Corporate Dealmaker Conference

I'll be moderating a panel on "extreme dealmaking" at next week's Corporate Dealmaker forum in NYC. I've also signed up for twitter - find me at @corporatetool on twitter.

Rolling Heads

Former McAfee GC Kent Roberts - rogue options backdating agent, or poor sap thrown under the wheels of the corporate bus? God knows we in-house counsel are ready and willing to take the blame for things our companies want to do or not do - within the bounds of the law, of course. But stand trial with jail time on the line? Methinks not.

Was Roberts - whose federal court trial was to start yesterday - left twisting in the wind by McAfee? The company has suddenly found a bunch of emails that apparently may exonerate Roberts. As for the company and the attorneys who missed this discovery the first time around? "Heads have to roll" - that's the word from U.S. District Judge Marilyn Hall Patel.

More on Google's EULA

PC World ran a comprehensive piece yesterday (including some analysis from yours truly) on the quirks of Google's terms of service and how the company claims a license to a whole bunch of user content across multiple products (Chrome, Picasa, Blogger, etc.).

Some people have wondered why I think Google won't use this license claim in a more affirmative fashion - as the argument goes, what's to stop Google from taking advantage of some particularly valuable piece of content that gets posted to Blogger or Picasa? I mean, what if the movie version of Corporate Tool is a global blockbuster - how can I be sure that Google isn't going to capitalize on my success?

Two reasons: First, Google's primary concern with having a license is to avoid operational or legal problems in running its site. It doesn't want to have to worry about copyright clearance or the like when making changes to its sites or products. Why does this matter? Because there is a fundamental difference in the strength of the company's claim between this "defensive" use and any use of the claim proactively to establish IP rights.

Secondly - and related to the business judgment that would make Google think twice before using its license claim proactively - Google is a multi-billion-dollar behemoth that makes money hand over fist, at unbelievable margins, from its advertising sales. Do you really think they'll see a viable business opportunity in pursuing a shaky-at-best licensing claim to your beach photos?

Overreaching Contracts

Credit card companies, telecom operators, website publishers and software developers are all familiar with the need for standard, easily-applied agreements that customers sign up to by default when using the service.

While these agreements come in many names and forms ("shrink-wrap" for packaged software, "click-wrap" for downloaded software or software-as-a-service, "End User License Agreement," "Terms of Service," "Terms of Use" or "Customer Service Agreement" for websites or telecom providers) they all have one thing in common - they are contracts of adhesion, meaning the end user is stuck with them if they want to use the service.

There's nothing wrong with this per se - some form of agreement needs to surround these services, and such terms obviously can't be negotiated individually with every user. However, as today's kerfuffle over the terms of service for Google's new Chrome web browser shows, a company's lawyers need to pay attention to what these terms say and whether they are fair in the context of a contract of adhesion.

Why? For starters, while most anything goes in a fully-negotiated agreement, courts will quickly find a contract of adhesion unconscionable if the terms are overreaching. After all, the consumer has no other choice but to vote with their feet (and sometimes they don't even have that choice). The Washington Supreme Court recently decided a case (see Groklaw for a terrific discussion) that offers a classic look at the far reaches of unconscionability - an AT&T customer service agreement that, in addition to requiring arbitration of disputes (usually OK, even in adhesive contracts), also barred class actions, required all proceedings to stay secret, shortened the statute of limitations to bring actions, and limited consumer rights to sue for attorney's fees, while giving AT&T the right to do so (this last point wouldn't fly even in a fully negotiated contract in many states, including CA and WA).

While the Google lawyers apparently were just a little sloppy in applying terms from other services to Chrome, AT&T's lawyers must have just felt compelled to make their terms as one-sided as possible.

The problem is that this kind of overreaching has its costs. If you're AT&T, the only terms above that really make much difference are the arbitration clause and the class action waiver. The rest of the stuff is noise. However, it's so blatantly one-sided that a court couldn't help but trash all of these clauses; indeed, AT&T is lucky the entire agreement wasn't stuffed.

