Friday, April 28, 2006

Cross-Border Fun and Games

I spent the last week or so on vacation in Rome - a great place for unwinding and gaining perspective. During my trip I stayed clear of e-mail (and certainly blogging), but I did watch enough of Sky News to see reports of the "merger of equals" (i.e., takeover) between Spain's Abertis and Italy's Autostrade. The new company will be the world's largest operator of toll roads and airports. It will also be headquartered in Spain.

Predictably enough, Italy's incoming Prodi government was all over the deal, questioning whether the Iberian-centric company would have the proper focus on creating new infrastructure in Italy. Putting aside the utter speciousness of that argument for a moment, I am struck by the continued resistance, in our age of globalization, to cross-border deals. And it's not just leftist coalition governments in Italy: In the last year here in the U.S., we've seen major deals blown on even flimsier grounds - the recent Dubai ports debacle and the attempted takeout of Unocal by China's Cnooc. In all cases the putative buyers are major global companies, traded on global exchanges, answerable to investors spread around the world, and often managed by teams hailing far from the acquiror's corporate HQ. Why the hyper-focus on the national roots of the corporate buyer? Listen to some folks talk and you'd think these guys are the modern equivalent of Viking raiders, lighting our thatched roofs on fire and brutalizing the people.

Governments obviously have a right - and a duty - to vett foreign purchasers and make sure deals don't compromise national security. I can even be somewhat sympathetic to government objections to deals that explicitly harm domestic competitiveness or cost a large number of jobs. There are certain higher bars that a foreign acquiror should legitimately expect to have to clear. However, it seems that you've also got to spend a lot of time sniffing out the more extreme arguments, play devil's advocate like a flag-waver, and in the end make a sober assessment of whether your deal can make it past the mob.

Tuesday, April 18, 2006


Sometimes it just doesn't pay to be a tough negotiator - witness Qualcomm's announcement Monday that it is entering into a consent decree with DOJ and paying $1.8M to settle claims of gun jumping in its acquisition of Flarion ("gun jumping" being where the acquiror starts getting a bit too intimate with the seller's business ops before the deal has closed).

While a buyer can't run the acquired business before the deal closes, there's always a healthy negotiation over the amount of control the buyer will exert (via operating covenants written into the acquisition agreement) during the pre-closing period. These covenants are typically designed to ensure that, to the extent possible, the acquired business continues to operate in a straight-and-narrow course until closing. Themes for operating covenants include the permissable amount of new debt, capital expenditue limits, asset sales, etc. - anything that might materially change the nature of what the buyer thought they were buying. However, buyers usually have to stay well clear of anything involving customers and markets, particularly when acquiring a competitor, to avoid the appearance of gun jumping.

Gun jumping is of heightened concern in industries like telecom, where the wait for closing can exceed one year. The long wait obviously increases the operating risk during the pre-closing period, thus ratcheting up the desire to steer the target's course during that period or get a jump on integration. Many M&A lawyers take a very conservative stance on gun jumping, preventing most conversation pre-close on the (not unreasonable) presumption that some business people will jump the gun. Buyers want to get moving; sellers usually want to be compliant - the gun gets jumped.

What's interesting about the Qualcomm news is that the claims don't relate to any over-reaching behavior by Qualcomm executives, but rather the language in the merger agreement itself.

Obviously the size of this fine is not material to Qualcomm or even this deal itself (the $1.8M fine is well less than one-half of one percent of the purchase price). However, I'm sure the threat of this action scuttling or slowing the deal caused many a sleepless night for those involved - and may still, if you are a Qualcomm lawyer.

Friday, April 14, 2006

Cougars and the Law

Non-corp dev related, but I noticed this morning that the Oregon Department of Fish and Wildlife is moving forward with an expanded plan to control the state's cougar population. Whereas to date the department has responded only to specific cougar sightings, they now plan to hunt cougars more generally in an effort to control the expanding population. To greatly increase the efficiency of this effort, they plan to use dogs.

Cougar sightings are on the increase out here in the West, and cougar populations have expanded at a time of rapid human population growth in western states. My hometown of Bend, Oregon - set in cougar territory just east of the Cascade mountains - has been one of the fastest-growing communities in the country for the last 20 years. There's little question that this combination leads to an increase in human/cougar interactions, as well as losses of livestock and domestic pets.

My first reaction to the news that state-funded hunters would be culling the cougar population was: Why not expand the cougar season and let private hunters do it? That's a cornerstone of wildlife management, as seasons, hunting rules, fees and limits are constantly adjusted to account for population fluctuations. As it turns out, the department has already done that, expanding the season to 10 months and reducing the tag fees to nominal levels. The problem? Private hunters in Oregon can't use dogs to hunt cougars, thanks to a state initiative passed some years back.

