New Gig

One reason for the slowing pace of my posting here is a change in focus - I've moved from Clearwire to Avvo, Inc., an internet start-up in Seattle dedicated to helping consumers with the daunting task of finding a lawyer. It's fun stuff, but my new role will likely have very little to do with the M&A issues I've been dealing with over the last five years. I may post on corp dev topics from time to time, but I will still be writing my column in Corporate Dealmaker magazine and will be contributing to the Avvo blog.

Facebook and Microsoft

The long-awaited Microsoft-Facebook linkup was announced today, with my neighbors here in Redmond ponying up $240M for a minuscule 1.6% stake in Facebook.

While this deal values the fast-growing social networking site at $15B, I doubt valuation was much of an issue for Microsoft. Yes, it's huge for Facebook to get a massive infusion of cash with only nominal dilution, but Microsoft has more nuanced concerns. Whether MSFT gets a decent return on the quarter-billion invested is of far less concern than getting linkage with Facebook and beating out Google. Besides an expansion of an extant advertising deals, the remaining scope of the MSFT-Facebook linkage hasn't been disclosed.

Bottom line? Huge win for Facebook, although it won't be raising more capital at this valuation any time soon. It's also a win for Microsoft, which now gets to participate in Facebook's strategic upside, if not the financial upside it would have also gotten had it pulled the trigger a year or so ago.

Ebay's Skype Writedown

Following up and tracking the success of deals some years on is not always a strong suit for corporate dealmakers - often it's on to the next deal before the ink is dry, with little need for the nostalgia of looking back.

Accountants, however, have no such luxury, and there is a certain discipline to tracking over time how good your deals really are. With that in mind, I note Ebay's $1.4B writedown of its Skype acquisition, accompanied by the departure of Niklas Zennstrom and the announcement that the earnout in the deal had only been one-third met. With the original purchase price of $2.6B and about $500M in earnout money, the charge represents nearly 50% of deal value.

Ebay may have some internal measures that indicate the deal was a success for strategic reasons, but by any objective outside view it was a bust. I hate to say I told you so, but . . .

Facebook Bonanza

I'm loving the Facebook rumors flying around here in Redmond right now - we've even got breathless reporting on Mark Zuckerberg sightings at the airport.

Microsoft is rumored to be paying $300-$500MM for 5% of Facebook, giving the social networking site a valuation of as much as $10B(!!). This, on $150MM in annual revenue, most of which is coming from MSFT already.

Facebook has enjoyed terrific growth, particularly over the last few months, and there's no question they've created something of value. That said, it boggles the mind to think that this site is game-changing enough to merit valuations in the double-digit billions. At the end of the day, this is an advertising-supported business that only six months ago was looking like an also-ran to MySpace. And, despite the robust growth, its users are characterized by low click-through rates on the site's advertising.

All this is by way of saying that Facebook would be insane to pass up an investment in this range, given the hefty valuation and nominal percentage of the company involved. The interesting part - and the area where a deal could fall apart for Facebook - is what kind of minority rights (or ancillary commercial deals) Microsoft gets along with its investment. $500MM is chump change for Microsoft; they can certainly take a flyer on Facebook - but they aren't going to do so unless the integrative side of the deal allows them to leverage Facebook across their other lines of business. Look for the details on this once the smoke clears on the crazy valuation.

More on MAC Clauses

I've posted before about MACs (material adverse change clauses; also called MAE - material adverse effect - clauses), particularly around the use of a MAC by Johnson & Johnson in trying to negotiate a lower price for Guidant. As we saw there, exercising a MAC is not only the M&A equivalent of nuclear war, it also can lead to unforeseen effects like an ultimately HIGHER price for the target company.

For those interested in learning more about the arcana behind the legal dimensions of MACs and why they are so hard to exercise, the M&A Law Prof Blog has an excellent post on that very subject.

Sourcing Deals

In general, I think it easier to find deals as a strategic acquiror than it is when looking for investment opportunities in the VC or PE worlds. First, the universe of potential targets is a lot smaller, unless you work for General Electric. Secondly, although your financial models may not adequately account for this factor, there is, at some level of the corporate decision-making process, a built-in "strategic bias" favoring deals that help grow the business.

