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MONDAY

JANUARY 7, 2013

VOLUME 24 ISSUE 4

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INDEX

TOP STORYWhen regulators set out to tame the derivatives markets, few imagined that swaps would morph into futures products, giving the edge to exchanges over interdealer brokers, but that’s what seems to be happening page 4

m&aThe complex world of pharmaceutical collaborations and partnerships is the most active and evolving area of life sciences dealmaking—and the least transparent page 10

The new year kicks off with a big deal in Washington and smaller transactions elsewhere, but political uncertainty could keep the lid on M&A for a while page 12

baNkRuPTcYA steady stream of once-bankrupt companies has filed for court protection again after undergoing a change of control, raising the question of why aren’t buyers more wary? page 13

PRIvaTE EquITYPrivate equity investments in Pakistan are paltry for a nation of its size, and two programs designed to jump-start the industry face major hurdles, including a dicey political situation page 15

Better Capital negotiates a company voluntary arrangement with the trade creditors of the money-losing direct marketing units of the U.K. arm of Reader’s Digest Association page 16

mOvERS & ShakERSPersonnel changes at Vanguard Group, Foley & Lardner, Debevoise & Plimpton and other firms page 17

backSTORYFinancial flexibility, not ideological rigidity, delivers Current TV to Qatar-funded Al Jazeera after an active auction page 18

RulES Of ThE ROaDAntitrust experts agree that the rules governing merger reviews shouldn’t change because the economy is in the doldrums page 19

SafE haRbORWith Delaware judges looking askance at standstill agreements, merging parties risk bigger settlements in shareholder litigation unless they take care to limit the scope of the provisions page 20

juDgmENT callDifferences between U.K. and U.S. acquisition agreements assume commercial and strategic importance as it becomes increasingly common for international acquisitions to be governed by English law page 21

fEEDbackTell us what’s on your mind page 23

cOmPaNY INDEXpage 24

ThE DEal PIPElINELinks to current content page 3

ThE DaIlY DEalSFor a summary of current risk arbitrage situations, click here

2 ThE DaIlY DEal m O N D aY j a N u a RY 7 2 0 1 3

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THE DEAL PIPELINE

Top acquisitions in the past two weeks

Target: Cerved Group SpAAcquirer: CVC Capital Partners GroupDeal value: $1.71 billionAnnounced: Jan. 2

Target: ArcelorMittal (15% iron ore mining stake)Acquirers: China Steel Corp., Posco Co. Ltd.Deal value: $1.1 billionAnnounced: Jan. 2

Target: VietinBankAcquirer: Bank of Tokyo-Mitsubishi UFJ Ltd.Deal value: $743 millionAnnounced: Dec. 27

Target: Duff & Phelps Corp.Acquirers: Carlyle Group, Stone Point Capital LLC, Pictet & Cie, Edmond de Rothschild Corporate FinanceDeal value: $665.5 millionAnnounced: Dec. 30

Target: Fieldwood Energy LLCAcquirer: Riverstone Holdings LLCDeal value: $600 millionAnnounced: Dec. 28

Source: The Deal Pipeline

Ahead of the newsAn executive summary of events likely to affect the markets tomorrowSigns from EU suggest PVH-Warnaco deal could be sewn up soon Click here

Daily updates on new and ongoing deals. Easy to search and download data

Exclusive videoM&A outlook for 2013 Paul Weiss partner Ariel Deckelbaum talks to The Deal about the forces driving M&A in 2013 including the EU, activist investors, corporate acquirers and private equity.

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MOST RECEnT AuCTiOnS• Vion NV - noncore assets |

Vion NV - UK food operations - 01/19/2013

• Carlo Tassara SpA - assets - 12/30/2012

• Hewlett-Packard Co. - noncore assets - 12/27/2012

MOST RECEnT BAnkRuPTCy• Absolute Life Solutions Inc. -

Warning - 01/03/2013• Water World Inc. - Warning -

01/02/2013• Elcom Hotel & Spa LLC - Filing -

01/02/2013

MOST RECEnT M&A• Tapit Media Pty Ltd. - 01/03/2013• Tamweel PJSC - 01/03/2013• Bayshore Technologies Inc. -

01/03/2013

MOST RECEnT FinAnCinGS• Leap Motion - VC - 01/03/2013• Labrys Biologics - VC -

01/03/2013• Gradalis Inc. - VC - 01/03/2013

3 THE DAILy DEAL MOND Ay J A N u A ry 7 2 0 1 3

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Two and a half years on, was it all for noth-ing? Out there, on the front line of financial reform’s unintended consequences, they are asking the question. Were the thousands of pages of laws, regulations, comment papers, concept releases, rule proposals and rule re-proposals committed to print in vain? Was the stakeholder language, so finely honed, so polite but so pointed, brought to a pitch of courteous acidity for no reason? Was one of Dodd-Frank’s signature projects—the overhaul of the derivatives market and, spe-cifically, the attempt to reform swaps, the financial products at the heart of some of the financial crisis’ hairiest moments—all a waste of time?

As 2013 opens, the financial industry finds itself grappling with the same heavy questions that weighed on the close of 2012: the relevance of swaps, the fate of entire markets. With the Commodity Futures Trading Commission yet to finalize the rules governing the new platforms—so-called swap execution facilities, or SEFs—designed to drag the swaps market from its opaque, over-the-counter past to a more regulated, transparent, centrally cleared future, and with many market participants left frustrated by regulatory delays and uncertainties, a handful of major deriva-tives exchanges have sensed opportunity. Over the past two months, Intercontinen-talExchange Inc., which in late December acquired the plum prize of NYSE Euron-ext for $8.2 billion, CME Group Inc. and CBOE Futures Exchange LLC have all launched standardized futures contracts that replicate the economic terms of several of the most liquid, heavily traded varieties of OTC swaps.

These exchanges have, in the lingo of the trade, set in train a process of “futur-izing” the gargantuan $639 trillion swaps market, potentially setting off a major wave of product innovation and dealmaking—in which ICE’s swoop for NYSE Euronext has been hailed by many as the first signifi-cant shot—and placing in peril many of the

big interdealer brokerage firms that have traditionally dominated the legacy OTC swaps market. In the process, a significant portion of the new regulatory architecture the CFTC has painstakingly tried to coax the derivatives industry into over the past two years may eventually be made obsolete. Many now question the future of swaps as a financial product: Are swaps, the big beasts of the financial jungle, the chunkiest, most complex products of all, facing extinction?

“One year ago we were walking around saying, ‘Hey, can I talk to you about this thing we’re thinking about called futuriza-tion?’ and people would be like, ‘What?’ ” said Neal Brady, CEO of Eris Exchange LLC, a futures exchange created in 2011, with the backing of a number of major trad-ing firms, for the purpose of positioning themselves for what many felt was an ap-proaching migration of the swaps market to futures. “Now the whole issue of futuriza-tion is at the forefront of the industry.”

What is futurization, and why is it hap-pening now? Some simple history will an-swer the question. Swaps were born unreg-ulated; they came of age unregulated; they suffered a serious accident and the public decided they needed to be policed. As poli-ticians, policymakers and regulators fussed over new rules, futures—a type of deriva-tive that can achieve, if less perfectly and precisely, many of the same objectives that swaps were originally created to service—emerged as a more attractive option for end-users than the new, heavily regulated species of swap.

For decades, since their origins in the ’70s and ’80s as a hedging and specula-tion mechanism for corporations and trad-ing firms, swaps were negotiated privately and bilaterally, with the big dealer banks, in their capacity as market makers, of-ten intermediating to “face” end-users as counterparties in trades. None of the major regulatory agencies was invested with for-mal authority over the marketplace. That, of course, changed four years ago, when credit default swaps—one of the most liquid

varieties of swap, along with interest rate swaps—became complicit in the failure of American International Group Inc. This prompted calls for a new era of proper regu-latory oversight of the derivatives market.

In responding to those calls, Dodd-Frank outlined an ambitious project with three primary objectives: to reduce the systemic risk in derivatives by requiring most trades (though not all) to be “cleared” through central counterparties subject to stringent capital and operational requirements; to increase the transparency of the market, by mandating trade execution on exchanges or exchange-like venues and by creating a robust trade data reporting regime; and to increase competition among execution and clearing venues, thereby increasing choice for end-users.

Clearing, execution, competition: from noble aims, the Dodd-Frank project is now indirectly causing the market to distort in ways that, some argue, may see some or all of these objectives stymied. This, accord-ing to many observers, is the result of delays and confusion around the regulation of the new marketplace. “The regulators have ba-sically created an arbitrage opportunity be-tween swaps and [swap] futures,” said Ben Macdonald, global head of fixed-income products at Bloomberg LP.

The CFTC has set March 11, 2013, as the start date for mandatory clearing of trades among major swap dealers. The big deriva-tives exchanges—notably LCH.Clearnet Group Ltd., CME Group and ICE—have emerged as warehouses through which much of the clearing of derivatives will be channeled. Clearing per se is not what is spooking the market; the market already understands clearing well. Many energy swaps already made the migration to a cen-trally cleared model in the early 2000s fol-lowing the collapse of Enron Corp. And over the past couple of years, as central clearing appeared inevitable, many swap dealers—whose trading activity, analysts estimate,

By aaron timms

Futurization shockAs regulators set out to tame the derivatives markets, few imagined what swaps would morph into

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accounts for around 70% of the total swaps market—have already made the move to-ward having the OTC trades they execute among themselves (in other words, from dealer to dealer) cleared centrally.

No, clearing scares no one. The real con-cern is in the CFTC’s requirement that once the rules are finalized, all swaps will need to be executed on either an exchange or a new type of electronic venue known as a swap execution facility. Exchanges have traditionally listed many types of deriva-tives, including futures and options, and, most presumed, would continue to do so once the Dodd-Frank derivatives rehabili-tation project was complete. Swaps, on the other hand, would be new creatures in the exchange universe, with their own dedicat-ed execution platforms: SEFs.

In 2010, SEFs struck many in the indus-try as both a premium catalyst for competi-tion and a natural parking lot—retirement

home, some suggest unkindly—for inter-dealer brokers.

The five big interdealer brokers—Icap plc, GFI Group Inc., BGC Partners Inc., Tullett Prebon plc and Tradition Group—are the swap industry’s eminences grises; they play a critical role in the plumbing of the OTC market, connecting dealers to each other. If you’re a dealer and you want to get a price on a swaps trade you’re looking to ex-ecute on behalf of a client, you call a broker to get a sense for where the market is. The system is heavily voice-dependent. Trans-parent in the lofty Dodd-Frank sense it—arguably—is not. But it is the system dealers and the market itself have chosen as swaps have evolved; the major interdealer brokers, who all exhibit a reluctance to speak on the record, are quick to point out that the voice bias of their business is a product of client preference, not, as critics claim, a deliberate design to deepen obfuscation around fair pricing and keep client fees high.

SEFs, many believed, would provide in-

terdealer brokers a logical home within the CFTC’s new derivatives architecture, and would also—by dint of the sheer novelty of the platform—encourage a flood of new en-trants.

Two and a half years later, that early op-timism has been reduced to weary embit-terment. Delays in the finalization of rules defining and describing SEFs have led many to cool on them altogether. “As we’ve gone through the last year, the SEF has looked less and less appealing as a vehicle,” said one senior executive at a major interdealer bro-ker. “And it’s out there generally that many people are recalibrating their thinking and saying, ‘Well maybe we should be [an ex-change] instead.’ And that’s not at all what the intention of Dodd-Frank was. It’s only because the SEF has been so delayed and so muddied in its formation and definition that we’ve arrived at this point. There was a very strong congressional intent to have SEFs as

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an alternative to [an exchange]—to have this as a separate venue for the handling and execution of swaps specifically. So it’s really turned into a mess—it’s not a satisfac-tory situation.”

