Sage Advice

Early in his career, lawyer Peter Lyons learned that M&A legal work could be anything but short and sweet. It was in 1986. Lyons was an associate at Shearman & Sterling’s New York headquarters. He was settling in after three years at the firm’s San Francisco office. John Madden, then the head of mergers and acquisitions, asked Lyons to fill in one day for a senior associate who was on vacation. A company called Fruehauf Corp. needed a proxy statement filed on a proposed merger. He worked on the case for about three years before moving on. In the interim, he had helped shepherd the company through a busted merger, a hostile takeover bid, a debt restructure, divestitures and, finally, a sale to Varity Corp. that signaled the end of the company. It was “soup to nuts,” Lyons says, looking back. “That’s how I learned the game. The real training and proving ground was there.” The mention of Fruehauf still makes Lyons smile. However, the defunct transportation and manufacturing company marked only the first of Lyons’ many complicated corporate deals. He now is the co-head of the firm’s M&A group and widely considered one of the pre-eminent deal lawyers in the United States today. A participant in many cross-border transactions, Lyons even ranks among the top 10 M&A lawyers in completed European deals this year, according to London-based Mergermarket.com. In the past few months, he has worked on KPMG’s attempted purchase of Arthur Andersen assets, USA Networks Inc.’s acquisition of Expedia Inc., Deutsche Bank’s acquisition of Scudder Investments and Trendwest Resorts Inc.’s sale to Cendant Corp. While the megadeals of two and three years back may seem like ancient history, Lyons believes it’s just a temporary lull. He cites financial services and pharmaceuticals as two sectors ripe for consolidation and large-scale mergers. Lyons thrives on complicated, time-sensitive negotiations. He describes with barely concealed glee the sale of United California Bank earlier this year. Japan’s UFJ Holdings Inc., the successor to Sanwa Bank, Tokai Bank and Toyo Trust and Banking, came to Shearman & Sterling in late October and said it wanted its California bank subsidiary sold by the end of March. “We looked at ourselves and [thought] that ain’t going to happen,” Lyons recalls. The complexities of a bank sale in the United States, with regulatory and due-diligence considerations, were compounded by cross-border cultural and business issues. Within a few weeks, the firm was able to help hire an investment bank, organize an auction and negotiate a sale. BNP Paribas SA paid $2.4 billion in cash for the bank. The sale closed March 15. Lyons marvels at how the firm was able to marshal forces. It assembled experts in bank regulatory issues, M&A, real estate and executive compensation. “It was fun. We ran a great process. We had a great result. Our clients were very pleased. We got it done.” Lyons, 46, acknowledges that he’s looked at within the firm as a bit of an elder statesman. “I have unfortunately come to the point in my life where I supply the gray hair,” he says, even if, immediately adding, “There’s not much [gray hair] and at least I still have mine.” As a sign of how much the firm values Lyons’ negotiating abilities, in mid-2000, Shearman & Sterling dispatched Lyons to San Francisco for a year as managing partner of the Bay Area. When he arrived, California operations were listless. High-profile defections and home-office miscues had sapped and demoralized the firm’s West Coast contingent during a time when other firms were riding high with the technology boom. Lyons had to reassure California partners that the firm had no intention of abandoning the West Coast, while acknowledging there was a need for more autonomy. “While we were there for a long time, we never really were integrated in the local business community as we should have been,” Lyons says. He came away from his experience, he says, more thoughtful and a better listener. Lyons says he still isn’t the most patient individual in the world but says he makes it a rule not to get angry and yell more than once during a deal negotiation. “You gotta be tough. You can’t be bullied around. But I don’t find screamers to be particularly effective.” Lyons sat down recently with The Daily Deal‘s Matt Miller for a series of conversations on dealmaking. Topics ran the gamut from the limitations of giving clients advice to deals from hell. Relaxed and affable, Lyons sits in an office crammed with corporate deal tombstones. One of his favorites: the flying corncob from the time he represented seed company DeKalb Genetics Corp. in a stock buyback and equity sale. There’s also a Boxing Nun doll that reminds him of his Catholic school education and a Louisville slugger bat from the time he was a founding member of the firm’s billing and collections committee. A copy of “Theodore Rex,” the Edmund Morris biography of Theodore Roosevelt, sits in one corner of the floor. On the wall is a map of Elizabeth, N.J., where he was born. Lyons describes himself as “the kid from New Jersey.” Lyons remains a believer in what he does. “This job is way too hard if you don’t like it,” he says. “I tell people who work for me that if working on a high-profile, complicated, frankly tense transaction doesn’t get your blood pumping, than you need to do something else for a living. You tend to live on adrenaline.” The Daily Deal: What was the worst M&A negotiations you’ve ever had? Peter Lyons: I was a third-year associate in San Francisco. It was the first deal I ever negotiated front line. It was a small deal. The client [whom Lyons declined to name] was getting screwed. They were getting lied to. They were getting misled. It was obvious. What was bad was that they wouldn’t listen. They were buying, and they fell for it hook, line and sinker. It was very frustrating because you could see it happening and it was like watching a movie of a car crash. You just wanted to avert your eyes. DD: What lessons did you learn? Lyons: You can’t take this stuff personally. You give your client your best advice and you try to make them understand the risks, the potential upside and downside. The clients will make the decision. Recognize that you’re an adviser. And to be a good adviser, you give them your best shot, but they can choose not to listen to you. DD: What was your biggest disappointment? Lyons: We represented American Cyanamid in 1994, and we were negotiating with SmithKline Beecham for a transaction to do an asset swap. It was very important to me. American Cyanamid was the first really big client I brought into the firm. I was the lead guy. We had a really creative tax structure that we came up with that no one had ever used, but it worked here. If it got done, we knew there was a chance that it