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A team of Sullivan & Cromwell lawyers led by partner Joseph Frumkin made a fortuitous decision early last year when the attorneys were representing Texas utility TXU Corp. in its sale to two private equity funds. They demanded that the buyers spell out by April what information their bankers would need later to get financing for the deal. Frumkin’s team also tightened the language of the February agreement to require a closing within 20 days of providing that information to avoid squabbling later, he said. The 20-day clock started ticking in September, and the $44.4 billion sale, which was the biggest private equity transaction ever, closed by October, keeping it on track even as some transactions were choked off by banks’ tightening purse strings amid the subprime mortgage crisis. Also in October, the sale of Sallie Mae parent SLM Corp. fell apart as a private equity consortium walked away from its offer. “We were able to get the deal closed sooner than most people expected,” Frumkin said recently in an interview, seeing more clearly in hindsight how critical speed was to completing the TXU sale. That transaction “would not happen today.” The most striking thing about private equity acquisitions in 2007 was that they happened at all, said attorneys who worked on them. It wasn’t until the middle of the year that the subprime crisis began to look like it might take a broader toll on the economy, but after that the impact got worse with each passing month, as banks stiffened lending terms and generally made capital less available for transactions. With credit drying up, some buyers had difficulty getting financing to complete transactions and some sellers expected they would have to hold buyers to their agreements or make them pay for dumping deals. It was the job of lawyers on both sides of the transactions to redouble their efforts to reach the finish line. They generally pressure-tested deals more intensely in 2007 as the year went on, vetting agreements with more partners than usual to ensure that a transaction could stand up in the worst-case scenario. Slight rise from last year Private equity acquisitions, those pursued by investment funds that buy public companies and take them private, accounted for $178.9 billion, or 43%, of the value of the top 25 transactions last year. That was a slight rise from the $177 billion in private equity transactions among the top 25 deals of 2006. (Unless otherwise specified, deal values come from Thomson Financial.) On the other side of the TXU transaction was attorney David Sorkin, then a Simpson Thacher & Bartlett partner who led the team representing buyers Texas Pacific Group (via TPG Capital L.P.) and Kohlberg Kravis Roberts & Co. (KKR). While Sullivan & Cromwell lawyers were racing to compile information to give to the private equity firms’ bankers, Sorkin’s team was busy seeking support from environmental groups for the TXU sale, winning over a major institutional shareholder that was balking at the deal and making sure all parties in the consortium were kept in the loop. “Last year was a year in which shareholders did vote down a number of transactions, or terms had to be changed,” Sorkin said. Asked recently whether the buyers sought or signed any modifications to the deal as the months passed between the agreement’s February signing and October closure, Sorkin declined to comment. Sorkin left his 22-year career as a private equity partner at Simpson Thacher in December to become KKR’s first general counsel. Big role for Simpson Simpson Thacher was the lead firm for either the buyer or the seller in more private equity deals than any other firm, mainly because its clients were doing a lot of the buying. KKR and The Blackstone Group L.P. have been turning to Simpson Thacher for mergers and acquisitions work since at least the 1980s. In all but one of its transactions, Simpson Thacher represented the buyers. The firm had at least 30 lawyers working for Blackstone on its $26.7 billion acquisition of Hilton Hotels Corp., a complex transaction because of the company’s international assets and a unique securitization of its real estate, franchise and management business for the financing. “We all understood the need to move quickly,” said Simpson Thacher partner Greg Ressa in commenting on the Hilton deal. The economy “had started to crack by the time we signed up the deal” in July, said Ressa, who leads the firm’s real estate group from New York. “There was enough uncertainty in the world that you knew if you didn’t get the transaction done quickly, maybe things wouldn’t stay the same and maybe the same transaction wouldn’t be available a month later.” Other major private equity purchases last year included KKR’s $27 billion purchase of First Data Corp., in which Simpson Thacher and Sullivan & Cromwell were again counsel to the buyer and seller, respectively. In the $26.9 billion sale of Alltel Corp. to Texas Pacific Group and The Goldman Sachs Group Inc., New York’s Wachtell, Lipton, Rosen & Katz represented the company and Cleary Gottlieb Steen & Hamilton, also of New York, was