Meanwhile, the small amount of cer-tainty on how swaps will clear and trade is pushing the industry to seek alternatives to the product itself. “The introduction of the listed [futures] contract introduces a unique opportunity, challenge and threat to the whole concept of SEFs and the current state of over-the-counter swaps,” said Vinayek Singh, CEO of Vyapar Capital Market Partners LLC, a New York-based broker-age firm. Market participants wishing to clear swaps need to post five days of initial margin—equivalent to the most the trade could lose or make over five days, based on historical simulations—to the clearing-house. By contrast, most futures contracts require only one or two days of initial mar-

gin for clearing purposes. Futures, in other words, involve a much smaller up-front commitment of capital for clearing than swaps.

This was no issue for as long as swaps trading was done over the counter; but giv-en that mandatory clearing for most swaps will kick in this year, it has suddenly become a very big issue indeed. “If you’re familiar with that bilateral world—you’ve been liv-ing it for the past 20 years—you never had to post initial margin on anything,” said Peter Barker, executive director of interest rate products at CME Group. “So the notion that you have to post 2%, 3%, 4% of the notion-al—that’s a lot of money.”

At the same time, debate rages over the definition of so-called block trades, the super-sized trades that account for a large part of the cleared derivatives market and are generally traded off-exchange. The idea behind block trading is that if your trade is hefty enough, you should be allowed time to negotiate and execute it away from the

public trading platform, producing a delay in reporting the price and size of the trade. The reason: to avoid announcing your in-tentions to the world and having the market move against you.

In the world of futures, block thresholds are set, often at comparatively low levels, by exchanges. In the world of swaps, which is only now grappling with an exchange-centric execution model, the CFTC has pro-posed that only trades that fall into the top 33% of a range of historical notional sizes should be entitled to the block trade ex-emption. In interest rate swaps and credit default swaps, this would mean only 6% of transactions are big enough to count as block trades.

Howls of outrage have ensued.“No one was happy that the CFTC was

going to dictate what a swap block would be,” said Will Rhode, head of fixed-income research at Tabb Group LLC, an indepen-

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dent advisory firm.Enduring regulatory uncertainty over

what a SEF will be, onerous margin require-ments for swaps clearing and unattractive conditions for block trading. Put all of that together, and it’s little wonder the swap is starting to lose some of its luster.

Into the vacuum have stepped the major derivatives exchanges, brandishing shiny new hybrid swap-futures contracts. Futures hold many advantages over swaps. They’ve been regulated in a relatively settled and certain way for decades; margin require-ments are not excessive; and block trading requirements are set by exchanges, not reg-ulators, at eminently palatable levels.

In October 2012, ICE converted all of its cleared energy swaps to economically equivalent energy futures. In early Decem-ber, CME, partnering with a number of major market-making banks such as Citi-group Inc., Credit Suisse Group, Gold-man Sachs Group Inc. and Morgan Stan-ley, launched an interest rate swap futures contract that delivers into an OTC interest rate swap on expiration. Eris Exchange, which counts DRW Trading Group and Getco Holdings Co. LLC among its partici-pating market makers, already offers a simi-lar interest rate swap futures contract that cash settles, rather than converting back into a swap. And one week after the CME unveiled its new interest rate swap future, the CBOE Futures Exchange launched an S&P 500 variance swap future.

The futurization craze intensified as the year came to a close, and that trend looks likely to continue into 2013: ICE has already announced that it will launch a credit de-fault swap index futures contract early this year, and several other major exchanges have declared their intention to futurize further.

How much traction will the new prod-ucts gain? It is too early to say. But initial interest in the new swap futures products has been positive. For instance, CME saw 782 deliverable interest rate swap futures contracts traded on Dec. 3, the day the new product launched, with volume growing steadily from there; 4,456 contracts were traded Dec. 12, the peak of post-launch trading, and by Dec. 31, a total of 27,107

trades had been recorded. Meanwhile, all exchanges have reported vertiginous drops in cleared swaps trading since key swap dealer registration requirements went into effect in mid-October.

How far is this likely to go? Will futures swallow swaps whole? No one, naturally, knows for sure. “Eventually, because it’s go-ing to be so much more expensive to trade a swap than a future, you would think there will be more people willing to provide li-quidity in a future than a swap, so it will be a more liquid market, but no one knows ex-actly how things are going to pan out yet,” said Don Wilson, chief executive of DRW Trading, a trading firm that patented a key piece of the calculation methodology for both Eris and CBOE Futures swap futures offerings. “We’ll just have to wait and see.”

The interdealer brokers, not surprising-ly, paint things in more alarmist terms. “It will touch everything,” said one. “It will be an assault on all swaps. We will go through a major futurization process and it will not be good.”

But most other market participants, even the most ardent partisans of the listed exchange model, envisage a world in which swaps, in the medium term at least, will continue to play a role. “The swaps market won’t go away, it will just morph into the exchange-listed marketplace, as well as co-existing with the [OTC] market,” predicted Singh. “The CME [is] working and creating a new ecosystem, which I think is going to be very positive for the marketplace. That doesn’t mean there’s not still going to be a bespoke marketplace.”

Putting a precise number on the poten-tial market share of swap futures, however, is an exercise that’s more art than science. The house view at Tabb Group, for instance, is that 3% of the interest rate swap market will migrate to futures. Others view this as a conservative estimate and see the poten-tial size of the swap futures market as much larger; but even on that conservative pro-jection, the sheer size of the current global swaps market ($639 trillion in total notion-al, versus $25 trillion for global futures) im-plies that the new market created by futur-ization would amount to a not-insignificant $15 trillion.

There is another way of approaching the question. Swaps and futures are fundamen-

tally different animals. The futures market is a high-volume business in which contracts are standardized according to start and end dates, coupons, and benchmarks; swaps, by contrast, constitute a lower-volume market in which individual trade sizes are much larger and the products themselves are more highly customized to meet very spe-cific hedging needs of end-users.

According to Charley Cooper, a senior managing director at State Street Global Markets, the extent of the eventual fu-turization of the swaps market—assuming swap futures attract sufficient liquidity—will depend more on the degree to which market participants are willing to sacri-fice the customization that swaps offer for the cost benefits of futures. “Yes, there are swaps that are unique and bespoke. The real question is, are those instruments still necessary if they become that much more expensive to trade?”

Much of it will come down to the degree of precision and accuracy market partici-pants will require in their hedges. The best guess at this stage is that those who are con-tent to seek the best fit for hedging their ex-posure to the credit and rates markets will look to futures, while those pressured to find exact matches in their hedges will pay extra to get that exposure through swaps.

Who wins and who loses in all this? “This is all skewed in favor of the Chicago axis—the CMEs and ICEs of the world,” said one interdealer broker. This is a common view in the industry. The brokerage industry was already in trouble, with stock prices of most of the big firms caught in a long, secular downdraft since the financial crisis; 2012 quarterly results have mostly presented a rolling tableau of misery, with losses across almost all asset classes and declining profits in the core voice brokerage business.

But this new development has compound-ed the pain. According to Brad Flaster, vice president of operations at Parity Energy Inc., a New York boutique, energy-focused interdealer broker, “The exchanges are seen more and more as the enemy—they’re try-ing to put brokerage shops out of business.”

Interdealer brokers paint this as more than the self-serving whine of an industry under attack. Where others see an exciting

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new ecosystem emerging as swaps futures take hold, the brokerage houses paint a grim future beset by monopolization, dys-function, market inequality and illiquidity. The market structure that’s taking shape, in which exchanges become dominant venues for both execution and clearing of deriva-tives, is, interdealer brokers argue, funda-mentally antithetical to the objectives of Dodd-Frank.

Recall the three objectives of the legisla-tion: risk mitigation, price transparency, and competition and consumer choice. “This country’s all about competitive conditions, and that’s what the lawmakers intended in this situation,” said one interdealer broker. “They said they quite like that competitive model at the clearing level and at the trad-ing or execution level—but they specifically said that they did not want a vertical silo, whereby you’d have bundling of clearing and execution and other services in the one

venue. And they said that for good reason—because it’s monopolistic and anticompeti-tive, and it’s the wrong way to go for a coun-try such as America. … The silo structure is fundamentally open to abuse.”

This is—unapologetically—an argument based on fear. “You can start parlaying clearing fees into execution fees and you can be abusive very easily if you control both of [the clearing and execution] avenues,” said the broker.

The response from many in the indus-try—led by the exchanges—is twofold. First, they say, it meets, not defeats, the objectives of risk warehousing and transparency to have swaps trade as futures on regulated exchanges. In Rhode’s pithy summation, “Swaps are moving into a more regulated and transparent trading environment—so why complain?” Second, they argue that the market for futures is fundamentally more democratic—and easier to access—than the clubby, broker-dominated swaps market; as a result, liquidity in both derivatives and

their underlying markets should remain buoyant as futurization proceeds, in con-trast to the retreat from liquidity many fear would result in a universe where more cost-ly, SEF-traded swaps were the best hedging mechanism. “Futures are less expensive, so there’s [likely to be] less of a dampening of liquidity,” said Cooper. “If I have to pay more in the swaps market for insurance, that’s going to have a bigger impact on the underlying market than would hedging in the futures market.”

To this, the brokers offer a pointed re-joinder: Low block trading thresholds mean there is not necessarily more transparency on exchanges, since most trading occurs off-exchange; and breaking the existing swaps market structure will break liquidity. The proponents of the emerging reality reply: A proliferation of execution venues will only harm the swaps market. Fractured liquid-ity spread out over multiple trading venues

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does not work for markets, and since liquid-ity follows liquidity, the force of consumer “choice” in the arena of trade execution is always centripetal, not centrifugal. The brokers disagree; the exchanges disagree with their disagreement. And on and on it goes, an endless back-and-forth every bit as minute and numbing as the Dodd-Frank rules-making process itself.

Amid the noise and the lobbying points, changes to market structure are causing a shift in the institutional balance of power. As the exchanges emerge as fortresses of li-quidity in a centrally cleared and newly hy-bridized marketplace in which swaps trade as futures and futures settle as swaps, the interdealer brokers are having to reposition themselves. “There will be considerable consolidation in this space,” said Flaster.

Many within the brokerage industry agree, and while the history of fierce compe-tition between the brokers makes mergers among the Big Five unlikely, for now at least, some are already looking to acquisitions as a way out of their corner. Icap acquired Plus Stock Exchange plc in June, with a plan to offer futures on the equities platform (which has since been renamed the Icap Securities & Derivatives Exchange); BGC earlier last year gained operational control of ELX Fu-tures LP, a financial futures venue; and GFI is reportedly looking to buy an exchange or independently establish one itself.

The irony in the brokers’ bluster about futurization and the exchanges’ land grab is this: Most big interdealer brokers would be open to tie-ins with the exchanges. It is open to debate, of course, whether the exchanges themselves would ever reciprocate the in-terest, especially given that, from a deal-making perspective, exchanges are most of-ten attracted to other exchanges. ICE’s late 2012 acquisition of the Big Board, of course, has provided a striking reaffirmation of that attraction. But the acquisition also punctu-ates the generational ascendancy of deriva-tives over equities and—more important-ly—highlights the impact that Dodd-Frank is beginning to have on dealmaking and market structure. The main interest in the deal for ICE, it is widely agreed, was not to lay claim to the history and prestige of the New York Stock Exchange, but to gain ac-

cess to the European derivatives market through NYSE Euronext’s control of NYSE Liffe, Europe’s second-largest futures ex-change. The regulatory changes sweeping the global swaps market should be seen as key elements of this process: ICE now has a major foothold in Europe for a new business model centered around clearing and swap futures. Meanwhile, CME Group, ICE’s main rival, has already announced plans to open a London-based derivatives exchange later this year. For now, the interest for the big exchanges appears to be in expanding the exchange business, not in repurposing the historical interdealer broker business for a newly exchange-centric world.