Assuming you're not operating within a global conglomerate or looking to expand inorganically into a new line of business, potential targets are going to be found primarily amongst your competitors and suppliers. For example, in the wireless industry we would do deals to acquire operating markets or raw spectrum from other carriers (competitors), acquire or sell towers to or from aggregators (suppliers), and acquire companies providing billing and other IT services (suppliers). In addition, there would be the occasional deal with a financial entity (speculators) to acquire spectrum assets, or a small company with something new and exciting to offer that wasn't currently a vendor (innovators).

In at least the first two groups, you should know who the potential targets are, at least for the most part. You probably already talk regularly with some of them. Others you may cold-call to get a discussion started, or they may hire bankers to approach you. Or your CEO might come back from a two-week camping trip with a deal in hand. In any event, deals with those categories of targets are not hard to get going.

Of the other two groups, the speculators are the easiest to locate - they will usually find you. The innovators are the tough ones to find. While this category may be of lesser importance in stable, slower-growing businesses, it's critical in many technology businesses to find and acquire these talents and ideas before the competition does. The problem of finding them could stem from not knowing where they might be, not knowing how to get your inquiries returned, or not being able to efficiently filter out the few good opportunities from the flood of dreck that is being thrown on your desk every day (an issue Google no doubt struggles with). More than ever, overcoming these issues requires those doing the deals to know as much as humanly possible about their company and the environment it operates in.

Free Drugs

Publix supermarkets announced today that the company will begin giving away seven popular prescription antibiotics. The articles on this development note that WalMart has been selling a number of popular generic medications for $4, and that several other pharmacies have moved in the direction of low cost/free prescriptions.

Amidst the laudatory statements of improving access to important medications, one notes that these seven medications represent nearly 50% of the generic prescriptions filled by Publix. Have you ever tried to comfort a crying child while waiting 15-20 minutes for a simple prescription to be filled? The reason it takes so long is the mind-numbing level of paperwork and authorizations a pharmacy must go through to get insurance authorization.

By making the medication free, Publix eliminates the need to deal with insurance issues on a massive volume of its pharmacy business. I don't know how much employee time this frees up for Publix, but I'm sure it greatly exceeds whatever the company pays for these generic medications. Fortunately, this is one of those rare cases where cost containment will actually lead to a better customer experience.

News Corp - Dow Jones Side Deals

Interesting but shoddy piece in yesterday's NYT about the "side deals" in the News Corp - Dow Jones deal whereby News Corp agreed to pay the sellers' banking and legal fees (totalling some $40M). Quoting several disgruntled Dow Jones investors and putative bidders, the article questions whether this side deal - and past banking and legal relationships between the parties - caused the advisors to give Dow Jones less-than-objective advice in pushing for a deal.

For starters, the entire thesis of this article is specious: Bankers, and firms like Wachtell that usually only bill for M&A work when a deal closes, ALWAYS have an incentive to see the deal get completed. ALWAYS. A seller asking for an 11th-hour concession (and one that here, at .7% of deal value, represented no more than a mere lagniappe in the context of the transaction) makes no difference in this dynamic. The sellers got a better deal by $40M - bully for them, and good for the advisors in obtaining it. They also got a 67% premium in the face of buyer perception that Bancroft family issues would make for a very difficult transaction.

That said, these folks are professionals who know far too well they value of their reputations and the need to be perceived as providing objective advice on whether to proceed with a deal. Given just how good this deal was for DJ investors, there's little need for them to defend their conduct. I would also observe that Wachtell, in representing DJ and all of the craziness involved in this deal with the Bancoft family, is not likely being overpaid in collecting $10M.

Results-Only Work Environment

I posted a bit about "Results-Only Work Environment" (or "ROWE") last year, in light of Best Buy's rolling out this concept at its HQ. At first blush, the name strikes me as faintly ludicrous - after all, aren't results the only thing that matters in the workplace?

It's a sad statement about how far from this headset so many corporate workplaces are that the creators of ROWE had to choose such an obvious name, but one hopes it serves as a daily reminder of what's important - and what's not - in the office. The concept of ROWE is a simple one; to quote CultureRx, the creators of ROWE:

"In a ROWE, people do whatever they want whenever they want as long as the work gets done. In the park, in a coffee shop, in the shower. At midnight or 3am or on Sunday. Whenever and wherever."

