Just about every corner of M&A suffered a serious slowdown in the first half of the year. It was slow in Houston, where three related-party transactions were the only oil and gas deals worth more than $900 million. It was slow in Silicon Valley, where Sun Microsystems Inc.'s agreement to sell to Oracle Corp. for $7.4 billion and EMC Corp.'s purchase of Data Domain Inc. for $2.1 billion were the only technology deals worth more than $2 billion.
And private equity remained in the doldrums, with a mere $9.4 billion of volume in the first six months of 2009, just a quarter of the activity in the same period last year, let alone the go-go years in the middle of the decade.
The financial institutions sector was also slow, with only two large deals to speak of: the $13.9 billion sale of IndyMac Federal Bank FSB to a consortium of private investors and Barclays plc's $13.5 billion sale of its mutual fund division to BlackRock Inc.The only exception to the M&A malaise was in healthcare, which had three mammoth mergers early this year and several smaller transactions. Pfizer Inc. agreed to plunk down $68 billion in cash and stock for Wyeth, while Merck & Co. promised to pay $41.1 billion in cash and stock for Schering-Plough Corp. and Genentech Inc. accepted a $42 billion offer from Roche Holding Ltd. for the 44% of the biotech company's float that the Swiss pharma giant didn't already own.
That M&A slowed during the first half of the year is no surprise, given the uncertainty and outright fear that permeated the economy when 2009 began. The pharma sector featured significant consolidation in 2008, but the events of last fall sent potential bidders in most other sectors to the sidelines, where they have generally stayed. Tight financing markets have chilled private equity activity and cooled the ardor of many acquirers, who would prefer to pay cash rather than use their beaten-down stock as acquisition currency, while targets have often refused to accept offers that value them at a fraction of what the stock market did before last September.
As if that dynamic weren't enough of a drag on M&A, uncertainty about the Obama administration's direction in healthcare, energy and antitrust has further discouraged would-be buyers.
All of this has contributed to a painfully steep drop in M&A and makes any conclusions based upon the first half's deals highly tentative.
Financing risk has become a central concern in most cash deals, but no paradigm has emerged as to how buyers and sellers will allocate that risk. Pfizer and Wyeth agreed to a clause that enables the buyer to walk from the deal upon payment of a 6% breakup fee if it can't raise the $22.5 billion in debt that it needs to fund the transaction, a feature that Merck and Schering-Plough adopted in their agreement. Merck must raise $9.8 billion to fund its acquisition.
But credit markets have steadily eased over the year, reducing the precedential value of those two merger agreements, which came in an industry whose generous cash flows eased the funding concerns of the companies and the banks financing them. Nevertheless, as of early August, looser credit had done little to spur M&A activity.
"Banks come into meetings saying that the high-yield window is open, but, outside the investment-grade world, they're often reluctant to meet the need for commitments for a bridge loan and a revolving loan," says Ethan Klingsberg, a partner at Cleary Gottlieb Steen & Hamilton LLP in New York.
With financing still a challenge and due diligence and contract negotiations taking longer than they would in a normal market, let alone a frothy one, lawyers have ample time to craft individualized solutions rather than tweak familiar forms. They also have the leisure to follow the long-running debate over proxy access, which Securities and Exchange Commission Chairwoman Mary Schapiro is intent on bringing to fruition this fall.
But the agency has yet to issue definitive rules on the topic, and lawyers are split on the importance of increased shareholder access to the corporate proxy. Some argue that it would allow dissidents to hassle companies unnecessarily in addition to being an unwarranted incursion into state law. Others say the impact would be marginal, since a dissident serious about winning would still have to invest time and money in finding credible candidates to nominate, hiring lawyers and making presentations to shareholders and proxy advisory firms.
The slow market notwithstanding, the Delaware courts had their share of activity during the first half. The most prominent matter before the Court of Chancery settled on the eve of a trial scheduled to start on March 9 as Dow Chemical Co. completed its $18 billion acquisition of Rohm and Haas Co. rather than attempt to persuade Chancellor William B. Chandler III to release it from a deal that it signed in July 2008, two months before Lehman Brothers Holdings Inc. collapsed. The Haas family trusts, which owned about a third of Haas' stock, and hedge fund Paulson & Co., which itself accumulated almost 10%, facilitated the compromise by buying a combined $2.5 billion of preferred stock from Dow. And Citigroup Inc., Merrill Lynch & Co. and Morgan Stanley, the three banks financing the deal, did their part by amending their credit agreement with Dow to give the acquirer more breathing room.
Also in March, the Delaware Supreme Court reversed on Vice Chancellor John Noble's puzzling decision in Lyondell Chemical Corp. v. Ryan.
The judge refused to dismiss a lawsuit that claimed Lyondell's directors violated their duty of loyalty by approving a $13 billion cash offer from Basell AF in July 2007, which came at a 45% premium to Lyondell's share price on the day before news of Basell's interest became public.
By the time Noble issued his ruling on Aug. 1, 2008, Hexion Specialty Chemicals Inc. was trying to walk from its agreement to buy Huntsman Corp., which had initially agreed to sell to Basell, and the high price of oil had caused a massive decline in the stocks of many chemical companies and helped push Basell's North American unit into Chapter 11 in January. Writing for a unanimous Supreme Court, Justice Carolyn Berger savaged Noble's opinion in a 20-page decision that was "a sweeping rejection of attempts to impose personal liability on directors for their actions in responding to acquisition proposals, and a reaffirmation of the board's wide discretion in managing a sales process," commented Wachtell, Lipton, Rosen & Katz partners Theodore Mirvis, Paul Rowe and David Katz in a memorandum to clients.
The most noteworthy opinion to issue from Chancery was also one of the last written by Vice Chancellor Stephen Lamb, who stepped down from the court after his 12-year term expired July 28 to join Paul, Weiss, Rifkind, Wharton & Garrison LLP. It came in a case arising from a proxy fight at Amylin Pharmaceuticals Inc., and the key question was whether a company's "board may approve a slate of nominees without endorsing them" and thus avoid triggering the change-in-control provisions in its debt while opposing a dissident slate -- provisions that often emerge not only in that circumstance, but on a company's sale. Relying on standard legal definitions, Lamb held a company may do so.
He went even further in dicta. Even if a target board tried to use a poison put as a defense in a proxy contest, Lamb suggested that a Delaware court might void such a move. Not only would a judge "want at a minimum to see evidence that the board believed in good faith that, in accepting such a provision, it was obtaining in return extraordinarily valuable economic benefits for the corporation that would otherwise not be available to it," Lamb wrote, but he would also "have to closely consider the degree to which such a provision might be unenforceable as against public policy." The number of companies that have debt with such provisions and the vigor with which creditors protect their rights may mean that the Delaware courts will face the issue again in the context of a takeover rather than a proxy fight.
Lamb's departure is one of several sources of judicial intrigue in Delaware. Chandler signed on for another term as chancellor, though word in Wilmington is that he will likely serve only a few years, perhaps to be succeeded by Vice Chancellor Leo E. Strine, whose term is up next year. In addition, the Obama administration has to fill a vacant seat on the U.S. District Court for Delaware. Andre Bouchard, a name partner at Bouchard, Margules & Friedlander PA in Wilmington, seems to be the leading candidate for the seat, while his partner Joel Friedlander is among those vying for Lamb's chair. The early favorite for that spot is J. Travis Laster of Abrams & Laster LLP in Wilmington.