business will ultimately determine whether there are in fact synergies to be realized from a merger.
M&A attorneys need to make sure that the parties making the decisions are disinterested parties and do not stand to personally gain from the transaction. Despite the outcome of the transaction, the corporate board should be able to defend their decision with facts and convincing evidence to bolster their business decision. The intricacies of an M&A transaction requires utmost consideration of the parties’ interests as well taking steps within the confines of the law. [13]
Conclusion
Despite signals of an economic recession, a tsunami of mergers and acquisitions is cascading over the landscape of Corporate America. Investment bankers and corporate attorneys are enjoying the fruits of their career as the aggregate dollar value of these M&A deals continues to increase. It is indeed true that many viable reasons exist for a company to either merge or seek acquisition and that depending on the economic signals are pressured to make such decisions. However, corporate executives should put the interest of their shareholders first, proceed with caution, maximize shareholder wealth within the nexus of business and law, and solicit the assistance of attorneys. Such meticulous actions will go a long wasy in preventing frivolous law suits arising out of the breach of one's fiduciary duty.
Resources
[1] Duke University, Office of News & Communication, Survey: CFO Optimism Falls; Capital Spending and Hiring to Slow, June 7, 2007, http://www.dukenews.duke.edu/2007/06/cfo_survey._print.ht.
[2] The Jordan, Edmiston Group, Inc, M&A Outlook and Valuations (Nov. 2007), http://www.jegi.com/files/docs/OutsellPresentation2007.pdf.
[3] Ari Levy, Microsoft Offers to Buy Yahoo for $44.6 Billion, Feb. 9. 2008, http://www.bloomberg.com/apps/news?pid=20601103&sid=aLsamJL6qUQY&refer=news.
[4] Microsoft and Yahoo: Does It Make Sense (and Will It Work)?, Knowledge@Wharton, Feb. 10. 2008, http://knowledge.wharton.upenn.edu/article.cfm;jsessionid=9a307da386666a22e5d5?articleid=1895.
[5] CNN MONEY, http://money.cnn.com/news/deals/mergers/reports/1167190020.html (last visited Apr. 9, 2008).
[6] Stephen Bernard, Discover buying Diners Club from Citi, Apr. 7, 2008, http://money.cnn.com/news/newsfeeds/articles/newstex/AFX-0013-24327734.htm.
[7] Id.
[8] Andrew Ross Sorkin, JP Morgan Pays $2 a Share for Bear Stearns, N.Y. Times, Mar. 17, 2008, http://www.nytimes.com/2008/03/17/business/17bear.html?_r=1.
[9] Id.
[10] California Business Mergers & Acquisitions Law, http://www.weblocator.com/attorney/ca/law/b12.html (last visited Apr. 9, 2008).
[11] The Wall Street Transcript, http://www.twst.com/ (last visited Apr. 9, 2008).
[12] Id.
[13] California Business Mergers & Acquisitions Law, supra note 10.