I'd take this as a manifesto of sorts - obviously not every job lends itself to a "whenever/wherever" working style, and sometimes acheiving results requires that the "whenever/wherever" be "in the office, this morning." The important distinction is that all questions of time, place and process are viewed through the lens of maximizing results, not face time or some antiquated notion of needing to clock a set number of hours each day in the office.

Of course, critical to making this work is that managers trust employees and employees take true ownership of getting results rather than filling a chair. It also means understanding that a) there are times you do all need to be together in the office to get the work done; and b) "reachability" and responsiveness become absolutely critical. Finally, it also means recognizing that some people get their best results by working in a corporate office for set hours.

The CultureRX site also has an amusing section on "sludge" - negative (and usually passive-aggressive) workplace language used to cast judgment on those who may not be filling their chairs as ardently as the sludge-slingers. Anyone who has spent quality time in a corporation has no doubt seen more than their share of this! I would add to this concept "sludge avoidance" - the subspecies of corporate type who constantly has to tell you how hard they are working, the sacrifices they are making to spend time in the office, etc.

Facebook Revisted

When, last winter, I last discussed the potential for a sale of Facebook, I urged the company to jump at the purported opportunity to cash out for north of $1B. Times have changed, and so has my opinion. Facebook has opened itself up, both to new classes of users and in an open-source way that is leading to explosive growth in applications centered around Facebook. These events have made the site a far more useful means for organizing information and connecting with others. Hell, even this corporate tool - who went to college well before e-mail and the web - now has a Facebook page.

I don't know where these applications will get to, or whether they will ever make any money for those developing them. And the Facebook interface, despite having some very nice features, has some strange quirks, particularly around e-mail. Nonetheless, it appears to be building into something quite a bit more valuable than I would have imagined a few months back.

DealMaven

Discovered the DealMaven Blogs, which I've added to the short list of dealmaking links here at Corporate Tool. Lots of good stuff, particular for those starting out in development or banking, or anyone who spends a lot of time with financial analysis and modeling.

Corporate Dealmaker Conference

If you're in NYC in early October, I'll be speaking at the "Corporate Dealmaker's Forum" on October 2 at the Union League Club. It's a rare opportunity to exchange ideas with a bevy of other corporate development professionals - I'd be delighted to meet any Corporate Tool readers who can make it.

Also on the Corporate Dealmaker site is my latest print article, relating to a particular pet peeve of mine - unnecessary delay in getting deals done.

Whole Foods - New Leadership Needed

I love seeing stuff like this - Whole Foods founder and CEO, John Mackey, has - for some 8 years - been posting anonymous comments on the WFMI stock message board at Yahoo.

Mackey claims he "had fun doing it." Look, there's no question that stock boards are completely irrelevant to all but the most thinly-traded stocks, and at least so far there is no indication that Mackey did anything more than pseudonymonously pat himself on the back and generally sing the praises of the company. But what does it say of the judgment of the leader of major company that he would even look at stock boards, much less get his jollies posting on them using as an alias an anagram of his wife's name?

Whole Foods runs a hell of a grocery store, but they desparately need some adult supervision at corporate HQ.

Let's focus on the PLANES!

If there's a theme that runs through Corporate Tool, it's that results are what matter in business. Getting good results should be first and foremost in the mind of any owner, manager, or employee of an organization. If a rule or practice in your organization is getting in the way of acheiving results, it must be ditched. Period. Sure, there can be lots of debate about whether a given rule or practice leads to good results, but let's look at a specific subset: Rules or practices that employees generally don't like.

The Corporate Tool rule for such practices is that they carry a heavy burden of proving they contribute to good results. Employees who are unhappy about nettlesome, pointless rules do not create good results for you. There will, of course, be unpopular rules that easily clear this hurdle - You run a construction company and employees don't like the mandatory random drug tests? Tough; that's an unpopular rule that carries its water.

But what of dress codes? Within reason, they will not offend any but those so lacking in common sense they should be sent packing anyway. But what of dress codes applied in benumbing detail to a group of people who a) don't see the public while working; b) have one of the most stressful jobs imaginable; c) are exceedingly low-paid relative to the importance of their jobs and d) are responsible for the lives and deaths of anyone flying on an airplane in our exceedingly-crowded skies?