What would have happened if they had kept the agreement scrupulously fair on the procedural side but had retained the important limitations (arbitration and class action waiver)? I say there's a fair chance the court would have upheld their agreement. Instead, their eagerness to craft a lopsided agreement cost them what they really cared about. Nitwits.

Business Performance with Integrity

WSJ law blog has a great interview today with Ben Heineman (former long-time GE general counsel), summarizing some of the key points in Heineman's new book, "High Performance with High Integrity." Lots of good points about the role of the GC, particularly the need to be neither a naysayer or a yesman.

I've pointed out before the tendency of some corporate leaders to create a culture where dissent or bad news is punished, and how much that hurts the organization. As Heineman notes, the GC has to have "the credibility, independence and guts to speak up, even in the heat of battle, about integrity issues." Too true. But organizations also need to foster cultures where such independence is encouraged (or at a minimum, tolerated) amongst as many levels of management as possible.

Microsoft and Yahoo - Saving Face All Around

According to reports today, Microsoft is floating an idea to buy Yahoo's search biz and take a "minority passive stake" in the company. Please. This is nothing more than a fig leaf to cover Microsoft's renewal of acquisition discussions.

Look, it would have made things difficult for Microsoft to simply come out and said, after two weeks of avowed denials, that they still want to buy Yahoo. And it would be similarly hard for Yahoo to say they realized they'd overplayed their hand and they're really amenable to a deal at $33 or $34 per share. So, they can both engage in this barely-plausible cover story, spend a little time "examining" the pros and cons on an asset sale + investment, before concluding that it really makes the most sense for MSFT to simply acquire YHOO outright.

Clearwire, Sprint, etc.

Congrats to my former colleagues at Clearwire for FINALLY getting the Wimax JV done with Sprint. Initial indications are that it was worth the wait - it's a full-blown, fully-funded deal that removes a huge measure of risk from Clearwire's business and allows it to roll out nationally. What's more, Clearwire - despite only owning 27% of the new JV -gets to run the whole thing.

You know the cable guys and Google insisted on Clearwire running the show for more reasons than just concern over potential conflicts between Wimax and Sprint's cellular service. One look at Sprint's operational track record over the last couple of years would have been all it took to make that decision.

Yahoo-Microsoft

It's been highly amusing watching Yahoo step in it over the Microsoft proposal - I just hope they aren't deluding themselves into thinking that anything less than $6 - $8 of their current share price is due to speculation the deal will come back on.

Will it? Ballmer has taken some heat for how this was handled (one of his folks reportedly called MSFT's handling of last weekend's events "amateur hour" - ouch!), but if this was a tactical play by the mercurial Ballmer it may have been a good one. Yang and Decker have been falling over themselves to say they'd still be happy to deal, and have all but admitted Yahoo would take $33 a share.

So - there's still a decent shot this deal gets done. The price differential just isn't that great. Frankly, I wouldn't be surprised to see it get done for a buck or two less than MSFT's last offer of $33 when Yahoo comes back hat in hand to revive the deal.

Confidently Handling Legal Matters

People ask me what, exactly, we're doing here at Avvo. It's really quite simple - despite the stakes involved, consumers have precious little in the way of resources when it comes to getting legal guidance. The #1 source for consumer legal information is the Yellow Pages!

We're trying to change that by pulling more legal information and guidance together in one place than has ever been done before. For example:

Looking for an Albany NY criminal defense lawyer, Eliot Spitzer?

Need an Orange County bankruptcy attorney now that your ARM has reset?

How about getting some free answers on what do about your first DUI?

Central to Avvo is the mixing together of public records data and user-generated content to create rich profiles of attorneys. Those profiles, along with other resources like Avvo Answers, are designed to help consumers handle their legal matters with more confidence. I'd love to hear comments and suggestions on how we can do an even better job with this.

Google Breathes a Sigh of Relief

I suspect that when we see the identity of bidders in the FCC's 700 MHz auction (Auction 73), we'll see that Google was the last bidder on the package of licenses making up the C block covering all 50 states.

