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Defying gravity: US M&A H1 2019

What's inside

A rise in US mega-transactions more than made up for a drop in volume in the first half of 2019


After a drop in activity in the second half of 2018, US M&A has recovered strongly in the first two quarters of 2019, demonstrating the appeal of dealmaking—despite uncertainty.

In spite of several quarters of growing uncertainty about macroeconomic headwinds, US M&A deal value grew again in the first half of 2019. Overall value for the first six months of the year was up 9 percent compared to the same period in 2018. And US deal value took up a larger share of global M&A, making up 53 percent of total global deal value, up from 41 percent in H1 2018. US deal volume, on the other hand, was down 21 percent compared to 2018, a record year for deal volume.

This is good news, particularly since global activity declined on both value and volume measures this year. But the future seems more uncertain today than it has in some time, particularly since there are strong reasons for both caution and optimism.

There are some signals warning that we are due for an economic correction, despite a US economy that remains healthy. US Federal Reserve Chairman, Jerome Powell, recently hinted at rate cuts, highlighting that uncertainty over trade policy and weakening global growth continue to have negative implications. Trade troubles persist, particularly with China. An inverted yield curve suggests that the market expects a downturn on the horizon. And, after a lengthy period of frenzied dealmaking, valuations are high.

Yet the US economic backdrop remains favorable, at least for now. Capital markets are at record levels and there is plenty of financing available for companies who need it to fund dealmaking. Private equity firms continue to amass capital to deploy.

Though deal volume has dropped for three quarters in a row, viewed in the longer-term context, activity remains robust.

Whether the second half of the year can sustain the same level of activity as H1 remains to be seen. The year-on-year growth in M&A value suggests that dealmakers still have appetite, as well as the capacity, to execute deals if the strategic rationale makes sense.

A break in the clouds: M&A in the first half of 2019

The US M&A market delivered a surprisingly robust first half, with total value rising 9 percent year-on-year. Volume, on the other hand, dipped 21 percent

Private equity slows in 2019 as valuations continue to rise

Despite accumulating a vast, historic pile of capital for acquisitions, private equity has moderated its pace of buyouts in the first half of the year

Sector watch

Sector overview: Pharma and TMT lead the pack

The pharmaceutical, medical and biotech sector was number one by value, followed by technology, media and telecoms (TMT). TMT led by volume, followed by industrial and chemicals.

Pharma chases innovation through deals

The need to replenish intellectual property has pushed the pharma industry to the highest-performing sector by M&A value

Technology dealmaking stays buoyant

H1 2019 has seen deal value continue to climb in technology M&A, as digital disruption overtakes segments of the market such as fintech and Big Data

Retail M&A falls as sector migrates online

M&A activity in the retail sector fell sharply during the first half of 2019, as uncertainty and digital disruption continue to put pressure on the sector

Megadeals drive oil & gas M&A

Concerns about the price of oil have left the industry reluctant to strike deals, bringing down volume and value in H1

Real estate M&A drops, but hopes are higher for H2

After a standout 2018, real estate M&A has dropped significantly in the first half of 2019, but segments of the market such as logistics and hotels have remained attractive

In Focus

Three key M&A decisions from Delaware courts

The first half of 2019 saw several decisions from the Delaware courts that will affect M&A dealmaking

SEC proposal would ease burden of certain financial disclosures on public companies

Proposed revisions to current financial statement disclosure requirements for business acquisitions and dispositions would simplify compliance while ensuring investors get the information they need


Can the good times last? Four factors shaping M&A in the second half of 2019

Many of the factors that have underpinned recent M&A activity remain in place, but concerns are mounting

Three key M&A decisions from Delaware courts

The first half of 2019 saw several decisions from the Delaware courts that will affect M&A dealmaking

6 min read

Aruba: Supreme Court awards "deal price less synergies" in closely watched appraisal case

Rejecting the Chancery Court's use of unaffected market price, the Delaware Supreme Court awarded stockholders seeking appraisal in connection with Hewlett-Packard Company’s 2015 acquisition of Aruba Networks, Inc. US$19.10 per share—a price based on the 2015 deal price minus synergies arising from the transaction. The Supreme Court’s decision confirms the continuing importance of deal price in appraisal proceedings.

The Chancery Court had previously determined the fair value of Aruba’s stock to be its 30-day average unaffected market price of US$17.13 per share—a significant discount from the US$24.67 per-share deal price paid in the 2015 transaction. The Chancery Court held that recent appraisal decisions by the Supreme Court in connection with the acquisitions of computer maker Dell Inc. and payday lender DFC Global Corp. endorsed using market price as an indicator of fair value when shares of the subject company trade in an efficient market.