But beyond the realm of M&A, inter-dealer brokers looking to operate in the new futurized marketplace will have other op-tions open to them—by functioning, for in-stance, as “introducing brokers” or “futures commission merchants” at the exchanges. “Brokers add a great deal of value to the market,” said Paul Cusenza, CEO of Nodal Exchange LLC, an electricity exchange, adding that their role would not disappear. “But they’re going to have to adapt.”

Accordingly, some brokers are less in-clined to a zero-sum view of the industry. Indeed, some are even happy to concede the general point that, as a result of futur-ization, the CFTC has, even if unwittingly, achieved the objective of bringing swaps into a more regulated environment. “A bro-ker can be a guy in a basement just making phone calls—there’s absolutely no regula-tion,” said Flaster. “With the exchanges moving everything to futures, we now have

post-trade transparency and regulated enti-ties where previously there were none. [So] the CFTC has indirectly achieved some of their objectives in these markets.”

“Indirectly” is the key. All of this has seemingly happened more by accident than regulatory design. Many have been left wondering: Was all the industry spent over the past two years to create an alter-native market structure for SEFs really just a bridge—a difficult, expensive, laborious bridge—to take OTC swaps onto exchang-es? Was the CFTC guiding the market on training wheels the whole time as it waited for swap futures to come along? Divining the minds of regulators is a difficult task—for no one more so, perhaps, than regula-tors themselves. The CFTC did not respond to requests for comment; but at the time of the launch of ICE’s energy swap futures contract in October, CFTC Chairman Gary Gensler, applying a brave, victor-by-de-fault’s sheen, told The Wall Street Journal, “The historic reform of 2010 is working. … It’s about lowering risk and increasing transparency, whether you call it a swap or a future, we’ll have that.”

Even though most agree that swaps are likely to survive, for the time being at least, the prospect of their potential demise, ac-cording to one former senior CFTC attor-ney who requested anonymity, brings few—if any—within the agency to tears. “If there were people who two years ago said, ‘This is going to kill the swaps market,’ I think a lot of people [within the regulatory commu-nity] would have shrugged and said, ‘Well that’s OK.’ But I don’t think anyone really thought it would turn out quite like this.”

And that is the point. Regardless of what-ever regulatory gloss is put on it, the mar-ket is morphing in directions well beyond anything Congress or the agencies initially imagined. Ultimately, “futurization” raises more questions than it answers. Will swaps disappear? Will the whole concept of SEFs be stillborn? Are interdealer brokers on the brink of obsolescence? Was that the regula-tory intent all along? We still don’t know. But there is one certainty in all of this, and that is in the enduring ability—even through an era of apparently greater oversight and scrutiny—of financial product innovation to skip well ahead of financial product regula-tion. n

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M&Ahealthcare m&a IndustrIals m&a tmt m&a energy m&a all m&a deals ytdmore at the deal PiPeline >

Christopher Garabedian beamed as he began the conference call, an Oct. 3 an-nouncement pronouncing that Cambridge, Mass.-based Sarepta Therapeutics Inc.’s experimental drug for Duchenne Muscular Dystrophy—a degenerative genetic disease with no cure—had met its endpoints in a closely watched, highly anticipated Phase 2b trial. “This treatment benefit is unprec-edented in DMD,” Garabedian, Sarepta’s CEO, said on the call.

Heady times were about to begin for Sarepta, which saw its stock triple in a day as giddy investors bid up shares on the prospects of its DMD drug, eteplirsen. Ga-rabedian noted that the company has plen-ty of options going forward, but he might as well have said plenty of challenges as well. Though Sarepta is now seemingly at a place every biotechnology company dreams about—holding all the rights to a poten-tially breakthrough drug—it is also on the verge of engaging in one of the least trans-parent, yet most active and evolving areas of life sciences dealmaking: the complex world of pharmaceutical collaborations and partnerships.

Sarepta isn’t alone, of course. Invariably, nearly every biotech that doesn’t crash and burn needs Big Pharma’s help in one way or another at some point. Despite their prob-lems, pharmaceutical companies still offer the financial wherewithal to push drugs through clinical trials; the manpower and sales force to manufacture and launch drugs both domestically and globally; and, potentially, an exit for investors in the form of a buyout—a particularly attractive op-tion these days given the tepid initial public offering market for biotechs.

This breeds a complex tug-of-war be-tween pharmaceutical and biotech compa-nies. The two engage in a dance that ulti-mately leads to some type of collaboration that often gives small biotechs the funding

they sorely need and Big Pharmas a piece of a drug—or potentially the whole com-pany—at a cost far lower than what they would have had to pay later in the drug’s development process.

In the process, such dealmaking cre-ates a host of challenges for those involved. Biotechs are under an immense amount of financial pressure and don’t have much leverage unless they have a clinically ad-vanced jewel backed by impressive data. Pharma companies, trying to cut down R&D expenses and wary of throwing cash at poorly performing programs, will do all they can to extract a biotech’s value for the lowest possible price. The deal negotiators—particularly on the biotech side—have few reference points to look to in their talks. As such, dealmaking takes on something of a Wild West flavor.

“There really aren’t bankers involved, and there aren’t really any databases,” said one M&A lawyer with decades of experi-ence in pharmaceutical collaborations and licensing agreements. “We’ve talked about gathering what data we could, but it’s sort of all over the place.”

To understand why, first consider the structure of a typical licensing deal: A large pharma company will make an up-front cash payment to a biotech for rights to some sort of asset, be it a preclinical, early-stage, midstage or even commercially available drug, or, in some cases, a technology plat-form or an entire portfolio of potential compounds. The biotech will then get a series of additional payments tied to either clinical milestones (the drug completing Phase 2 or Phase 3 trials, for example), reg-ulatory events (the drug winning approval from the U.S. Food and Drug Administra-tion or similar government bodies abroad) or commercial success (the drug hitting certain sales targets). Sometimes, the bio-tech will also get a percentage of royalties on the drug’s sales (typically in the 5% to

15% range, the M&A lawyer explained). At other times, the pharma will get an exclu-sive option to buy the biotech outright at a later date.

Other quirks also exist. The game is vast-ly different from a traditional M&A deal in that valuations are largely projection-based and difficult to model. Comparables exist, but aren’t always available, and in most cases, products are years away from earn-ing actual money in the market. Generally, transparency is in short supply. In Celgene Corp.’s Oct. 4 deal with VentiRx Phar-maceuticals Inc. to develop the biotech’s lead compound, cancer drug VTX-2337, the only thing Celgene publicly disclosed was a $35 million up-front payment to fund R&D of VTX-2337 through certain unspecified, predefined clinical endpoints—but the deal also included an option for Celgene to ac-quire the company outright.

“It’s really a math equation where you throw all these different factors into a giant calculator and you come out with a docu-ment that gives you a [return on invest-ment] or a [net present value],” said Michael Lerner, the chairman of New York-based law firm Lowenstein Sandler PC’s life sci-ences group. “If it’s positive, you’re going to do it. If it’s negative, you’re not.”

Those figures come down to a variety of factors, said Robert Baltera, a consultant for pharmaceutical executives and the former CEO of Amira Pharmaceuticals Inc., which partnered with GlaxoSmithKline plc on an asthma drug in 2008 and was ultimately acquired by Bristol-Myers Squibb Co. in 2011.

Such factors, Baltera said, include the indication (or indications) for the drug, the potential market size, how far along the drug is in development, how much it will take to get the drug to market and the strength of the drug’s patents (and whether

by ben Fidler

Putting a price on promisePharma collaborations and partnerships are most active but least transparent in life sciences deals

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M&A

or not there may be potential intellectual property litigation hanging over it).

Where the drug is in development is a major factor in the size of the up-front payment. A recent study by Deloitte Re-cap LLC—a subsidiary of the big account-ing firm that publishes periodic reports on pharmaceutical licensing and partnership issues—showed that the median up-front payment for a preclinical compound was $7.3 million, a figure that jumped all the way to $34.4 million in Phase 2 and up to $102 million for an already-approved prod-uct.

Merck & Co., for instance, paid Wup-pertal, Germany-based anti-infectives specialist AiCuris $142 million up front on Oct. 15—and offered $429 million in mile-stone payments—for the rights to a portfo-lio of treatments for viral infection human cytomegalovirus led by a drug in Phase 3 that has already gained orphan drug sta-tus. By comparison, Bayer AG paid Evo-tec AG just ¤12 million ($15.52 million) up front, but offered a potential ¤580 million in milestones, to collaborate on a trio of po-tential drugs for endometriosis that haven’t been created yet.

Celgene even recently signed up to seed San Diego’s PharmAria LLC, a maker of cancer drugs, while getting an option both to license certain R&D programs and ulti-mately to buy the company outright.

“The earlier stage the company, the more likely the outcome is going to be an acquisition,” Baltera said. “Given where the IPO market is today, that is the more attractive of the two liquidity options [for investors].”

The wide swing in value is no surprise, given that the most significant leverage a cash-starved biotech can bring to the ne-gotiating table is solid data that alleviates risk. This is so much the case that bidding wars can erupt when that data appears. The M&A lawyer noted that pharma companies are now more willing to put more money up front for assets that are worth partnering because of the increased competition.

“The assets that have data that [are] at-tractive and compelling have probably been partnered, or people are aware of it or are circling around it,” Lowenstein Sandler’s

Lerner said. “These companies have tons of business development guys looking for the next great thing.”

The most notorious recent example is Pharmasset Inc., whose hepatitis C com-pound, then known as PSI-7977 and only in Phase 2, was so sought after that Foster City, Calif.-based Gilead Sciences Inc. had to pay $10.8 billion and buy Pharmasset outright to trump Bristol-Myers and oth-ers and capture the drug. But Pharmasset is more the exception than the rule.

Dublin’s Amarin Corp., for example, won FDA approval of Vascepa, which many analysts saw as a potential blockbuster drug to reduce very high triglyceride lev-els, on July 26. Amarin had repeatedly said publicly that its main focus was to keep the asset unencumbered in the hopes of setting itself up for a buyout or finding a partner to help launch it.

Upon FDA approval, its stock shot up. Yet, some four months later, Amarin still hasn’t signed a deal, which industry ob-servers speculate could stem from anything from problems securing New Chemical Entity status for the drug, which gives it an additional two years of market exclusivity before someone can file a legal challenge to it, to simply not yet getting the price it wants from a potential licenser or buyer.

Most feel that in this market the lever-age in partnerships lies with Big Pharma, largely due to investor wariness among venture firms and the dearth of capital flowing to biotechs—even though pharma companies need such biotechs to mitigate the risk of drug development and reduce their R&D costs.

“The challenge [for biotechs] is, you need to be able to demonstrate that you have no immediate need for cash,” Baltera said.

The next part of the deal structure is the back end, the size of which also depends on the product’s distance from the market and its potential. Three of the most significant licensing deals of the past 12 months gar-nered high numbers because of both their early stage focus and their therapeutic mar-kets. In December 2011, Johnson & John-son agreed to pay up to $975 million—$825 million of which was reserved for mile-stone payments—to help Pharmacyclics Inc., based in Sunnyvale, Calif., develop a Bruton’s tyrosine kinase, or BTK, inhibitor,

an oral treatment option for various cancer indications that was only in Phase 1 and Phase 2 trials.

