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Life Inside A Hostile World

With Yahoo taking its case for independence to its shareholders, Microsoft meeting with Yahoo shareholders, Yahoo considering alternatives with News Corp. and law suits starting to fly, my mind goes back to the summer of 1999.

I was a senior associate in the New York office of Brown and Wood. Our client, Grupo Mexico, was interested in buying a copper company called Asarco. Problem was Asarco had just agreed to merge with another company (Cyprus Amax) and a third company, Phelps Dodge, was also on the prowl. An innocent phone call from a partner asking if I had time to work on the deal pretty much kick started one of the worst 9 months of my life. 18 hour days were the easy ones. It was the all nighters, and the double all nighters, that really sucked. Why is this? Because public M& A deals are never done.

The problem is when you're a public company and you agree to a deal, it means nothing. Every deal has what lawyers call a "fiduciary out", which basically acknowledges the fiduciary duty the board has to public stockholders to consider other buy-out offers, even after signing a deal. If someone lobs in a higher offer, the board HAS to consider it.

If they take it, there's usually a pretty hefty break-up fee to be paid by the target to the original buyer . This fee is designed to compensate the first acquiror for its sunk costs (contractual liquidated damages, so to speak) but in reality there's a deterrent effort there as well. The trick is the fee can't be so big that it actually does deter other offers. Fine lines here.

Imagine trying to sell your house this way. It's no wonder that the law firms love this stuff.

Also, most times these types of deals have at least a partial stock component to them (i.e. the target companies stockholders receive part of their purchase price in acquiror's stock). In many instances the deal includes what's called a collar, which says that should the acquiror's stock dip below a certain level, the deal is either renegotiated or ended. In other words if Yahoo and Microsoft sign a deal and Microsoft stock tanks (as a result or otherwise), the deal may go up in smoke. Like I said, the fun never ends in public deals.

With Asarco, they originally sold the company to Cyprus Amax, then came the hostile offers from Phelps Dodge and Grupo Mexico. After those, Asarco had an auction which was won by Phelps Dodge and a deal was signed. Grupo Mexico countered with another tender offer, above the Phelps Dodge price, which, after much wrangling, was accepted. A few weeks later Grupo Mexico closed on the deal.

Life representing Grupo Mexico in the deal was rough from an hours perspective, but not as bad as it was representing Asarco. I remember when we were negotiating the final deal with the lawyer from Skadden, at one point he wearily said to me "this is the third time I've sold this company in the past few months, I really hope there isn't a fourth." Thankfully for him (and our client) there wasn't.

Anyway, lesson here, if an when this Microsoft/ Yahoo/ news Corp/ whomever things happens, don't think its over. It's probably just the beginning. That's life in a hostile world. It ain't pretty.


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