As someone who flies a lot, I want HAPPY air traffic controllers. Controllers who feel good about their team, their managers and the job they are doing. I don't want them feeling the least bit harassed and thinking it might be time to kick it in, start their own business and let some new guy with three month's experience keep the planes apart.

And I don't care that, as the FAA spokesperson puts it, this is a simple dress code that "would not raise an eyebrow in the business community. " The "business community" meets with customers, civic leaders, competitors, etc. Controllers sit in a darkened room, far from the public eye, and keep aluminum tubes full of hundreds of human beings from crashing into each other.

The FAA has a bad enough track record in dealing with controllers. It should be bending over backward to make their jobs as bearable as possible, but instead they come up with this. Sad.

IPhone, uRain

Lots of folks lined up outside the AT&T Mobility store in Redmond Town Center, awaiting this evening's re-opening and launch of the much-hyped iPhone. I took this photo at lunchtime, when it was actually a bit sunny. I hope the wait was worth it - rain has been falling all afternoon.

Red Handed at Whole Foods

I’ve stayed away from posting on the Whole Foods – Wild Oats merger and the FTC’s lawsuit to block the deal. For one thing, I’m a Whole Foods shareholder, having bought after their most recent quarter when WFMI stock finally dropped to attractive levels. For another, I’m in general agreement with the consensus that the FTC is out to lunch on its view that the relevant market in which Whole Foods competes is a narrowly-defined category of natural foods stores, and I haven’t had a whole lot to add.

However, I have a theory about why the FTC filed its lawsuit, and today's revelations bolster my view. I shop at Whole Foods, but I don’t care about getting organic carrots; I appreciate the food quality and the aesthetic of shopping there. Like most others jostling through the cheese aisle at the Redmond Whole Foods, I don’t shop there exclusively. Within a few miles there is competition on the low end from Albertson’s and Fred Meyer, at the mid-point from recently remodeled QFC and Safeway, and local stores like Larry’s and PCC (PCC, an 8-store Seattle chain, is, for all the world, like a mini Whole Foods). All of these grocers have expanded their organic and gourmet foods offerings while also enhancing the whole “shopping experience.” Just about everyone gets this – including, I believe, the FTC.

So who doesn’t get it? Whole Foods. As documents unsealed today show, WFMI’s CEO believed the merger with Wild Oats would prevent a price war. Huh? If Whole Foods competes with all groceries – as everyone believes, and Whole Foods is now trumpeting to all who will listen - what’s the rationale for buying Wild Oats in the first place? Does it really help them expand faster? How does acquiring smaller-formal stores that WFMI plans to close or relocate help them expand geographically? Why not just grow organically, as they’ve done so well for the last decade?

So, the merger never made a whole lot of sense to me, and my theory is that it didn’t make sense to the FTC, either – except as an attempt to take out a competitor (which is not, in itself, a reason to bar a merger). However, any such attempt doesn't even appear to be rational, given the widening of WFMI's competitive market. Three years ago, it might have cleared the field nationally for Whole Foods. Today, they're just buying up a second-tier competitor in a crowded marketplace.

Whole Foods is working off of yesterday’s playbook, and the FTC is probably going overboard because it found some unfortunately-worded documents. The ironic thing is that the antitrust authorities may well end up protecting Whole Foods from a value-destroying merger by killing the thing in court.

Counsel - Friend or Foe?

Beyond considerations of competence, how much does your choice of deal counsel matter? For larger companies, what about your internal counsel – are they helping or hurting your cause? As I’ve harped on before, there’s a cost to having your company viewed as being hard to deal with. It’s great to be known as a tough negotiator, but you never want to cross the line to the corporate equivalent of “unreasonable asshole.”

In fact, the biggest problem I’ve encountered isn’t overly-hard negotiating, but rather being a difficult pain in the ass over things that don’t really matter. Very little in corporate law is black and white – it is almost always a balancing of risks and opportunities. When it comes to your deal, a good lawyer will pay a lot more attention to remote risks that carry major potential consequences than to those risks that are likelier but would create only minor problems. Beware those lawyers who can’t tell the difference. If you find yourself arguing more with your own attorney than with the other side, that’s a sign you’ve got a problem.