counsel to the buyers. Hilton hired Sullivan & Cromwell for the sale to Blackstone Group. Use of protective clauses To build in more security for buyers and sellers, lawyers generally made more use of “go-shop” clauses, which allow sellers to check rival offers for a restricted period of time, and “reverse termination fees,” which specify the damages against a buyer in the event an offer is dropped. The two transaction tools had emerged a couple of years earlier, but were more widely used in 2007, Sorkin said. Material-adverse-change clauses, detailing changes in a company’s condition that might allow the breakup of a deal, became more important also, the lawyers said. “What was interesting was monitoring the markets and trying to keep a sense of where things were headed,” said David Slotkin, the partner at Washington-based Hogan & Hartson who shepherded through the $21.7 billion sale of Archstone-Smith Trust despite negative reactions from some research analysts who said the price was too low. When Archstone-Smith agreed to be sold to Tishman Speyer Properties L.P. and Lehman Brothers Holdings Inc. in late May, there was little sign of the coming credit crunch, but by late August the buyers were asking for more time to close the deal, Slotkin said. Archstone-Smith, a real estate investment trust and owner of apartment buildings, had a strong material-adverse-change clause that would have made it difficult for the buyer to scrap the deal, Slotkin said. By the time the transaction was completed in October, other deals were in question, he said. Pre-emptive bid in Alltel deal One of the deals that may have been in question was Alltel’s May agreement to be sold to Texas Pacific Group and Goldman Sachs through Atlantis Holdings LLC, a holding company that was created for the deal. The transaction got off to a quick start when the buyers placed a “pre-emptive bid” before the deadline for offers and called on the company to act on it within days, said Cleary Gottlieb partner Paul Shim, who led the team representing the buyers. The agreement was signed within a week in May. “It was an aggressive strategy, and I don’t think people had been doing a lot of that,” said Shim, who worked on the transaction with about 20 other attorneys at the firm. Discussions with financing providers over terms for the deal became “difficult and tense” in the months that followed the agreement and ultimately had to be modified to give the lenders confidence that the debt used to finance the purchase could be sold in the market. “Finding ways to help tweak the terms of the debt to make it more marketable in the current environment while allowing the deal to remain viable from the buyer’s perspective was a challenge,” said Shim, who works in the firm’s New York office. Completing the $26.9 billion acquisition ultimately in mid-November spoke to “the parties’ willingness to get it done in very difficult circumstances,” he said. Long process for First Data First Data’s sale eventually became another bellwether late in the year. Sidley Austin attorney Frederick Lowinger, who was representing the company, early in the year actually encouraged his client to take the process slowly so that First Data could carefully ferret out bidders’ best offers and get the best price for shareholders, he said. “We were very concerned that if we weren’t properly structuring or limiting what a bidder could do, [a bidder] could basically take actions that would prevent other bidders from mounting a bid,” said Lowinger, who co-heads the firm’s private equity and mergers and acquisitions practice. An agreement to sell the company to KKR was signed by early April, but First Data still had a “go-shop period” during which it could solicit rival bids. Lowinger said his team built language into the agreement to make sure KKR’s ties to financiers and other parties wouldn’t preclude other offers, he said. As First Data’s discussions with KKR dragged on past Labor Day, people watching the deal from the outside started to wonder whether it would get done. Still, Lowinger was confident that it would be difficult for the buyer to assert any material adverse change in the company’s condition and that the $750 million breakup fee would make it “painful” for KKR to back out. By late September, the deal closed. “There were a variety of bad situations that didn’t happen,” Lowinger said. This year, lawyers expect fewer and smaller transactions, perhaps with more capital from foreign buyers. Hogan & Hartson’s Slotkin predicts that deals will reach valuations of about $3 billion, not the $10 billion to $25 billion range. Buyers once again are crafting acquisition agreements that have an escape hatch if financing can’t be arranged, which is a departure from the past few years, when private equity firms had committed financing and didn’t need such caveats, Slotkin said. “Now, the banks are putting in place more conditions, and therefore more deals are requiring financing conditions,” Slotkin said. “It creates more uncertainty once a deal is signed.” CHART: Top Announced U.S. M&A Deals of 2007

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