Abbott Laboratories promised to pay as much as $1.35 billion, including roughly $1.17 billion on the back end, to team with Mechelen, Belgium-based Galapagos NV on a rheumatoid arthritis drug in Phase 2 in February. Also, Allergan Inc. signed a $1.5 billion collaboration with Molecu-lar Partners AG, of Zurich, to develop and commercialize products for ophthal-mic diseases such as exudative age-relat-ed macular degeneration. That included just two separate $62.5 million up-front payments—the key compound, currently named MP0260, hasn’t yet made it through the human proof-of-concept stage.

Pharma consultant Baltera explains that the further along the drug is in clini-cal development, the more milestones will be geared toward hitting sales targets. Li-censing deals for earlier-stage compounds, on the other hand, will have much more weight placed on meeting clinical mile-stones. Pharmacyclics has already earned three separate $50 million milestone pay-ments for hitting clinical targets alone through its deal with J&J. The latest $50 million installment came when it enrolled its fifth patient in a Phase 3 study testing the drug, ibrutinib, in a combination ther-apy on patients with relapsed or refrac-tory chronic lymphoma/small lymphocytic lymphoma. Johnson & Johnson aims to en-roll 580 patients total in the study.

Such conversations for Pharmacyclics and J&J likely began some time ago. Bal-tera said the process of partnering begins well before a drug is in the clinic.

“You really need to be out there work-ing years ahead of time, pitching your story to all the potential buyers of your stock,” he said. “You need to establish these relation-ships early on.”

Once the time comes, the process is very similar to an M&A auction. The biotech will attempt to have as many discussions as possible, whittling anywhere from 50 to 60 potential bidders down to 10 to 15 who sign confidentiality agreements. Management will then hold conferences presenting data, and ultimately three or four may offer term

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The biggest deal of 2013 may already have happened. Well, sort of. On Jan. 1, most U.S. taxpayers awoke to find they weren’t about to plunge over the fiscal cliff after all. The stock market gave a brief round of applause the following day, which cheered everyone up for a little while. But a bigger question is whether the eleventh-hour budget reso-lution will do much to heal the economic anxieties that have addled corporate M&A ambitions the past two years. Will the long-awaited M&A floodgates finally open? So far, the fiscal cliff conundrum has offered up one possible boon for M&A—and a retro-spective one at that.

In the fourth quarter, U.S. corporates sprang to life after a year of malaise—com-pleting 3,116 deals, the highest volume for the period over the past 12 years, according to Dealogic data—with much of the activity coming in December. Thank the tech sec-tor, one of the single most active industries, which accounted for 595 deals in the quar-ter’s tally, representing the highest fourth-quarter tech total since 1999. That activity, spurred in part from companies wanting to avoid potential tax increases and fallout if there was no fiscal cliff resolution, helped put a bit of a shine on an otherwise dismal deal landscape for 2012, where global and U.S. volumes were the lowest in years.

Whether the fourth quarter is as good as it gets for the next 12 months is hard to say, though it might be a stretch to suggest the fiscal fix did much to raise the feel-good factor among CEOs. The Jan. 1 agreement merely delayed across-the-board automatic spending cuts until March and didn’t raise the debt ceiling. Unless that’s fixed fairly soon, the U.S. Treasury will be forced to sus-pend new bond issues and stop paying some bills—hardly confidence-inducing stuff.

Apart from all the high drama out of Washington, there was a smattering of deals and developments during the shortened New Year’s week. Most recently, Google Inc. threw a victory celebration after the Federal Trade Commission said the Inter-net company had not violated antitrust or anticompetitive laws in the way it arranges its searches, capping a two-year investiga-tion. Among other things, the company ar-gued that “technology is such a fast-moving industry that regulatory burdens would hinder its evolution,” according to The New York Times. That said, it wasn’t an unmiti-gated victory as the FTC also ordered the company to stop its legal efforts to prevent competitors from using key patents it owns for smartphones and other devices.

Beyond the Google news, Gap Inc. agreed to pay $130 million for Intermix Holdco Inc., a New York-based specialty

retailer of women’s contemporary and lux-ury. As part of the deal, private equity firm Goode Partners LLC sold its minority stake in Intermix.

In the auto industry, Avis Budget Group Inc. said it would pay $500 million in cash for car-sharing pioneer Zipcar Inc. The of-fer of $12.25 a share represents a premium of 49% over Zipcar’s closing stock price of $8.24 at the end of 2012, though it is still be-low the $18 a share that Zipcar commanded at its initial public offering in April 2011.

Among crossborder deals, Anaheim, Calif.-based Questcor Pharmaceuticals Inc. snared longtime Canadian business partner BioVectra Inc. in a transaction worth as much as C$100 million ($101.5 mil-lion). The deal includes an up-front C$50 million cash payment.

Elsewhere, Hormel Foods Corp., the Austin, Minn.-based maker of Spam and Wholly Guacamole dips, said it will pay Unilever plc/NV $700 million to add Skippy to its brand portfolio. The acquisi-tion, Hormel’s largest to date, comes three months after Unilever put the Skippy brand up for sale.

Over in Luxembourg, ArcelorMittal agreed to sell a 15% stake in its Canadian iron ore and coal mining operations for $1.1 billion to a joint venture led by steel-making rivals Posco Co. Ltd. and China Steel Corp., raising cash to help pay down some of its about $34 billion of gross debt. The granting of access to key supplies to its steelmaking rivals is evidence of the pres-

By suzanne miller

Cliff hangersNew year kicks off with a big deal in D.C. But doubt persists

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sheets, said Baltera. While doing so, the biotech will need to

manage a timeline of its cash position, in-cluding a deadline by which it would have to make a decision before deciding to go forward on its own. “If you don’t, a lot of the negotiating for Big Pharma is ‘Let’s just wait until they run out of cash,’ and as a biotech you never want to be in that posi-tion,” the consultant said.

Ideally, the biotech attracts more than one bidder, and term sheets are played off one another until a deal is struck. The bio-

techs have much less to go on in valuing their programs. “At the end of the day when you’re at the negotiating table, your only ar-gument is what is market [value], and what is market [value] if there is no window into it?” said the M&A lawyer.

Big Pharmas, on the other hand, have business development teams casting out projections and models, a process bank-ers sometimes get involved in, giving them much more to draw from in the negotia-tions. “Typically, it quickly moves to [the fact that] the selling side wants money as soon as possible and the buyer wants to drag it out as long as possible,” Baltera said.

This is a situation Sarepta likely finds it-self in right now. Garabedian noted on Oct. 3 that Sarepta has had “a lot of interest ex-pressed” in its program and would begin to entertain a partnership.

“If a partner can bring the economics to allow us to accelerate the broader program and create a true win-win, where we can access those drugs sooner in the U.S., they can get access to those drugs and approve them more rapidly outside the U.S., I think there is a structure that we could consider if the economics are right,” he said at the time. Alas, that’s something very few bio-techs have the leverage to do. n

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BANKRUPTCYbankruptcy m&a by industry bankruptcy auctions by industry 2009 bankruptcies in review dip financingsmore at the deal PiPeline >

When Krystal Infinity LLC purchased Krystal Koach LLC out of bankruptcy in January 2011, it had hopes to return the limousine maker to viability by implement-ing a restructuring plan and infusing more capital into the business. KI had all sorts of ideas on how to revamp the business, in-cluding a plan to start manufacturing elec-tric vehicles.

While trying to save that business, how-ever, KI instead found itself facing the same reality that Edward P. Grech, the previ-ous owner of Krystal Koach, did: a lack of liquidity and, ultimately, the need to file a Chapter 11 petition. KI’s own fortunes soon sagged, and it filed for bankruptcy on Aug. 14, less than two years after buying Krystal Koach.

KI is not the only company to purchase a debtor and then find itself back in bank-ruptcy court. In fact, of the 31 companies that made repeat bankruptcy filings in 2012, at least 14, or nearly half, did so after experiencing a change of control after they petitioned the first time. Among the ex-amples besides KI are Omtron USA LLC, which bought Townsends Inc. out of Chap-ter 11 last year; HMX Acquisition Corp., which acquired bankrupt Hartmarx Corp. in 2009; and Ritz Camera & Image LLC, which took control of bankrupt Ritz Inter-active Inc. in February.

“In quick sales, they really haven’t fixed the company,” said Dennis Connolly of Alston & Bird LLP. “Some of the opera-tional fixes that are necessary simply aren’t done.”

The first debtor may be operationally be-reft but recoup enough money to pay debts and confirm a plan, so an acquirer may not realize until well after the purchase that it bought a company that still has all the is-sues that led it to file for bankruptcy in the first place.

Take HMX, for example. The private

equity-backed apparel maker famous for outfitting President Obama and Republi-can presidential nominee Mitt Romney still needed to recapitalize its balance sheets af-ter acquiring Hartmarx. While it was able to resolve about $35 million in secured debt after the Hartmarx acquisition, the com-pany made a second bankruptcy filing on Oct. 19. Now HMX is planning to resolve its financial woes by selling its assets to Authentic Brands Group LLC—bringing about another change of control.

Quick sales aren’t the only occasions when a bankruptcy fails to fix a company. Louisiana Riverboat Gaming Partnership, which didn’t sell its assets in its first bank-ruptcy, filed a second time, citing the exact same causes that it did on the first go-round. The casino operator, then called Legends Gaming LLC, first filed for Chapter 11 on March 11, 2008, due to operational difficul-ties that caused it to default on its secured debt obligations. The company emerged

from that bankruptcy on Sept. 18, 2009, with the same debt structure it had prepeti-tion. The only difference was that the com-pany received a $15 million equity infusion from its chairman at the time, William J. McEnery.

Post-emergence, Legends faced the same difficult market conditions and was still un-able to service its debts. The company then filed its second bankruptcy as LRGP on July 31, this time with plans to sell its two Dia-mondJacks Casinos and liquidate its com-pany.

The question now becomes, Will the new buyer, Global Gaming Solutions LLC, break the repeat filer’s bankruptcy cycle, or fall prey to it?

Connolly said buyers often will initiate a second bankruptcy for a company they acquired during a first bankruptcy because further restructuring could help them

by AvivA GAt

Ignoring caveat emptorA steady stream of once-bankrupt companies has filed again after undergoing a change of control

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sure on ArcelorMittal to reduce borrowing after its credit rating was cut last year to one notch below investment grade on expectations that the global market leader could breach debt covenants in 2013.

In the private equity sector, financial advisory and investment banking house Duff & Phelps Corp. agreed to sell itself for $665.5 million to a consortium of financial inves-tors led by Carlyle Group and Stone Point Capital LLC. and including Edmond de Rothschild Group. Duff & Phelps said its stockholders would “receive an immediate and certain cash premium for their shares.” The deal will be structured to preserve the firm’s independence, Duff & Phelps said.

In the apparel sector, private equity firms BDT Capital Partners LLC and Gen-eral Atlantic LLC will become minority investors in women’s apparel company Tory Burch LLC. The development followed news that founders and former husband and wife team Christopher Burch and Tory Burch had settled their legal disputes. Tory Burch is now the largest shareholder in the company, retaining her 28.3% stake.

In the beverage industry, New York investor Cerberus Capital Management LP said it would buy pubs group Admiral Taverns Group Holdings Ltd. for a reported enterprise value of about £200 million ($320 million), providing a full debt and equity exit for Lloyds Banking Group plc.