In reversing the Chancery Court's decision, the Supreme Court emphasized that, for purposes of appraisal, the subject company should be valued "as an operating entity…but without regard to post-merger events or other possible business combinations." As a result, any appraisal award must exclude any value the selling company’s stockholders would receive because a buyer intends to operate the subject company as part of a larger enterprise. Applying this going-concern standard, the Supreme Court found that the Chancery Court incorrectly dismissed deal value less synergies as an indication of fair value because the Chancery Court believed it needed to make additional deductions from the deal price for unspecified "reduced agency costs." According to the Supreme Court, the Chancery Court's view had no basis in the record. In particular, the Supreme Court noted that, unlike a private equity transaction, the HP/Aruba acquisition would not replace Aruba’s public stockholders with a concentrated group of owners but simply swap out one set of public stockholders for another. According to the Supreme Court, "HP's synergies case likely already priced any agency cost reductions it may have expected."

The Supreme Court also made clear that the recent appraisal decisions in Dell and DFC do not compel reliance on unaffected market price in determining fair value. While the price a stock trades at in an efficient market is an important factor, a market price further informed by the due diligence efforts of arm’s-length buyers, with access to confidential non-public information, to learn more about the company they are buying "is even more likely to be indicative of so-called fundamental value." Going forward, parties should expect deal price less synergies to receive considerable weight in appraisal proceedings absent deficiencies in the deal process.


Olenik: Further guidance for controller transactions

The Supreme Court provided further guidance on how to obtain the benefit of business judgment rule treatment (and avoid the more stringent "entire fairness" standard) in connection with controlling stockholder transactions. The Supreme Court had previously held that the deferential business judgment rule applies to a controlling stockholder transaction if such transaction is conditioned "ab initio" upon the approval of the informed vote of a majority of the minority stockholders and upon the approval of an independent committee of directors (Kahn v. M&F Worldwide Corp. (MFW)). In late 2018, the Supreme Court clarified that MFW's "ab initio" requirement would be satisfied if the required conditions were in place prior to any "substantive economic negotiations" (Flood v. Synutra). 

In the April 2019 case of Olenik v. Lodzinski, the Supreme Court provided further guidance on when substantive economic negotiations begin. The Chancery Court had previously dismissed a challenge by Olenik, a stockholder of Earthstone Energy, Inc., to a business combination between Earthstone Energy and Bold Energy III LLC on the basis that MFW’s protections applied and the transaction was subject to the business judgment rule. The Supreme Court reversed, finding that the plaintiff had pled facts supporting a reasonable inference that the MFW requirements were not in place before substantive economic negotiation took place. While some early interactions between the parties could be fairly described as preliminary, the Supreme Court found that, for purposes of dismissal at the pleadings stage, the preliminary discussions transitioned to substantive economic negotiations “when the parties engaged in a joint exercise to value Earthstone and Bold.” According to the Supreme Court, these valuations “set the field of play for the economic negotiations to come.” Since the MFW conditions were not in place prior to these substantive economic discussions, the Supreme Court held that the complaint should not have been dismissed. Based on this most recent case, controlling stockholders hoping to obtain business judgment treatment should carefully monitor the nature of any discussions held prior to imposing the protective MFW conditions.


RSI: Protecting attorney-client privilege 

In 2013, the Chancery Court held that, following a merger, all assets of a target company, including privileges over pre-merger attorney-client communications, transfer to the surviving company unless the seller takes affirmative action to prevent such transfer (Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP). In Great Hill, the sellers neither included language in their merger agreement preserving their privilege nor prevented the surviving company from taking actual possession of the communications. As a result, the Chancery Court held that the sellers had waived their ability to assert privilege. 

The Great Hill decision encouraged sellers to use their contractual freedom in order to avoid waiving attorney-client privilege in connection with a merger transaction. In the recent case of Shareholder Representative Services LLC v. RSI Holdco, LLC, the sellers did just that in connection with the sale of Radixx Solutions International, Inc. The applicable merger agreement contained an express provision that 1) preserved any privilege attaching to pre-merger communications, 2) assigned to the sellers' representative control over those privileges, 3) required all parties to take steps necessary to ensure that the privileges remained in effect, and 4) prevented the buyer from using or relying on any privileged communications in post-closing disputes against the sellers.

Despite this provision, the buyer, in a post-closing dispute with the sellers, sought to use approximately 1,200 pre-merger emails between Radixx and its counsel contained on computers and email servers acquired in the merger. Because the sellers did not excise or segregate the privileged communications from the computers and email servers transferred to the surviving company, the buyer argued that the sellers waived the privilege. The Chancery Court rejected the buyer’s argument. Importantly, the Chancery Court noted that the merger agreement provision covered any privileged communication prior to the Closing Date. Thus, even if the sellers waived privilege post-closing, the merger agreement still prohibited the buyer from using the communications against the sellers. The Chancery Court also noted that requiring the sellers to take action to preserve privilege would undermine the guidance of Great Hill, which had encouraged parties to negotiate for contractual protections. By enforcing such a provision, the Chancery Court reminds parties of the importance of clearly stating how pre-merger communications will be treated following a transaction.





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