My friend and colleague Moira Conlon, President of Financial Profiles, was keynote speaker at a recent National Association of Corporate Directors event addressing steps that public companies should take to be prepared for activist shareholder attacks.
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“Preaching to the choir”. In this case, the choir is me. It seems that every commercial banker I meet, tells me to advise my clients, or anyone who’ll listen, to lock in today’s low interest rates.
When I ask, “what’s the risk?”, I get a lecture that we’re in an interest rate bubble and that despite the Fed’s announcement about the Fed Funds rate, business loan rates will likely rise, especially after the election.
When I confess that I not only believe them but share their concern, I ask “what should a company do to lock in these low rates?”
Since most companies have floating rate business loans, the bankers’ most common recommendation is to enter into a swap arrangement to fix the rate.
The cost of the swap, especially after tax, is considered very low cost insurance relative to the risk of a rise in interest rates.
A swap is not the only way, however. Some bankers recommended fixed rate term loans or even public bond issues if the financing is large enough.
One of my clients raised its first high yield bond last week so I’m doing my best to help companies to reduce interest rate risk. My banker friends would be pleased that their preaching paid off.
I can help your company to lock in low current interest rates. Please contact me. Thank you.
Dennis McCarthy – email@example.com - (213) 222-8260
Roche’s hostile offer for Illumina is a great case study to follow up my post “M&A Defense Checklist” and to prove that old adage that “the devil’s in the details”.
The Roche hostile offer for Illumina highlights two of my points,
Now there is higher risk of hostile activity for all companies. Illumina, before the offer, was trading at 4x revenue and 14x EBITDA: not what you’d consider a low valuation target although its stock at $37.69 was below its 52 week high of $79.40.
Companies should carefully review their M&A defenses to uncover and potentially fix any weaknesses before an aggressor uses them against the company.
As background on this case, after what appears to be a short courtship period, Roche launched a hostile tender offer to shareholders to buy Illumina at $44.50/share an 18% premium to Illumina’s closing price the day before the offer. Roche also announced that it intends to wage a proxy battle which would result in its slate of nominees comprising a majority of the Illumina board.
In this post, I highlight key points from an impressive article entitled “The Chink in Illumina’s Defense” by Steven M. Davidoff, writing as The Deal Professor, a commentator for the New York Times’ “DealBook”. The article speculates that Roche’s proxy battle strategy will likely include proposals to:
Nominate board candidates for the 4 seats up for election this year;
Propose a by-law amendment to expand the size of the board by two members to 11 and nominate those two board candidates; and
Propose a shareholder vote to remove all of Illumina’s board without cause.
Illumina’s defenses include:
Staggered board of nine members with only 4 up for election this year;
Supermajority vote of 67% of all shares outstanding required to amend a by-law;
Shareholders can’t call a special meeting;
Shareholders can’t act by written consent; and
Poison pill which had expired in 2011 but could be reinstated by board action alone.
Proving that time-tested maxim, “the devil’s in the details”, here’s what we might learn from issues with Illumina’s defenses that Roche may be exploiting according to “The Chink in Illumina’s Defense”.
Certain key elements of Illumina’s defenses are contained in its by-laws, not as charter provisions. A corporate provision contained in a company’s by-laws may be amended by shareholder action without board action. In contrast, a provision in a company’s charter requires approval by both the board and shareholders.
Illumina’s by-laws specify the size of the board which Roche is proposing to expand by two to eleven members of which Roche’s slate of 6 would constitute a majority. Shareholders can approve, albeit by 67%, this by-law amendments to expand the board without board approval.
Illumina’s by-laws also permit removal of board members without cause upon approval by a simple majority of the votes cast at the meeting, a relatively low threshold. Delaware law requires the provision for removal of board members without cause to be in a company’s charter so this provision will, no doubt, trigger litigation as to its validity and usefulness in Roche’s attack.
Illumina’s advance notice provision for submission of proxy proposals to be included for consideration at its annual meeting requires only 90 days vs longer periods which are common. As a result, Illumina has less time to respond before its annual shareholder meeting.
Subsequent to Roche’s offer, Illumina’s share price rose well above Roche’s offer price signaling that Wall Street thinks Illumina is worth more than Roche’s offer. Also, Illumina reinstated its poison pill at a 15% threshold with updated definitions of beneficial ownership to include ownership through derivatives.