Alltel LBO

Good news for AllTel, cashing out to PE buyers to the tune of $27+ billion. What caught my eye was this story, claiming that this deal pre-empted a process AllTel was running and caught other potential bidders napping. That could be true, although presumably at a minimum calls were made and no one was able to react in time. Obviously, if presented with a tight time frame, AllTel would need to take the (attractive) bird in hand. Doubtful the deal contains a go-shop, and at this valuation and what is likely a $1B+ break-up fee, I wouldn't expect to see any interlopers.

Corporate Tool Updated!

I've finally gotten clear of some Blogger server glitches, and Corporate Tool is now on the new Blogger. As a result, I've been able to add categories, including those covering the broad M&A topics of sourcing, valuation, negotiation, closing and integration. Naturally, there is also a place for all of my musing on "office life." I've gone back and placed all prior posts into the appropriate categories. I KNOW that will make it more useful to me when posting, and I hope it will be similarly useful for Corporate Tool readers.

Another new addition is a Google news reader for M&A topics; time permitting, I will see about adding a Corporate Tool store.

Quit Your Yapping

Here's my latest piece in Corporate Dealmaker magazine; if anything, I went light on my aversion to yapping in the workplace. I've got nothing against sports-related banter or lurid office gossip, but windbag-itis gets under my skin. Perhaps the prevalence of e-mail has made some feel the need to squeeze more out of every opportunity to talk (although their e-mail messages typically also display this tendency). Besides being annoying, this habit is ruinous when trying to get things accomplished or negotiate effectively.

Listen effectively and talk sparingly. As my favorite Southern rock band (the Drive-By Truckers) says, "just because I don't run my mouth doesn't mean I got nothin' to say."

Passing of a Non-Corporate Tool

Farewell to Kurt Vonnegut, dead at 84 despite a lifetime of chainsmoking, general despiser of corporate toil and its costs (personal, environmental, spiritual, etc.) and author of many a fine, darkly satirical novel. My favorite is still his first: Player Piano, which envisions a near-future world where virtually all work is done by machines. Resistance? Futile, as you can well imagine.

Dow Shenanigans

Dow Chemical, rumored to be the latest giant company to be swallowed up in a PE deal (for some $50B), fired two of its executives today over the rumors. The interesting part is that they weren’t canned for the pedestrian offense of leaking the potential deal to the media, but rather for having unauthorized discussions with potential buyers. What’s more, at least one of these guys - Romeo Kreinberg, a 30-year company veteran who currently heads Dow’s Sales & Marketing functions and its Performance Plastics division – is vehemently denying doing anything untoward.

Were Kreinberg and the other "traitor" (Pedro Reinhard, a member of Dow’s Board) really going behind the board’s back and talking to suitors, or were they thrown under the bus? While dealmakers in most organizations have (or at least should have) wide latitude to talk to potential targets and partners, there’s no question that things need to get tightly constrained when you’re talking with potential buyers. There are just too many sensitivities around relations with employees, customers and investors to let such discussions take place without the direction and oversight of the board. I’m guessing we’re going to get a good glimpse at how this works – or should have worked – at Dow as this little drama gets played out.

Sometimes you've got to stop . . .

Brilliant article in the Sunday Washington Post – what happens when you take one of the world’s pre-eminent violinists, set him up in a Metro station with his $3.5M violin, and have him busk away, open case at his feet, for rush hour commuters? No, nothing related to M&A – but terrific musings nonetheless on our need to make time for beauty in our over-scheduled lives.

Wither Private Equity?

Some readers have asked why I don’t have much to say about private equity, as PE seems to be the hot topic in just about any current financial forum. For starters, there’s not much that I could say, opinion-wise, about PE that isn’t already being more than adequately addressed by Equity Private and others in the PE field. Secondly, my focus always has been on corporate – strategic – dealmaking rather than that of the PE, or strictly financial, type.

For this reason, folks need to understand that my posts on topics such as the limitations of financial analysis are to be viewed through the lens of the corporate acquirer, who may be blending in non-financial (or at least difficult-to-quantify) factors relating to competition, speed to market, organic growth alternatives, etc. Obviously, financial analysis should take a far more prominent role in a PE setting.

