Year-end is a time for professors to grade. In a similar spirit, I end this year by highlighting the lowlights of the year’s deal making. These are, by category, the Deal Professor dropouts, the deal makers who deserve an F.
SHAREHOLDER RIGHTS
Cedar Fair failed hands down. After missing earnings estimates and suspending its dividend, Cedar Fair, an amusement park operator, announced a $2.4 billion sale in December 2009 to the private equity firm Apollo Global Management. Cedar Fair is based in Sandusky, Ohio, and has a large local shareholder base.
These shareholders formed a core group protesting the low price and management’s participation in the buyout. Cedar Fair responded by stonewalling its shareholders and postponing a vote on the deal at the last minute. Shareholders then held their own tea party revolt, convening an alternative shareholder meeting.
The sale was canceled, Cedar Fair’s chief executive announced his retirement, and Cedar Fair is still grappling with a hedge fund activist shareholder. Deal makers should remember that shareholders do not react kindly when management tries to manipulate the sale process, especially when they can see management in the local coffee shop.
BIDDING TACTICS
It was the year where Bruce Wasserstein’s “Dare to Be Great” speech, egging on bidders to pay a full price, was turned on its head. Bidders, including Alimentation Couche-Tard for Casey’s General Stores and Hertz Global for Dollar Thrifty, repeatedly refused to raise offers and walked instead.
In this vein and for the second year in a row an F goes to Agrium for its unsuccessful hostile offer for CF Industries. After missing the deadline to nominate directors to CF’s board in 2009, Agrium failed to bid forcefully for CF in 2010 after waiting a year and arranging an ingenuous solution to obtain antitrust clearance. Instead, the company dropped its bid just like everyone thought it would.
COMMUNICATIONS
In this perennially competitive category for bad grades, the F this year goes to Dynegy. The energy company threatened its shareholders with possible bankruptcy if a sale to the Blackstone Group was not completed at $4.50 a share. The threat made the company appear heavy-handed with its shareholders and was ill conceived, because only a month after the Blackstone sale was canceled, the company agreed to sell itself to Carl C. Icahn for $5.50 a share. This latest sale is also being challenged by one of Dynegy’s largest shareholders.
MANAGEMENT BUYOUTS
Robert X. Sillerman, former chief executive of CKX, owner of the “American Idol” brand, receives an F. This year Mr. Sillerman made his second effort to acquire CKX, a company in which he owns 21 percent. As with his last proposal, this one was half-baked, lacking financing and was less than half the value of his initial offer in 2007. Mr. Sillerman withdrew his latest proposal in October, leaving CKX adrift without a plan.
Others deserving an F are Tilman Fertitta, chief executive of Landry’s, for his second buyout effort of the restaurant company.
J. Crew’s chief executive, Millard S. Drexler, and the private equity firms TPG and Leonard Green also receive an F for appearing to manipulate the J. Crew sale process unduly in their favor. Among other maneuvers, these buyers dropped their offer at the last minute, leaving the impression they cowed the J. Crew special committee of independent directors into a sale.
CORPORATE LAW
The most esteemed corporate law court in the land, that of Delaware, unfortunately gets an F for its opinion in the Airgas case. The Delaware Supreme Court’s decision overruled shareholders who had voted for Airgas to hold its next meeting of directors in January 2011. The opinion ignored prior law on the issue, and instead appeared to be a political statement by the judges, who endorsed the board’s central role over shareholders in resisting hostile takeovers.
ACQUISITION EFFORTS
Charles River Laboratories International’s effort to buy WuXi PharmaTech was particularly disastrous. Charles River again highlighted the oft-made point that poorly performing companies shouldn’t try to climb their way to profit through risky, game-changing acquisitions. Charles River succeeded only in bringing the activist hedge funds out to deep-six the deal. Another acquirer meriting an F is General Motors for buying the subprime auto-finance company AmeriCredit at a high valuation. G.M. appears to be repeating the mistakes of its past by focusing on financing to bolster sales instead of simply making cars.
FINANCING
The first F of 2010 went to the South Korean company Arigene in connection with its failed takeover of Trimeris. Upon announcement of the deal, Arigene’s stock price fell almost 75 percent on the Korean stock exchange. Arigene was unable to complete an equity offering necessary to finance this acquisition.
Unfortunately, Arigene did not negotiate an ability to terminate its agreement for a failure to secure this financing. Early in 2010 Trimeris recognized that suing a Korean company with no assets in the United States might be a fruitless endeavor and terminated the deal.
CROSS-BORDER TRANSACTIONS
There were two significant F’s this year. Prudential of Britain receives a failing grade for its failure to correctly read its shareholders before agreeing to acquire American International Group’s Asian business, AIA, in a $35.5 billion deal. Prudential’s new chief executive violated a cardinal rule of deal making: Don’t make big deals in your first years.
BHP-Billiton and the Canadian government also receive an F. BHP Billiton receives this low grade for spending more than $800 million on failed takeover efforts for Rio Tinto and the Potash Corporation of Saskatchewan. Canada receives the F for rejecting BHP Billiton’s Potash bid for blatantly political reasons.
INVESTMENT BANKERS
Frank Quattrone’s new investment bank, Qatalyst, receives an F for the fairness opinion and valuation it provided to 3Par in connection with Dell’s offer to acquire the company at $18 dollar a share. Hewlett-Packard subsequently paid $33 a share for the company, almost double Dell’s initial offer.
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