The result of the initiative's passing was a steep climb in the cougar population as hunting success plummeted due to the lack of ability to use dogs. The state tried to offset this growth by expanding the cougar season and reducing tag prices, but now finds itself turning to dogs to keep the population in check. So, the net outcome of the voters' action wasn't to permanently end the hunting of cougars with dogs; it was simply to shift the cost of hunting cougars with dogs from private hunters to the state and its taxpayers. You've got to love the initiative process.

Thursday, April 13, 2006

My Vodafone Disclaimer

Nice attention from The Deal today. I should mention that when it comes to Vodafone I'm not necessarily partial; I spent several months dealing with them very closely when we were auctioning off AT&T Wireless. I came away from that process deeply impressed with Vodafone's operating efficiency. They just seemed to do everything well, even down to how they conducted diligence and negotiated the merger agreement. And you never saw a more starry-eyed group of swooning senior executives than our folks after the presentations Vodafone made to us for reverse diligence. I sometimes think I might have lost some respect for them had they paid as much for AWE as Cingular did! So - besides the lack of compelling business logic, I also have a more gut-level negative reaction to the prospect of Vodafone being taken apart by Verizon-Telefonica-Blackstone trifecta.

That sale, by the way, was quite the drama. Amir Mirza, a banker at Merrill Lynch (and a helluva guy) has always told me I should write a book about the experience. Now that I've got more than one year's distance from Cingular, I think I may do something like that and serialize the story here. Look for postings titled "The Sale of AT&T Wireless".

Monday, April 10, 2006

Vodafone Catching a Bid?

Funny rumor circulating about a potential takeover of Vodafone by Verizon, Telefonica and Blackstone. According to reports, the trio would pay about $168B for Vodafone. Since the press is notorious for not dealing with debt in merger valuation, as an equity valuation this would represent a 20% premium to today's price. Including Vodafone's $22B in long-term debt makes this a $190B deal.

It's an audacious rumor, and the market is having none of it - Vodafone stock has barely moved today. Why should it? This one of the world's biggest companies, and one of the best managed. While Vodafone has run into a rough patch in the last year, this hardly seems like the time for Vodafone shareowners to cut and run.

But what of the putative acquirors? Could it really make sense to break up this global powerhouse, built on the back of dozens of mergers over the last 10 years? I'd guess that it's easy for Blackstone, since as the glue holding this deal together they would get the pieces of Vodafone most easily grown and re-sold. It's harder for Telefonica - while it gets them more solidly into Europe, they seem to have ample room for growth in their LatAm markets without needing an expensive acquisition like this. Telefonica is also still working through the integration of O2, acquired just last year. Still, it's enormously gratifying to the corporate ego to smack a big competitor down, and that factor can't be entirely ignored.

My guess is that this rumor is a trial balloon floated by Verizon's bankers. Within the next year or so, Verizon is going to have to pony up $50B+ for Vodafone's minority interest in Verizon Wireless. There is probably a very credible model floating around Verizon's HQ showing that buying and breaking up Vodafone is a better deal for Verizon than simply paying a ton of cash for outright ownership of Verizon Wireless.

It would be a bold play (to put it mildly), but I'd be surprised to see it happen. Besides the obvious execution risk, there's the fact that, rightly or wrongly, domestic investors don't give U.S. companies adequate credit for foreign operations. This doesn't make much difference for companies with relatively low costs to enter and manage new markets, but it creates a big headwind for teleco companies having to invest billions in licenses and capital to build and maintain networks. While obtaining Verizon's UK assets may be accretive to Verizon compared with buying Vodafone out of the U.S., it would need to do so in a way that accounted for U.S. investors' tendency to treat foreign assets as non-core. Even with Vodafone stock mired in a slump, it's hard to see how this could pencil out to being anything more than marginally better than the alternative of biting down hard and paying Vodafone to walk from Verizon Wireless.

Monday, April 03, 2006


While the Alcatel-Lucent tie-up makes a lot of sense on paper, creating an integrated company in high-tech manufacturing is tricky business. Throw in the cross-border and cultural compatibility issues, and this looks to be at least as steep a climb as the HP-Compaq merger. I hope it works out better than that, but both companies are going to have to be very, very focused on executing their integration plan.

I know, that seems obvious - every company going through a merger should be focused on merger integration. However, big companies can't always get out of their own ways, and when the realities of quarterly results, competition and internecine fighting start kicking in, that focus can be lost. Some consolidating mergers can absorb these effects and still succeed - this one can't.