The last bid on that package, at about $4.7B - which came in about a week ago - was enough to push it over the reserve price and ensure that the so-called "open access" requirements Google lobbied for will apply to whoever wins the licenses. However, bids on the individual licenses comprising the package have been increasing in the interim, and have now exceeded the package price.

These bids are, without a doubt, coming from the incumbant telecoms. Google, not wanting to get into the capital-intensive, low-margin, highly-competitive network operator business, can now sit back, secure in knowing that it has acheived its lobbying end via a shill bidding strategy. It's an open question whether the "open access" requirements are truly meaningful - they are in many ways the final battle of yesterday's war, and far more toothless than what Google originally wanted. Still, you've got to admire the execution on Google's strategy here.

Microsoft's Yahoo! Bear Hug

A tremendous amount has been written about Microsoft's bid for Yahoo!, so just a quick note on my perspective:

- I absolutely love the bold approach. The level of the bid really only gives Yahoo management two options: Sell to MSFT or find a white knight. Convincing shareholders that independence is the best route to unlocking value would be a laughable exercise.

- Watching the flailing about by the tech media and Yahoo insiders for potential alternatives to MSFT has been highly amusing. Points for creativity, but none of these fantastical imaginings will come to pass.

- Google needs to watch itself. While it has vastly expanded its lobbying resources in the last few years, Google doesn't always show a lot of maturity. As a near-monopolist in search and internet advertising markets, it needs to be careful about making overstated objections to this merger that will come back to haunt it when it goes to make a big acquisition down the road.

- Microsoft has a lot of work to do. Getting this deal past the regulators will be no mean feat, particularly in Europe. However, the bigger issue will come in dealing with merger integration on a scale Microsoft has zero experience with. We'll want to check back in a few years on how this one works out.

Diligence Stories

Absolutely terrific post by Equity Private regarding an undercover diligence mission. I agree completely that there is absolutely no reason to ever give a buyer anything resembling this kind of unfettered access. It must be controlled, time-limited and escorted - and preferably kept entirely off-site.

Note to EP - the problem with non-signed employee agreements you ran across is probably a non-issue, as standard employee non-competes are completely unenforceable in California.

More on ROWE

Cali and Jody’s ROWE (Results-Only Work Environment) blog – which hits dead-on so many of the inanities of our clock and face-time obsessed workplace culture – has a recent post regarding attorney billable hours, and the fact that clients are driving the push to rid the delivery of legal services from this archaic model.

Now, I’m sure most of these clients aren’t living the ROWE ideal, but at least there is a recognition that the results provided by legal services are not always – or even most of the time – linked to the time it takes to produce them. I spent less than three years working in a billable hours environment before entering the corporate world, but I hated it from the first. Ironically, part of the problem was the clients themselves, who had no problem paying for endless hours spent summarizing depositions or twiddling one’s thumbs in a courtroom status conference but would balk at time billed for conferences between the firm’s attorneys, to say nothing of paying on a sliding scale based on results.

On the Limits of Analysis

Ken Klee over at Corporate Dealmaker penned a brief review of a recent HBR article titled "Innovation Killers: How financial tools destroy your capacity to do new things." As Ken points out, any critique of the limitations of DCF analysis is highly applicable to dealmaking.

I've mentioned before my somewhat jaundiced view toward financial analysis and the reverence to which it is held in every big company I've worked with. While DCF analysis has its place, its limitations absolutely must be recognized.

As Ken points out, one problem is that fact that most DCF models are built on status quo assumptions (or corporate growth projections) that don't account for the strategic and competitive dimension. I would add that there is also the simple problem of garbage-in, garbage-out: the less you know about what's likely to happen (as is the case with new lines of business and transformational transactions), the less reliable the output of your DCF model becomes. The problem is that instead of acknowledging this limitation, many embrace the modeled output as Holy Writ. Besides being a false data crutch, it squeezes out consideration of other "softer" factors (like assumed competitive ramifications, or non-quantifiable synergies)that are every bit as worthy of consideration.

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.