And so we await the next political drama. n

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BANKRUPTCY

achieve more value in the company.Other industry sources agree, saying

that sometimes buyers of bankrupt com-panies already have their eyes on a further bankruptcy for additional restructuring.

“Purchasers are aware that they can buy a company and then go through bank-ruptcy again,” said Christopher A. Ward of Polsinelli Shughart PC, a lawyer who rep-resents both debtors and creditors. “Some-times the purchaser just takes the company as is and the seller just wants to sell and pay down its debts.”

This strategy, of course, isn’t limited to repeat filers. Some acquirers have been can-ny about buying a deeply distressed com-pany and then putting it into bankruptcy, shedding unwanted liabilities under Sec-tion 363 of the federal Bankruptcy Code without going through a change of control. Boca Raton, Fla., private equity firm Sun Capital Partners Inc. has put companies into bankruptcy just to buy them again. One of its portfolio companies, Fluid Routing Solutions Inc., filed for bankruptcy in 2009 with a stalking-horse bid from Sun Capital allowing the PE firm to maintain control of the company while shedding its unprofit-able hydraulic fuel division and wiping out $7.4 million in debt.

Sun Capital then did a similar thing with another of its portfolio companies, Big Ten Tire Stores Inc.

The difference with Chapter 22s is that a buyer of a company in its first bankruptcy often fails to realize that the debtor didn’t take the time to address all of its issues but focused on a single one instead. Concentrat-ing on one problem instead of many keeps down the time and money spent in Chapter 11.

Alston & Bird’s Connolly believes com-panies oftentimes are hoping to charge through the bankruptcy court as quickly as possible with hopes of trying to keep down the administrative costs. The longer a com-pany lingers in bankruptcy, the more fees it racks up.

But debtors that rush their proceedings soon regret it. And so do their second own-ers. Take Buffets Inc., for example, which gave its reorganized equity to lenders, led by Credit Suisse Securities (USA) LLC,

when it emerged from its first bankruptcy on April 28, 2009.

Less than three years later, on Jan. 18, Buffets decided to take a second gulp of bankruptcy with plans to reject certain above-market leases that it failed to drop during the previous case. In fact, during its second case, Buffets rejected leases for 126 of its steak-buffet style restaurants. Buffets emerged from its second bankruptcy case on July 19 and Credit Suisse got the equity again in return for the debt it held.

Twinkies and Wonder bread maker Hostess Brands Inc. also filed its second bankruptcy on Jan. 11, 2012, seeking to ad-dress the union issues that went unresolved in its first bankruptcy. Private equity firms Ripplewood Holdings LLC, which owns 68.56% of Hostess’ equity, and Silver Point Finance LLC, with 12.28%, gained con-trol of the baked-goods maker after its first bankruptcy, when it was known as Inter-state Bakeries Corp.

IBC first emerged from bankruptcy on Feb. 3, 2009, still kneaded by its labor costs and pension and medical benefit obligations. While IBC fought hard with its unions dur-ing the first 4-1/2 year bankruptcy, it was unable to win the concessions it needed.

The problems proved intractable in the second bankruptcy, too, leading the com-pany to announce on Nov. 16 that it would liquidate after a nationwide strike by one of its largest unions thwarted production at its baking facilities. As Hostess sells off its brands, another change of control is in the offing.

Even if a debtor can address all of its problems in bankruptcy, sometimes plans are based on overly optimistic assumptions of conditions that are beyond a company’s control.

Hostess, Buffets and LRGP all emerged from their first bankruptcies with plans based on sales and cash flow projections that they were unable to realize. So did Shee-han Memorial Hospital, which initiated its third bankruptcy proceeding on Aug. 24. This will be the first filing, however, under which it will seek a buyer.

Bogged down by tax claims, Sheehan emerged from its second bankruptcy after winning confirmation of its plan on Nov. 22, 2006. The plan contemplated Sheehan being able to pay off its tax debt by the end

of 2010. Sheehan, however, was still behind on tax payments when it filed for the third time.

Vertis Holdings Inc. faced similar prob-lems that led it to initiate its third bank-ruptcy on Oct. 10. In its first bankruptcy, filed July 15, 2008, Vertis exited by merging with fellow debtor American Color Graph-ics Inc.

Two bankrupt companies merging is probably not a great idea to begin with, but the deal partners suffered from bad timing, too.

“The company emerged from bankrupt-cy amidst the capital markets crisis that ul-timately precipitated the global economic downturn,” Vertis said in court filings, leading it to file again on Nov. 17, 2010, with a prenegotiated plan that handed its equity to new owners—its creditors.

Rising raw material costs, persistent economic ills and intense competition forced the company to try Chapter 11 a third time, and it will sell itself to yet another new owner now.

And Krystal Infinity certainly isn’t alone when it comes to new owners that succumb to the same fate as the debtors they believe they’re helping rehabilitate. Look at Ritz Camera & Image, which was a creditor of Ritz Interactive Inc. when the latter filed for Chapter 11 on Aug. 19, 2011. RCI was very fa-miliar with RI; after all, RI’s primary asset was an exclusive license to use and repro-duce certain names and trademarks owned by RCI, which acquired the trademarks in July 2009 during retailer Ritz Camera Cen-ters Inc.’s bankruptcy case.

RCI acquired RI on Feb. 21 as part of a plan of reorganization, but the largest spe-cialty camera and imaging chain in the U.S., with about 265 stores in more than 30 states, found itself four months later a debt-or as well. On June 22, RCI filed for Chap-ter 11, taking RI in with it. RCI originally wanted to reject its unprofitable leases and restructure its debts to improve cash flow for sustained operations while under court protection. While looking for a new inves-tor or buyer, however, RCI realized the only way it could pay its debts was to liquidate.

The good news is it’s unlikely a new owner will come in and perpetuate the RI and RCI bankruptcy cycle. The reason? RCI has been selling off assets piecemeal. n

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PRIVATE EQUITYripe pe candidates by industry pe auction bidder listings pe auctions latest sellers•assetsmore at the deal PiPeline >

The U.S. government this year will seed as many as four new private equity funds in Pakistan. Meanwhile, a group called Indus Basin Holding Ltd. is in-vesting in Pakistani agribusiness, using a hybrid model that combines elements of private equity and venture capital.

Both efforts represent attempts to ignite one of the world’s most under-achieving capital markets.

“There is no private equity industry in Pakistan. There is no traction. Zero. Zilch. There’s one local fund and a cou-ple foreign fund managers and that’s it,” says Aamer Sharfraz, who heads In-dus Basin. “For a country of 190 million people having one private equity fund is simply not enough.”

A State Department program, work-ing through USAID/Pakistan, will offer up to $24 million each to new private equity funds, which must raise match-ing capital of at least that amount. The $80 million program envisions individ-ual investments ranging from $500,000 to $5 million to secure equity in compa-nies the proposal describes as small and medium-sized enterprises. Each fund is expected to last 10 to 12 years.

The embassy in Islamabad solicited pro-posals in October. A short list is expected this month, with a final decision made sometime in the spring.

“We want to help catalyze the private equity market here,” says Vinay Chawla, deputy coordinator, economic and develop-ment assistance at the U.S. Embassy in Is-lamabad.

Indus Basin has been up and running since 2010, and is now gaining momentum. Indus Valley has made investments in three greenfield projects so far. Two more proj-ects are in the final planning stages, Shar-fraz says.

Indus Basin has invested about $5 mil-

lion in Rice Partners (Pvt) Ltd., a rice milling and contract farming effort begun last year. Indus Basin tapped Mars Food, with its Uncle Ben’s brand rice, as the target market for Rice Partners’ output.

While rice farming is anything but new, this sort of operation is ground-breaking, Sharfraz maintains. The farmers gain ac-cess to better information, technology and inputs, while receiving above-market pric-es for their output. Mars Foods has better quality control and fewer rejections.

“It makes great commercial sense for ev-eryone involved,” says Sharfraz.

Indus Valley, which calls itself “spon-sor manager,” targets investments totaling about $10 million in each company, but in a

staged manner. Sharfraz anticipates a total investment pool of $100 million.

The firm consciously decided not to raise a private equity fund, says Shar-fraz, but instead make direct invest-ments in startup companies, soliciting co-investors on a project-by-project ba-sis. Co-investors so far include venture capitalist Tim Draper and the invest-ment office of Baron Lorne Thyssen-Bornemisza, the European industrial-ist.

“There couldn’t have been two words more difficult to market in the same sentence than ‘fund’ and ‘Paki-stan,’ ” says Sharfraz, who splits his time between Islamabad and London. “What was a lot easier was to organize as a platform company that makes di-rect investments closely managed by us alongside a small pool of very high quality co-investors. That way we could start immediately.”

He says the USAID project has the potential of changing the calculus. “You need some sort of stimulant to build a private equity industry in Pakistan,” says Sharfraz, whose own background includes stints in both venture capital

and private equity.To date, Pakistan’s sole private equity

fund has been JS Private Equity Fund I, which the financial services firm JS Group launched in 2006. It closed late 2007 with $158 million. Limited partners came en-tirely from the ranks of multilateral lending agencies, including the International Fi-nance Corp., CDC and Asian Development Bank. However, it doesn’t appear JS Private Equity has fully invested and plans for a second fund never materialized.

JS didn’t respond to e-mail seeking com-ment.

In addition, Dubai-based Abraaj Capi-

By matt miller

East is leastPrograms designed to jump-start investment in Pakistan face major hurdles, including political risk

CONTINUED >

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PRIVATE EQUITY

Readers Digest is giving distressed busi-nesses investor Better Capital LLP indi-gestion.

In an announcement Friday, the private equity firm said it is negotiating a company voluntary arrangement with the trade cred-itors of the money-losing direct marketing units of the U.K. arm of Reader’s Digest Association Inc., which it bought out of insolvency administration for £13 million ($20.8 million) in 2010. It plans to concen-trate instead on the more profitable maga-zine business.

A spokeswoman for Better Capital said there was no third-party bank debt in the business, but explained that the private equity owner would attempt to conclude the CVA with its operational creditors over the next few weeks with a view to closing the direct marketing sector over about six months. She said there were six to eight large creditors involved.

Better Capital, established by former Al-

chemy Partners LLP boss Jon Moulton in 2009, said it had injected “very substantial funds” into the business “without adequate return.” This was despite the support of global license holder Readers Digest Inc., of Pleasantville N.Y., and despite “very signifi-cant progress in the operation of the busi-ness and improved customer satisfaction.”

It said “no easy route to long-term viabil-ity” existed for the direct marketing busi-ness and a “faster than expected decline” in the direct marketing sales of CDs, DVDs and books had continued to make opera-tions difficult.

Better Capital said it had appointed BDO LLP to assist the board of Becap Vivat Ltd., (which does business as Reader’s Digest U.K.) in restructuring the company via the CVA process. Legal advice on the CVA was from Olswang LLP.

In the meantime, Better Capital planned to make some 95 employees redundant im-mediately. The book-buying operations would cease and orders would also cease

with immediate effect. However, exist-ing orders would be honored provided the goods are in stock.

But if the restructuring were successful, then several smaller businesses around the magazine would continue to operate and the magazine itself would continue to pub-lish.

Better Capital and its investment vehicle Becap Fund LP bought Reader’s Digest U.K. in April 2010, after the parent group put it into administration following a dispute over the company’s pension fund with the U.K. Pension Regulator. In a statement at the time, it said the “magazine and prize draw will continue, but it should be remembered that these are just a part of a much larger business.”