To read Roche’s offer letter to Illumina, click here or go to www.sec.gov for the recent documents filed under Illumina including its poison pill and various filings by both sides.
This is a valuable lesson for all of us, at Illumina’s expense.
The Federal Reserve announced that economic factors “are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”
This will, no doubt, influence interest rates through this period, but this is not the sole determinant of a company’s interest rate as noted in my post “Seems Smart Now“.
For example, the debt market for corporations, both large and small, is influenced by supply and demand factors in addition to the benchmark federal funds rate. The predicted reduction in demand for corporate debt by collateralized loan obligation (CLO) funds suggests that companies may see higher new issue interest rates. In contrast, any increase in demand by other lenders such as high yield bond and “relative value” investors may ease rates.
The recent post, “No Loan Left Behind“, by Randy Schwimmer of Churchill Middle Market Finance, now a unit of The Carlyle Group, describes these supply and demand forces at work on the larger size loan market (size above $100 million).
To support Randy’s view that high yield investors are supplying critical demand, this week one of my clients successfully priced its first high yield bond replacing other financing sources.
My message is that while Fed action gets the headlines, there are several other factors at work, behind the headlines, which influence a company’s debt rate.
A frequent response to my post “Living with No Growth” focused on the argument that the US will benefit from continued growth in Asia, particularly China, to escape a slow to no growth world.
While the optimist in me hopes this is true, the message I’m getting from reputable sources in China is that its economy is experiencing stresses which may result in a “harder landing” than had been hoped. The benefit to the US, therefore, may be less than expected.
One of my sources on developments in China is Patrick Chovanec whose Bio and bloglink is below:
Patrick Chovanec (程致宇) is an associate professor at Tsinghua University’s School of Economics and Management in Beijing, China, where he teaches in the school’s International MBA Program. His insights into Chinese business, economics, politics, and culture have been featured by international media including CNN, BBC, Time, Newsweek, Wall Street Journal, Financial Times, Bloomberg, New York Times, Washington Post, Forbes, Foreign Policy, The Atlantic, PBS, NPR, and Al Jazeera. He is a regular guest commentator on Chinese Central Television (CCTV-9) and China Radio International (CRI), and serves as Chairman of the Public Policy Development Committee for the American Chamber of Commerce in China.
This article summarizes key considerations for a business owner contemplating its sale in 2012. Many thanks to my colleague, Barbara Taylor, of Synergy Business Services, a regular contributor to the New York Times small business blog.
Maybe because this M&A defense provision doesn’t enjoy a colorful name like a “poison pill”, the recent battle waged over proxy rules for selecting board members and determining many critical M&A corporate governance provisions went largely unnoticed except by a small band of M&A specialists.
The side of this battle, described as defense, would likely claim victory because it succeeded in judicially thwarting a measure by the SEC to mandate a set of procedures to clarify and standardize the proxy proposal submission rules known as “advanced notice bylaw and proxy access rules”.
See what I mean about the catchy name?
What was left standing after the fierce battle were provisions which permit shareholders to submit proposed proxy provisions for a vote by shareholders. Shareholders, therefore, can propose proxy proposal submission rules to address what was in the thwarted SEC mandate.
So the question is, in the next several years, will shareholders seize this opportunity to vote into place proxy proposal submission provisions which are more aggressor friendly than those in the thwarted SEC mandate?
Will slow to no growth in corporate performance trigger more shareholder impatience and activism and, guided by proxy advisory firms like ISS, translate into proxy proposal submission provisions which facilitate changes in underperforming companies’ boards?
Will we look back and see that “the defense” declared victory by defeating the SEC mandates and completely missed what turns out to be a more dangerous development?
The attached post from the law firm of Latham & Watkins provides an excellent discussion of the topic and suggests potential corporate responses. Please click on the link below to download the pdf document.
In response to my “Seems Smart Now” post about the risk of a company funding all its capital needs with short-term floating rate debt, I got several inquiries about the rate levels for longer-term debt. Please see the following article from Churchill Financial’s blog “On The Left” which presents term debt rates for the 4th quarter 2011 by industry sector (data provided by Thomson Reuters).