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Deal professionals considered crises past and present Friday morning at the Tulane Corporate Law Institute in New Orleans. At a panel marking the conference's 20th anniversary, Martin Lipton and Joe Perella offered a history of the last generation of dealmaking, one punctured every decade or so by meltdowns in one M&A-related market or other.
Perella drew a key distinction between the current crisis and earlier ones such as the collapse of Drexel Burnham Lambert in the late 1980s or that of the dot-com bubble at the beginning of this decade. In those situations, he said, Wall Streeters could "brush the dust off their shoulders" and carry on with their business. But this time, he added, "The financial services industry is at the vortex of the storm." Lipton and Perella entertained the crowd of more than 250 lawyers with war stories from their M&A careers. Perella told of US Steel Corp.'s response to angry noises from Carl Icahn in the late 1980s. Icahn argued the company was worth $30 a share, which the target CEO said wildly overvalued the company. Perella advised the CEO to call Icahn's bluff, which he did. When the CEO suggested Icahn sign a confidentiality agreement and begin due diligence on the company, Perella said, Icahn was taken aback, and the agreement took four months to negotiate -- an exceptionally long time. Toward the end of the talks, Ivan Boesky was arrested on insider trading charges, causing uncertainty in the M&A market. Icahn called Perella and said, "I'm highly confident that I'm less confident than I was yesterday," a reference to the legendary "highly confident" letters with which many hostile bids were then backed by Michael Milken. Then as now, when the debt markets seize up, all bets are off. Lipton recounted his invention of the poison pill in 1982. The founding partner of Wachtell, Lipton, Rosen & Katz had been pondering how to defend companies from hostile takeover bids as he was working on a convertible debt transaction when he wondered why he couldn't use a similar structure as a defense, since the convertibility feature was preserved in any change of control of its issuer. Like Perella, Lipton addressed the current financial crisis, which the lawyer said "stems from the invention of junk bonds and the ability to divide a capital structure into more layers. This gave rise to the slicing and dicing of the capital structure of companies throughout the world." As a result, the financial markets have turned into an incomprehensible "melange of securities." While Lipton and Perella offered a sweeping vision of the M&A marketplace, the morning's second panel dealt with the challenges of recent months. Delaware Vice Chancellor Leo E. Strine Jr. posed the central question by asking how deal terms are developing in the wake of the LBO bust and the collapsed deals that have marked it. Those deals have collapsed in large part because PE buyers have been able to walk with little or no pain, while sellers have been unable to force the buyers to complete the transactions. The judge wondered if deals in which one company agrees to buy another would "descend in deal certainty to the level provided by PE buyers." The panel wasn't able to provide a answer to the question, in part because of its deceptive complexity. Not only must parties negotiate so-called "material adverse effects" clauses that specify under what conditions a prospective buyer may walk, they also must determine whether a seller will have the right to sue suddenly reluctant buyer for specific performance and, in buyouts, how to harmonize the merger agreement with various lending documents, which are usually governed by different law and specify a different legal forum. William Savitt, a partner at Wachtell Lipton, noted that many sellers still aren't demanding specific performance, which may reflect their recognition that "option" contracts, those in which a buyer in essence has an option on the target rather than a firm obligation to buy it, are of value to sellers. Savitt also noted that contractual indeterminacy can be valuable in allowing parties to reach a deal -- a counterintuitive position, but one argued forcefully by Richard Posner, the founding father of law and economics and a longtime 7th Circuit judge. Summarizing the apparent intractability of the problem, Strine quipped at the end of the session, "Wouldn't the solution be to scrape up one deal and spend the year getting the terms right?" - David Marcus See Dealscape's additional coverage of the Tulane Corporate Law Institute in New Orleans Categories Deal Video
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