However, what it called the “tremen-dous opportunities for our businesses in fi-nancial services, books and healthcare” and the “significant plans to expand all aspects of the Reader’s Digest business in the U.K.” failed to live up to their initial promise. n

by Jonathan braude in london

Readers Digest U.K. arm seeks to close marketing unitOwner Better Capital is negotiating a company voluntary arrangement with creditors

tal, one of the largest Mideast private equity houses, has made three investments in Pakistan, totaling $200 million. Abraaj’s founder and CEO is Arif Naqvi, a Pakistani.

Naqvi is the best-known of many Pakistanis who have made their mark in private equity, but in locations such as Dubai, London and New York. The U.S. government hopes its program can attract some of that talent and expertise back to their homeland.

“We got a strong response from diaspora Pakistanis,” says Chawla. “They want to make investments here.”

Pakistan’s scant track record in private equity contrasts vividly with private equity across the border in India. Indian private equity has grown dramatically over the past decade, although the ardor is beginning to subside, with well more than 100 funds formed and tens of billions of dollars raised. In the first three quarters of 2012, private equity invested $6.5 billion in India, according to figures compiled by PricewaterhouseCoopers LLP, and that was a nearly 27% drop from comparable 2011 figures.

To attract long-term institutional capital, Pakistan must over-come major hurdles. Those obstacles include the obvious political risk: A war rages in neighboring Afghanistan, with militants roam-ing across borders. Lawlessness engulfs huge swaths of Pakistan

itself and the rule of law is suspect throughout the country. As one development specialist explains, investors aren’t sure whether Pakistan five years from now will rebound or collapse into a failed state.

Add to that economic growth that has lagged behind the region, a dearth of professional managers and exits that so far have been largely confined to initial public offerings on the Karachi Stock Ex-change.

“Going into investments in Pakistan, one has to think much more realistically about exit potential, but it’s there,” says Sharfraz, who has his sights set on potential listings for his portfolio companies in Toronto, London or Hong Kong as well as sales to strategics.

Lack of capital severely constricts the Pakistani private sector. According to the USAID proposal, more than 40% of all commer-cial bank lending in Pakistan goes to the government, which pays 12%—13% interest on the loans. Foreign direct investment last year totaled less than $1 billion.

So, in theory, at least, the private sector should be open to private equity-type investments. The problem, says Sharfraz, is that most of those businesses are family run and are reluctant to give up con-trol. “If you try to do majority or control transactions, they’re dif-ficult to come by, because high-quality, family-run businesses don’t necessarily want to exit such a major stake.” n

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Sandip Bhagat resigned as head of Vanguard Group’s equity investment group, which handles more than $900 billion in assets. Before joining Vanguard in 2009, Bhagat was head of global asset allocation and systematic strategies at Morgan Stanley Investment Management. Before that, he was a managing director at Citigroup Asset Management. He began his career in 1987 at Travelers Investment Management Co. and eventually became its chief investment officer.

Also, George Sauter retired as chief investment officer and managing director of Vanguard. Managing director Mortimer Buckley succeeded him.

Foley & Lardner LLP announced that Christopher Donovan joined the firm’s healthcare industry team and business law department as a partner in the Boston office. He will also be a member of the life sciences and senior living industry teams. Prior to this, Donovan was a partner with McDermott Will & Emery LLP, where he practiced in the corporate and health practice groups for nearly 30 years and co-led the firm’s post-acute and outpatient services strategy affinity group. He counsels companies, as well as their investors and lenders, in mergers and acquisitions, recapitalizations, buyouts and restructurings.

Kevin Francis Lloyd joined Debevoise & Plimpton LLP as a litigation partner, resident in the firm’s London office. Lloyd was a senior partner in the commercial litigation group at Herbert Smith Freehills LLP.

Lloyd began his career at Herbert Smith and then joined Mallesons Stephen Jaques in 1988, where he was named a partner in 1990. Lloyd rejoined Herbert Smith in 1999 as a partner and served on the firm’s board from 2009 to 2012.

Mayer Brown LLP added Bill Hart Jr. to its Houston office as a partner in the banking and finance practice. Previously, he was a partner with Baker Botts LLP. He handles financial transac-tions, including the placement of high-yield debt securities; large syndicated bank transactions; project finance, oil and gas financ-ings; and reserve-based, acquisition and asset-based financings.

Duane Morris LLP opened an office in Palo Alto, Calif. Intellec-tual property litigator Karineh Khachatourian joined as man-aging partner of the new office. Khachatourian arrives from K&L Gates LLP. Khachatourian’s technology focus includes computer hardware and software, with an emphasis on encryption technol-ogy, related consumer electronics and computer peripherals, and video gaming technology.

Dykema Gossett PLLC said Daryll Vann Marshall joined the firm as senior counsel in the corporate finance practice in Chicago. He was a corporate partner at Kirkland & Ellis LLP. Marshall represents corporate borrowers, private equity groups

and financial institutions in secured and unsecured transactions, including senior, mezzanine and bridge financings and refinancing.

Former Ohio Supreme Court Justice Yvette McGee Brown will join Jones Day as a partner in the firm’s Columbus office in the business and tort litigation prac-tice. She served on the court from January 2011 through

December. Brown was elected to the Franklin County Common Pleas

Court, domestic relations and juvenile division, in 1992. She served on the Common Pleas Court until 2002, when she retired from the bench to create the Center for Child and Family Advo-cacy at Nationwide Children’s Hospital.

Pillsbury Winthrop Shaw Pittman LLP appointed Mike Pierides to its partnership in London. He joins from Pinsent Masons, where he was a partner in the technology, media and telecommunications and sourcing group. Pierides is joined by senior associates Simon Lightman and Alistair Charleton.

Blank Rome LLP welcomed William Bennett III as of counsel in the international and maritime litigation and arbitration and alternative dispute resolution group in New York. Bennett joined the firm from Bennett, Giuliano, McDonnell & Perrone LLP, where he was a partner.

Of counsel Michael Berman and associate Jefferson Cheatham joined Barnes & Thornburg LLP’s intellectual property de-partment in the firm’s Delaware office. Berman was previously a patent agent and associate at Drinker Biddle & Reath LLP. Cheatham worked at Connolly Bove Lodge & Hutz LLP.

Robins, Kaplan, Miller & Ciresi LLP made partner V. Robert Denham Jr. regional managing partner of its Atlanta office. The office, with 22 lawyers, focuses on business litigation, intellectual property litigation and insurance law, representing national prop-erty insurers in complex industrial catastrophe claims.

Venable LLP named Joseph Schmelter as partner-in-charge of the Tysons Corner, Va., office. Schmelter, co-chairman of the government contractor services group, succeeds David Smith, who returns full time to his labor and healthcare practice. Douglas Mc-Donald continues as administrative partner for the Tysons office.

BDO USA LLP, an accounting and consulting organization, named Todd Kinney a relationship director for its national private equity practice. Kinney has been with BDO since 2003 and was most recently the Northeast regional director of business development. Prior to joining BDO, Kinney spent a decade as an investment banker at Oppenheimer & Co., Cowen and Co. LLC and Société Générale SA. n

MOVERS & SHAKERScompiled by baz Hiralal

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Don’t take it personally, Glenn Beck. Cur-rent TV refused Rupert Murdoch, too.

But it wasn’t about the political issues you claim. No, you and Murdoch were de-nied a seat at the Current TV bargaining table for reasons much more pedestrian—namely, indifference and miserliness.

Or, to quote a source close to the just-shy-of-$500 million transaction that de-livered cable news channel Current TV to Al Jazeera last week: “There wasn’t anyone who had both the interest and the means that was philosophically un-acceptable, so it never really came up. Thinking whether they would have sold to someone ‘philosophically challenging’ because that party would have paid a big price is purely hypothetical.”

Far from hypothetical, in contrast, was Al Jazeera’s desire to penetrate the U.S. news market. Indeed, if there’s an uncov-ered aspect to the decision of left-leaning Al Gore and Joel Hyatt to sell Current TV, it’s the serendipitous sympathy between these two sellers and the Pan-Arabian news-gathering operation that ultimately won an auction featuring, at one point, 40 prospects.

As Hyatt himself wrote in a staff memo about the Qatar-funded news network with more than 80 bureaus, “Al Jazeera was found-ed with the same goals we had for Current: To give voice to those whose voices are not typically heard; to speak truth to power; to provide independent and diverse points of view; and to tell the im-portant stories that no one else is telling.” And so the mission set forth by Gore and Hyatt on launching Current TV in 2005 has the promise, at least, to outlive their ownership.

This wasn’t at all clear when, in September, Current TV re-tained Raine Group LLC and JPMorgan Chase & Co. to explore strategic options. The investment banks, after canvassing the usu-al suspects, eventually narrowed the field to a dozen and then to a handful. Throughout it all, though, the bidding group maintained representation from new and old media.

That deep-pocketed new media failed to go the distance struck some observers as surprising. After all, they note, Google Inc. co-founder Sergey Brin not only appeared at Current TV’s San Fran-cisco launch party but called the two companies’ Google Current partnership, which provided the cable channel twice-an-hour up-dates on top Internet searches, “an extraordinary opportunity.”

Yahoo! Inc. also partnered with Current TV, setting up a so-

called Yahoo! Current Network on the new media company’s website in 2006. The effort was disbanded after several months but not before the partnership’s first four channels—Current Buzz, Cur-rent Traveler, Current Action and Cur-rent Driver—established themselves as Yahoo Video’s most popular offerings.

As for old media, the issue appears to have been valuation. What’s a cable chan-nel worth that’s barely breaking even, if that, when traditional metrics confer a value of 13-to-16 times Ebitda? Or how do you get to $500 million when an al-ternative metric places a limit of $2 per subscriber on Current TV’s 40 million subscription base?

Then again, as Macquarie Capital (USA) Inc. analyst Amy Yong explains, the appetite of old media for new assets appears relatively sated: “The traditional

players already have real estate on cable networks and don’t feel they have to bulk up much.”

That was hardly the case with Al Jazeera, which the cable ana-lyst goes on to describe as deep-pocketed, politically motivated and almost desperate for a U.S. entry point. But Current TV, with 51 million subscribers before losing carriage from Time Warner Cable Inc. due to the channel’s change of control, offers much more than the fully distributed channel so coveted by Al Jazeera. It also offers what a source close to the sale calls “content defini-tions in its distribution arrangements that specify news and infor-mation.”

These definitions fit perfectly with Al Jazeera’s intentions of “bringing large-scale resources to journalism,” according to Hyatt in his staff memo, “something which we have not been able to do.” Even more important is the minimal wiggle room the definitions leave for distributors inclined to drop the channel many Ameri-cans know best for airing post-9/11 videos of Osama bin Laden. “It was a real bull’s eye,” the source close to the sale says of the match between Al Jazeera’s needs and Current TV’s specs.

This bull’s eye is what motivated Al Jazeera to pay 7 times the $70 million that an investment team led by Gore and Hyatt forked over for the channel rebranded Current TV less than eight years ago. It’s also what produced an auction price that not only made the former vice president and his serial entrepreneur sidekick

By richard morgan

A half-billion reasonsFinancial flexibility, not ideological rigidity, determined the winner of Current TV’s auction

BACKSTORY

The BlAze fOundeR glenn BeCK

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Critics of aggressive anti-trust enforcement say the government should ease its merger rules during a reces-sion. Since the 2008 finan-cial panic, there have been periodic calls in some quar-ters for antitrust regulators to help the U.S. break out of the lingering economic dol-drums by approving deals they might challenge in bet-ter times.

Allowing some merg-ers that would otherwise be blocked, they say, would encourage stronger compa-nies to mop up struggling rivals, which would boost the economy by promoting more efficient companies and more productive allocation of capital.