CVS-Caremark

I haven't posted on this in a while, largely because it finally has become the competitive process it should have been from the beginning. Caremark's management had to be dragged into this, but the net result is likely to be a much better deal - with the same suitor, CVS - than the company would have gotten had management had its way. Sometimes you win in spite of yourself.

More Fun with (Financial) Models

Analysts I’ve worked with in the past have accused me of taking an overly-skeptical view toward financial analysis/valuation of potential deals. Guilty as charged, I suppose, although I’d quibble with the “overly” part.

As I’ve noted before, one of the inherent limitation of financial modeling is that its reliability as a predictive tool decreases with the level of uncertainty involved. Stable, slow-growing businesses are easy to model reliably; new or fast-growing ones, not so much. It’s a matter of “garbage-in, garbage-out”: if you’re guessing at future input levels (which you have to be doing for something new), your output will not necessarily conform with reality. That’s OK – often a best guess is fine – but decision-makers need to be able to differentiate between these two scenarios and discount the value of the model accordingly. I don’t see that done often enough.

Also on the subject of models: I am always amused that, more times than not, the bankers or brokers peddling distressed or declining businesses feel compelled to include a page showing three or five years of historical financials along with the corresponding period of projections. Imagine the revenue graph – the historical numbers trend downward, reaching their nadir at the time the business is being sold. Miraculously, at that point the trend reverses and heads upward from there in the projections. Sometimes there is an explanation for how this bit of magic is supposed to come about, more often not. I haven’t come up with a good name for this little bit of modeling desperation, but I’m partial to the “golden horseshoe.” Any other thoughts?

XM-Sirius

I've been a happy customer of XM Radio for two years, and I'll be even happier when I can access the full suite of channels offered by XM and Sirius on their merger. Many don't think the merger will get through. The FCC has an explicit rule prohibiting joint ownership of the spectrum. A narrow definition of the relevant market for antitrust combination analysis would yield an HHI score off the charts (i.e., if the relevant market is satellite radio, the merger yields a monopoly). Despite all that, my prediction is that the merger gets through.

XM and Sirius face competition from all sorts of fronts, from traditional (free) radio to iPod link-up. While some of these might not be considered "substitutes" for antitrust analysis purposes, there's no question that terrestrial radio - and nascent high-definition radio in particular - will be considered. Layered on this competitive analysis will be the fact that two satellite competitors, with their astronomical cost structures, are probably not viable long-term anyway. This will take care of the DOJ's concerns. The FCC will do a similar analysis, and reach the same conclusion and eliminate the spectrum cross-ownership rule, although it will likely be a more tortured path getting there than that of DOJ.

Is many respects, the current FCC prohibition is akin to the cellular cross-ownership rule, which prohibited the same entity from owning both cellular licenses in any given geographic market. That rule was eliminated about four years ago as the availability of PCS spectrum made it largely moot. Circumstances demand a similar result here.

Proxy Advisor: NO to CVS-Caremark

In the continuing tussle between CVS and Express Scripts over Caremark, independent proxy advisor Glass Lewis has weighed in, advising Caremark shareholders to vote "no" on the CVS link-up. I can't recall ever seeing a deal of this size (well north of $20B) run afoul of the proxy guys, much less for the target conducting a "flawed negotiating process." Glass Lewis, like many others, has latched onto the fact that Caremark has shown a strangely unyielding commitment to seeing the CVS deal through, despite ardent interest from others.

I've pointed out in previous posts some of the speculation surrounding the motivations of Caremark management. Suffice it to say is highly unusual for the managers of a multi-billion dollar public company to act as Caremark's has in handling this sale process.

Negotiating Tactics

Besides the stuff on building a corporate development department, this last issue of Corporate Dealmaker also has a piece on negotiations that stresses the importance of preparing for big negotiating sessions and focusing on structural/relationship issues rather than tactics. The acticle includes a great paraphrased quote from Marty Lipton (long-term readers will know I've spent my share of late evenings at his firm): "You can get the price up 2% by at-the-table tactics; by bringing in other credible buyers you can bring the price up by 50%."