Neither the Department of Justice nor the Federal Trade Com-mission has bought into this view, however, and it seems neither have some prominent antitrust hands. A panel of merger experts brought together by the American Bar Association’s antitrust sec-tion last month unanimously concluded that it would be a mistake for the government to adopt more lenient merger rules during a recession.

“Enforcement shouldn’t change or be relaxed as result of a downturn in the economy,” said Michelle Lee, litigation counsel for Visa Inc.

“It is not the job of the DOJ and the FTC to trot around the countryside looking for optimal economic outcomes,” agreed Richard Parker, antitrust partner at O’Melveny & Myers LLP. “They are law enforcement agencies and charged with enforcing a series of statutes that mandate competition as national policy. That does not change when the economy goes south.”

The panelists agreed there is plenty of evidence that the long-term harm of more lax merger enforcement outweighs whatever good might come of relaxing the rules for a spell.

“To paraphrase De Beers—mergers are forever,” said Bert Foer, president of the pro-enforcement American Antitrust Institute. “We have to worry about allowing mergers to take place at a down time when we can foresee that there’s going to be an upturn in the future. You’ve gotten locked into a smaller industry.”

Bob Levinson, an economist with Charles River Associates, a leading economic consultancy on antitrust issues, agreed. “The

fundament issue is whether a merger, in good times or bad times, is expected to reduce consumer welfare,” he said. “We don’t want consumers to pay too much for things. In a recession es-pecially, where consumers are already under financial distress ... the last thing you want are higher prices.”

Parker questioned whether allowing question-able mergers carries much short-term benefit either. The country’s experience with relaxed antitrust rules during the Great Depression provides a cautionary tale,

he said. Early in the administration of Franklin Delano Roosevelt, Washington enacted the National Industrial Recovery Act, which allowed otherwise illegal collusion between companies. The aim of the law was to boost margins and therefore promote hiring.

The law was ditched in FDR’s second term and the number of collusion cases brought in the first year after his re-election climbed from 15 to about 50, Parker said. But much damage had already been done. He noted that a study of the law’s impact con-cluded that the pro-collusion policy lengthened the Great Depres-sion by about seven years.

by bill Mcconnell in Washington

Hey buddy, can you spare a merger approval?Experts agree that antitrust rules shouldn’t change because the economy is in the doldrums

rules of the road

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seem like savvy investors—hardly a foregone conclusion based on the loss-making operation Current TV became—but allowed the sellers to deflect interest from such right-wing outlets as Mur-doch’s Fox News and Beck’s TheBlaze LLC. (Beck, for example, contends the price he had in mind for Current TV was $250 mil-lion.)

The question now, of course, is whether Al Jazeera can deliver content in the U.S. of the sort that has it the No. 3 news network in the U.K., after the BBC and Sky News, and has former U.S. Sec-retary of State Colin Powell declaring it’s the only cable news net-work he watches. As Gore and Hyatt know all too well, winning an auction is one thing, winning an audience another. n

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Standstill agreements have taken center stage in the Delaware Court of Chancery. Chancellor Leo E. Strine Jr. discussed the per-missible scope of standstills recently in a case brought by share-holders of Ancestry.com Inc. who are challenging the company’s $1.6 billion sale to Permira Advisers LP. Last month, Vice Chan-cellor J. Travis Laster addressed the issue in shareholder litiga-tion arising from the $109 million sale of Complete Genomics Inc. to BGI Shenzhen Inc. Both judges made their comments in oral rulings from the bench, which Strine cautioned should not be accorded the same weight as written opinions. Nonetheless, there is very little Delaware case law on the standstills, so lawyers are parsing the transcripts of both rulings closely.

A standstill provision, as the name implies, bars one party from investing or increasing its stake in another. A potential acquirer often agrees to such a clause as part of a confidentiality agreement under which a target grants access to confidential information. All standstills are not alike. In situations where two companies are in exclusive talks, a standstill will often bar one company from mak-ing an unsolicited offer for the other for a year or two after the

date on which the pact containing the standstill is signed. That was the fact pattern in the litigation last spring between Martin Marietta Materials Inc. and Vulcan Materials Co., a case in which Strine found that the confis that the parties signed barred Martin Marietta from making a hostile bid for Vulcan, though the ruling hinged on another aspect of that confi.

Both Ancestry.com and Complete Genomics ran auctions in which they signed confis with multiple parties. The terms of the confis differed, which is common. Private equity firms often spend little time marking up the confis that potential targets send them and thus accept standstill clauses that bar them from even asking the target privately for a waiver of the standstill. Strategic bidders are often more aggressive about demanding that a stand-still agreement ends in the event that the target signs with an-other bidder—a so-called fallaway provision.

Standstills protect a target from an unwanted approach by a bidder in the event exclusive talks come to naught or an auction

By DaviD Marcus

Don’t just do somethingMerging parties risk bigger payouts to plaintiffs unless they limit the scope of standstill agreements

SAFE HARBOR

CONTINUED >

Foer added that the financial panic of 2008 also proves the folly of relaxing merger rules. In their rush to shore up weak bal-ance sheets of large financial firms, the banking regulators forced through roughly a half-dozen megamergers and kept antitrust regulators and competition concerns almost entirely out of the deliberations. The result is a crop of even more systemically dan-gerous and hard-to-manage financial institutions. “It’s fairly clear that the Treasury Department and the Federal Reserve Board didn’t really want input on competition issues,” he said.

Levinson insisted that macroeconomic tools available to the government are better ways to juice the economy than tweaking antitrust policy anyway. “Those tools don’t come at the expense of consumer welfare,” he said.

So should antitrust regulators do anything differently during a recession? The panelists agreed that the regulators already have some options without changing current law. One of the most po-tent is the power to allow anticompetitive takeovers if the target is a “flailing firm.” Under this defense, a merger that might oth-erwise be viewed as anticompetitive would be permitted if the target is struggling and not considered a factor in the competition for new business. “That would most certainly have an effect on enforcement decisions in a bad economy,” Parker said.

(The flailing firm defense is different than the rarely success-ful “failing firm” defense in which the target must be proven to be

exiting the market.)As for changes to current practice, Levinson said regulators

also should be aware that the economic tools they use during good times may produce skewed results during downturns. For instance, the “upward pricing pressure” model used to gauge a firm’s ability to raise prices after a merger might make a combi-nation appear less harmful than it actually is. UPP theory holds that the narrower a company’s profit margins, the less likely that a merger will harm competition. Levinson noted, however, that re-cessions lead to temporary margin squeezes and using UPP dur-ing a recession may provide a “false air of comfort” about a deal’s impact on consumers.

Conversely, a key model used to predict the likelihood that premerger prices will be sufficient to lure new competitors into a market probably provides overly negative results during down times. “Recessions depress premerger prices and at same time in-crease the risk of entry failure,” Levinson said. “They distort en-try analysis and may make entry look harder than it really is.”

Foer said a vital change is to make sure competition regula-tors have a voice in setting the government’s reaction to the next economic crisis, especially if the crisis affects industries that are the most critical to consumers, such as healthcare, banking or en-ergy.

“In any future financial crisis, time is going to be of the essence, but nonetheless there should be built into the system a substantial voice of competition policy,” Foer said. n

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fails to produce an acceptable offer. The clauses can also push bid-ders to make their best proposal in an auction rather than wait until the target signs a merger agreement with another party and then make a topping bid. That’s especially true when a winning bidder demands that the target sign a merger agreement with a provision that requires the target to enforce its standstills in con-fis with other bidders and bars the target from waiving those pro-visions. Thus a losing bidder is barred by the confi from asking for a waiver of the standstill, and the target is barred by the merger agreement from granting the waiver of its own accord.

In that context, the standstill arguably becomes a deal protec-tion device subject to scrutiny from a Delaware court, the view Laster took in Complete Genomics. The company signed nine confis in its sale process, one of which contained a so-called don’t ask, don’t waive provision. Laster compared such a standstill to a clause in a merger agreement that bars a target from talking to other bidders. Then-chancellor William B. Chandler III found “no-talk clauses” prevent target boards from fulfilling their “duty to take care to be informed of all material information reasonably available” and are therefore “impermissible” under Delaware law.

Strine didn’t go that far in Ancestry.com. “Per se rulings where judges invalidate contractual provisions across the bar are ex-ceedingly rare in Delaware, and they should be,” he said in his Dec. 17 bench ruling in the case. “It’s inconsistent with the model of our law.” Nevertheless, he said that don’t ask, don’t waive pro-visions are “pretty potent, and directors need to use these things consistently with their fiduciary duties, and they better be darn careful about them.”

The judge accepted that such clauses can help targets maxi-mize the value they receive in an auction. But the judge did not

think that was the effect of the clauses in the case before him. The merger agreement Ancestry.com signed with Permira did not re-quire the target to enforce the don’t ask, don’t waive provisions in the confis it signed with other bidders. Thus, Strine said, af-ter signing the Permira deal, Ancestry.com could have contacted those bidders and told them it was waiving the provisions in the standstills barring the bidders from even asking Ancestry.com for a waiver.

Critically, Strine held, “I think the plaintiffs have pretty obvi-ously shown that this board was not informed about the potency of this clause. The CEO was not aware of it. It’s not even clear the bankers were aware of it.”

But it’s fair to ask how often a target board and CEO will ever be aware of the interaction between a standstill and a merger agree-ment or truly understand that interaction even if they are aware of it given the subtlety of the legal point and its modest impor-tance compared to all of the other issues a board has to consider in the sale of a company. As Ancestry.com and Complete Genomics show, Delaware judges are sympathetic to arguments from share-holders that don’t ask, don’t waive clauses violate Delaware law. Parties that include them in future deals will pay more to settle shareholder litigation, and so the rulings from Laster and Strine may push targets to include fallaway provisions in their confis in order to avoid the problem.

Critics of the decision argue that Laster and Strine have in-truded on the right of companies to enter into contracts and that their rulings will limit companies’ ability to get the best price pos-sible in a sale. But many merger agreements allow the acquirer to match a higher offer from another bidder, and virtually all pro-vide for a breakup fee if the target agrees to another deal. Those provisions are strong deal protections that encourage bidders to put their best bid on the table in an auction and may limit the real-world importance of the two decisions. n

Differences between U.K. and U.S. acquisition agree-ments are assuming commercial and strategic impor-tance as it becomes increasingly common for interna-tional acquisitions to be governed by English law.

This development is driven by a number of factors, including familiarity with English law and concerns over U.S. litigiousness, but, more importantly, by the perceived advantages of English law and practice for sellers.

While there are many exceptions to the general rule, here is a quick summary of the key factors driving the use of English law, particularly in auctions.

Deal certainty. Critically, a typical U.K. agreement assumes that deal certainty is required from signing and from that point risk passes to the buyer. Thus, U.K. agreements usually contain conditions required only by law or regulation, whereas U.S. deals are gen-erally more likely to have greater conditionality and a more protracted period before closing.

Also, it is still relatively unusual for U.K. deals to be subject to a material adverse change condition.

Even if one is included, it is likely to be relevant only upon an

JUDGMENT CALL

By Stephen R. heRtz and david inneS

Oh, to be in England!Why U.S. buyers may feel pressure to accept U.K. style documents in order to be competitive

CONTINUED >

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“Armageddon” event unrelated to macro fac-tors. MAC clauses are far more common in the U.S., although they are interpreted very nar-rowly.

With regards to fi-nancing, U.K. deals are usually done on a “cer-tain funds” basis, with no condition. Some stra-tegic and private equity deals in the U.S. contain financing conditions. In the U.S., if there is no financing condition, there will typically be a reverse termination fee requiring the buyer to pay a fixed amount if the financing is not available, absent a seller breach. Reverse termi-nation fees are relatively rare in the U.K.