I've got little use for negotiating tactics, and I'd take this one further: That 2% opportunity is offset by an increased risk that you'll crater the deal with juvenile, offensive or misdirected tactics. Spend the time figuring out what the other side needs to get. Make sure your own objectives aren't muddled. Then go to the negotiating table as yourself - you won't need to play any games.

Google Blogger Issue

Google continues to be unable to move me to the new blogger application, and it seems for the last few weeks my posts haven't actually been published. As I don't pay a lot of attention to what my blog looks like, I didn't notice until now. In any event, check back through the last few posts if there's something you've missed.

M&A Departments

The latest issue of Corporate Dealmaker is a particularly good one, with a number of first-hand views from corporate dealmakers on how they've structured their departments and improved the results their companies have gotten from M&A. It's also got my now-regular back page article; this month is a look at the fun and games of corporate annual review time.

Ben Stein on Caremark

Curmudgeon Ben Stein has weighed in on Caremark, and while he gives short shrift to the timing and regulatory advantages of the CVS deal, he rightly points out the lack of regard Caremark management has shown for the (financially) superior ESRX bid, and explores some of the reasons this may be the case.

Caremark - ESRX Developments

Express Scripts (ESRX) continues to battle away for Caremark. Along with the proxy fight, ESRX also filed a lawsuit last week aimed at the breakup fee in the CVS-Caremark deal. I suppose they have to try everything, but the lawsuit isn't going to work; aside from the merits there's a decent chance they don't even have standing to sue.

As predicted, CVS has upped the stakes a bit in an attempt to push things over the top, announcing a $2 special dividend for Caremark shareholders. This isn't quite as good as it appears, since shareholders essentially pay themselves for the post-merger portion of the company attributable to Caremark, making the dividend closer to $1 than $2. However, between that and recent stock price increases, the ESRX bid is now less than 5% better than the CVS proposal. There's no question CVS is now the superior proposal, given the timing benefit and the fact that regulatory clearance has already been obtained.

The next move belongs to ESRX - while they will continue to slog forward on the desperation measures of the proxy fight and lawsuit, expect to see a sweetened bid in the days to come.

Proxy Fight!

Express Scripts is not skulking away from Caremark's summary rejection, opting instead to raise the volume by nominating four directors of its choosing for the Caremark board. This tactic, an old standby of hostile takeovers, allows the successful hostile to get a friendly board which will, in turn, approve the hostile's takeover proposal. CVS, whose friendly proposal has been embraced by Caremark, labeled the ESRX move a "publicity stunt." It's not, unless CVS means that ESRX is using any means necessary to plead its case to Caremark shareholders.

This isn't a move you'd usually see in a deal this big, but Caremark didn't give ESRX many options. What remains to be seen is whether Caremark shareholders will be swayed. While there has been some grumbling, it doesn't seem loud enough yet. Will shareholders decide that the 50% cash component and 13% premium in the ESRX deal outweighs the better timing and increased chance of closing the CVS deal? I'd say no, unless ESRX ups its bid.

Caremark - CVS

New year, new deals to watch. Some time ago, pharmaceutical services provider Caremark (NYSE: CMX) announced a "merger of equals" with CVS (NYSE: CVS) in a transaction valued at $21B. That deal had toddled along for a few months until competitor Express Scripts (NDAQ: ESRX) hurtled in with a $26B cash-and-stock offer. Today brings Caremark's rejection of the Express Script proposal, and the unusually detailed statement from Caremark is well worth a read.

After the expected litany of reasons why Caremark thinks a combination with CVS offers better strategic benefits, growth opportunities, etc., we get to three of the real reasons Caremark prefers CVS: Less integration risk, quicker timing and greater closing certainty (the CVS deal has already passed antitrust review). These are valid concerns and would certainly justify taking a lower price, particularly considering the concentration in the industry and the considerable (9+ months) timing benefit. Still, with a 20% pricing gap between the proposals you've got to wonder if Caremark has really taken the time to review the merits of a deal with Express Scripts, or at least play it out to leverage CVS to a better price or terms.

There's also a lot of drama in the backstory here, relating to options backdating, indemnity and officer compensation that I won't get into here but which may make the issue of closing certainty that much more important for Caremark management. How that works for shareholders is another matter. I suspect this one won't move quietly to closing.