There is also a marked contrast in the treatment of breakup fees. In the U.S., a buyer in a public deal that sub-sequently gets trumped by a topping bid will be entitled to a breakup fee. In the U.K., breakup fees on public bids are expressly prohibited without the consent of the U.K. Takeover Panel.

Pricing mechanics. In many U.K. deals, the purchase price is established on a fixed basis at signing (often by reference to “locked box” accounts), with no post-closing adjustment. This is consistent with the general U.K. principle that risk passes on signing and creates greater certainty for sellers.

In the U.S., it is still common to have a purchase price ad-justment based on the working capital or net worth of the com-pany as of the closing date. The seller thus retains at least some of the commercial risks and rewards of the business until clos-ing.

Seller liability. Sellers will typically provide less extensive warranty coverage in U.K. law–governed deals than in U.S. ones. And in the U.K., it is unusual for representations (other than fundamental representations such as title and capacity) to be brought down to closing. In the U.S., representations are generally required to be brought down, subject to materiality qualifications.

In the U.K., the sell-er’s disclosure against representations typi-cally consists of a mix of general and specific disclosures. In auctions, the entire contents of the data room and any vendor due diligence re-ports are often deemed to be generally disclosed against the representa-tions. In the U.S., the buyer will usually re-quire a more tailored and specific approach to the disclosure sched-ules.

In the U.S., a buyer would often enjoy ex-press contractual in-demnification for breach of warranties and rep-resentations, although a buyer’s recourse may be limited in duration to one year or less and to funds on deposit in an escrow account. In the U.K., such express indemnification is much less common, other than in relation to tax or oth-er specifically identified

risks. The purchaser’s remedy for breach of a warranty would usually be a contractual claim for damages, with a duty to miti-gate losses and a requirement for any damage to be reasonably foreseeable.

Financial thresholds, (that is, caps and baskets) are common under both U.K. and U.S. agreements, though in some circum-stances, a U.K. agreement may contain more extensive general limitations on the seller’s liability. In the U.K., private equity sellers rarely stand behind business warranties in an acquisition agreement, although management will often do so. Management does not do this in the U.S.

These differences demonstrate why sellers may prefer that international deals, particularly auctions, are done under U.K. law and why U.S. buyers may face increasing pressure to accept U.K.-style documents in order to be competitive. n

Stephen R. Hertz is a partner in the New York office of Debevoise & Plimpton LLP. David Innes is a partner in the firm’s London office. A version of this article originally appeared in the spring 2012 issue of the Debevoise & Plimpton Private Equity Report.

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23 THE DAILY DEAL M O N D AY J A N U A RY 7 2 0 1 3

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COMPANY INDEX

A-h

Abbott Laboratories . . . . . . . . . . . . . . . . . . . . .11Abraaj Capital . . . . . . . . . . . . . . . . . . . . . . . . . . 15Admiral Taverns Group Holdings Ltd . . . 13AiCuris . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11Alchemy Partners LLP . . . . . . . . . . . . . . . . . 16Allergan Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11Alston & Bird LLP . . . . . . . . . . . . . . . . . . . . . . 13Amarin Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . .11American International Group Inc . . . . . . . 4Ancestry .com Inc . . . . . . . . . . . . . . . . . . . . . . . 20ArcelorMittal . . . . . . . . . . . . . . . . . . . . . . . . . . 12Authentic Brands Group LLC . . . . . . . . . . . 13Avis Budget Group Inc . . . . . . . . . . . . . . . . . . 12Baker Botts LLP . . . . . . . . . . . . . . . . . . . . . . . . .17Barnes & Thornburg LLP . . . . . . . . . . . . . . . .17Bayer AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11BDO LLP . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 17BDT Capital Partners LLC . . . . . . . . . . . . . 13Bennett, Giuliano, McDonnell & Perrone LLP . . . . . . . . . . . . . . . . . . . . . . . . .17Better Capital LLP . . . . . . . . . . . . . . . . . . . . . 16BGC Partners Inc . . . . . . . . . . . . . . . . . . . . . . . . 5BGI Shenzhen Inc . . . . . . . . . . . . . . . . . . . . . . 20BioVectra Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Blank Rome LLP . . . . . . . . . . . . . . . . . . . . . . . .17Bloomberg LP . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Bristol-Myers Squibb Co . . . . . . . . . . . . . . . . 10Carlyle Group . . . . . . . . . . . . . . . . . . . . . . . . . . 13CBOE Futures Exchange LLC . . . . . . . . . . . 4Celgene Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Cerberus Capital Management LP . . . . . . 13Charles River Associates . . . . . . . . . . . . . . . 19China Steel Corp . . . . . . . . . . . . . . . . . . . . . . . . 12Citigroup Inc . . . . . . . . . . . . . . . . . . . . . . . . . .7, 17CME Group Inc . . . . . . . . . . . . . . . . . . . . . . . . . . 4Complete Genomics Inc . . . . . . . . . . . . . . . . . 20Connolly Bove Lodge & Hutz LLP . . . . . . .17Cowen and Co . LLC . . . . . . . . . . . . . . . . . . . . .17Credit Suisse Group . . . . . . . . . . . . . . . . . . 7, 14Current TV . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Debevoise & Plimpton LLP . . . . . . . . . . . . . .17Drinker Biddle & Reath LLP . . . . . . . . . . . . .17DRW Trading Group . . . . . . . . . . . . . . . . . . . . 7Duane Morris LLP . . . . . . . . . . . . . . . . . . . . . .17Duff & Phelps Corp . . . . . . . . . . . . . . . . . . . . . 13

Dykema Gossett PLLC . . . . . . . . . . . . . . . . . .17Edmond de Rothschild Group . . . . . . . . . . 13Eris Exchange LLC . . . . . . . . . . . . . . . . . . . . . 4Evotec AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11Foley & Lardner LLP . . . . . . . . . . . . . . . . . . . .17Galapagos NV . . . . . . . . . . . . . . . . . . . . . . . . . . .11Gap Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12General Atlantic LLC . . . . . . . . . . . . . . . . . . . 13Getco Holdings Co . LLC . . . . . . . . . . . . . . . . . 7GFI Group Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Gilead Sciences Inc . . . . . . . . . . . . . . . . . . . . . .11GlaxoSmithKline plc . . . . . . . . . . . . . . . . . . . 10Global Gaming Solutions LLC . . . . . . . . . . 13Goldman Sachs Group Inc . . . . . . . . . . . . . . . 7Goode Partners LLC . . . . . . . . . . . . . . . . . . . 12Google Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 18Herbert Smith Freehills LLP . . . . . . . . . . . .17HMX Acquisition Corp . . . . . . . . . . . . . . . . . 13Hormel Foods Corp . . . . . . . . . . . . . . . . . . . . . 12Hostess Brands Inc . . . . . . . . . . . . . . . . . . . . . 14

i-z

Icap plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Indus Basin Holding Ltd . . . . . . . . . . . . . . . . 15IntercontinentalExchange Inc . . . . . . . . . . . 4Intermix Holdco Inc . . . . . . . . . . . . . . . . . . . . 12Johnson & Johnson . . . . . . . . . . . . . . . . . . . . .11Jones Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17JPMorgan Chase & Co . . . . . . . . . . . . . . . . . . 18JS Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15K&L Gates LLP . . . . . . . . . . . . . . . . . . . . . . . . .17Kirkland & Ellis LLP . . . . . . . . . . . . . . . . . . . .17Krystal Infinity LLC . . . . . . . . . . . . . . . . . . . 13 LCH .Clearnet Group Ltd . . . . . . . . . . . . . . . . . 4Lloyds Banking Group plc . . . . . . . . . . . . . . 13Lowenstein Sandler PC . . . . . . . . . . . . . . . . . 10Macquarie Capital (USA) Inc . . . . . . . . . . . . 18Mars Food . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Martin Marietta Materials Inc . . . . . . . . . . 20Mayer Brown LLP . . . . . . . . . . . . . . . . . . . . . .17McDermott Will & Emery LLP . . . . . . . . . .17Merck & Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11Molecular Partners AG . . . . . . . . . . . . . . . . . .11Morgan Stanley . . . . . . . . . . . . . . . . . . . . . . .7, 17Nodal Exchange LLC . . . . . . . . . . . . . . . . . . . 9NYSE Euronext . . . . . . . . . . . . . . . . . . . . . . . . . 4

O’Melveny & Myers LLP . . . . . . . . . . . . . . . 19Olswang LLP . . . . . . . . . . . . . . . . . . . . . . . . . . 16Omtron USA LLC . . . . . . . . . . . . . . . . . . . . . . 13Oppenheimer & Co . . . . . . . . . . . . . . . . . . . . . .17Parity Energy Inc . . . . . . . . . . . . . . . . . . . . . . . . 7Permira Advisers LP . . . . . . . . . . . . . . . . . . . 20Pharmacyclics Inc . . . . . . . . . . . . . . . . . . . . . . .11PharmAria LLC . . . . . . . . . . . . . . . . . . . . . . . . .11Pillsbury Winthrop Shaw Pittman LLP . . . . . . . . . . . . . . . . . . . . .17Pinsent Masons . . . . . . . . . . . . . . . . . . . . . . . . .17Polsinelli Shughart PC . . . . . . . . . . . . . . . . . . 14Posco Co . Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . 12PricewaterhouseCoopers LLP . . . . . . . . . . 16Questcor Pharmaceuticals Inc . . . . . . . . . . 12Raine Group LLC . . . . . . . . . . . . . . . . . . . . . . 18Reader’s Digest Association Inc . . . . . . . . . 16Rice Partners (Pvt) Ltd . . . . . . . . . . . . . . . . . 15Ripplewood Holdings LLC . . . . . . . . . . . . . 14Ritz Camera & Image LLC . . . . . . . . . . . . . . 13Robins, Kaplan, Miller & Ciresi LLP . . . . .17Sarepta Therapeutics Inc . . . . . . . . . . . . . . . 10Sheehan Memorial Hospital . . . . . . . . . . . . 14Silver Point Finance LLC . . . . . . . . . . . . . . . 14Société Générale SA . . . . . . . . . . . . . . . . . . . . .17State Street Global Markets . . . . . . . . . . . . . . 7Stone Point Capital LLC . . . . . . . . . . . . . . . . 13Sun Capital Partners Inc . . . . . . . . . . . . . . . . 14Tabb Group LLC . . . . . . . . . . . . . . . . . . . . . . . . 6TheBlaze LLC . . . . . . . . . . . . . . . . . . . . . . . . . . 19Time Warner Cable Inc . . . . . . . . . . . . . . . . . 18Tory Burch LLC . . . . . . . . . . . . . . . . . . . . . . . . 13Tradition Group . . . . . . . . . . . . . . . . . . . . . . . . . 5Travelers Investment Management Co . . . . . . . . . . . . . . . . . . . . . . . .17Tullett Prebon plc . . . . . . . . . . . . . . . . . . . . . . . 5Unilever plc/NV . . . . . . . . . . . . . . . . . . . . . . . 12Vanguard Group . . . . . . . . . . . . . . . . . . . . . . . .17Venable LLP . . . . . . . . . . . . . . . . . . . . . . . . . . . .17VentiRx Pharmaceuticals Inc . . . . . . . . . . . 10Vertis Holdings Inc . . . . . . . . . . . . . . . . . . . . . 14Visa Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19Vulcan Materials Co . . . . . . . . . . . . . . . . . . . . 20Vyapar Capital Market Partners LLC . . . . 6Yahoo! Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Zipcar Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

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