would have been challenged and it would at that time have been the next big deal in Delaware case law. It would have made new law. The negotiations dragged out. What happened was everything that we feared would happen if we took too long. Word leaked out and then American Home Products came in and made a hostile deal, which made it as a practical matter impossible for [our] deal to get done … It just reinforced what I’ve always known: Time and the number of people involved are the enemies of large deals. The longer it takes, the more people who are involved, the risk of a leak just goes up exponentially. It’s always been very difficult keeping large, complicated deals from leaking and leaks can sometimes kill transactions. I have this rule of thumb. If you get more than 20 people who know about a deal, it’s very hard to keep it quiet. If you’re worried about a leak, you want to make sure that there is a common understanding with respect to big issues, price, governance, other important terms, before you broaden the group because once you broaden the group, the risk of leak goes up. And if you’re going to have a deal go bust, typically you would rather have a deal bust early and privately than later and publicly. DD: Can you almost anticipate deal breakers? Lyons: In most deals, you can typically identify significant issues up front. On the other hand, in a significant percentage of deals, issues come out of left field, typically because the information isn’t complete. DD: So that argues for thorough due diligence, right? Lyons: Here’s the tension you have. If time and the number of people involved are the enemies of the deal, diligence is necessary but problematic. What you saw in the halcyon days was very limited due diligence. Where you got these huge mergers of equals, people took the position — not irrationally — that the materiality threshold and the legal and financial due diligence would be quite limited. In the current environment, I don’t see any of our clients who are prepared to go to their boards of directors and say, “Yeah, we did our financial diligence. We saw their plan and spent half a day with their CFO.” So you have tensions. You need to get it done fast. You need to avoid leaks. On the other hand, you’re going to do extensive due diligence, that means by definition you will need to take the time. This is what I advocate: Before you open yourself up to the leak risk, please, please make sure you’re confident that you can reach agreement on the fundamental issues. DD: When you come into M&A negotiations, what is your role? Lyons: Your first role is to help your client understand and prioritize the issues so he can make decisions on the tradeoffs. Your second role is to facilitate communication and make sure both sides understand their own positions and where they agree and disagree. The next role is to be an advocate for your client’s position. And you often must play a role as facilitator — someone to come up with a creative solution and bridge the gap. I have often experienced that negotiations can get contentious because communication is poor. DD: What about post-merger integration issues? Lyons: If you’re trying to integrate organizations, experience indicates there are a couple of things that people who have been more successful at it often do. They identify the leaders of the combined organization early on. They do it in a way that is perceived fair, but they do it quickly. If you stretch that out, you allow ill will to fester. People need to be thoughtful about those integration issues before they decide to do a deal and not gloss over them. There’s a deal we tried to do a few years ago. It was a complicated deal. It made a lot of sense on paper. We were going to carve out a piece of the other company’s business and put it into the combined entity. We sat down and had a meeting, and the CEO walked out and said, “We’re never going to be able to combine our manufacturing operations and here are the following three reasons.” As soon as he said it, people said, “Yeah, you’re right.” DD: What about advising against doing a deal? Lyons: We have to be very careful in what we do in our business, because we all like to get deals done. That’s how we measure success in our little world here. But, I hate to say this, sometimes you can’t believe your own bulls–t. [Sometimes] our job is to make sure people understand that there are some deals that shouldn’t get done. Our role is to serve as a brakeman and say “wait” because people who are advocates always want to get the deals done and those are the people who want to gloss over the problems. On the one hand, we want to make sure people don’t gloss over the risks. On the other hand, there are people in organizations who don’t want a deal done for whatever reason, and we also need to make sure those risks aren’t overly dramatized and overstated. DD: How has your perspective changed with age? Lyons: Ten years ago, I thought I knew everything. Only now I’ve started to realize how much I didn’t know. Not the technical, legal issues. Having done this for so long is really helpful, in the sense that you get to see things at a different level. For example, when viewing disclosure issues and interpretation of the SEC rules, I now have a better understanding of the context and the ebb and flow of what’s going on in the world and how that affects the advice we should give. We now live in what people call the post-Enron age. This will impact, for example, the way the Delaware chancellors will view a case. This is a very different environment than a year ago. Not just the economic environment. It’s the environment of the securities market. I was on the phone yesterday. Some of my clients were trying to argue that they ought to be able to do X and Y and they had a very technical argument why this is OK. And I said, “You have to understand what counts in court is not what’s true, but what you can prove.” People will view perceived conflicts of interest and perceived insider deals with a much more jaundiced eye. Deals that are characterized in that way will be subject to greater judicial scrutiny and skepticism. We need to recognize that judges read the newspapers and this will affect how they will view cases. It has to. Recently, two of our capital markets partners and I sat down to look at whether certain market activity counts as a tender offer or not. We thought about it and we went back and looked at the learning on it, which is all quite old. I am old enough to put into context the evolution of the rule. And I said, “Wait a minute, all this learning on what constitutes a tender offer is before the SEC established the all holders and best price rule,” which basically says that you have to treat everybody in the tender offer the same. So you have to take that into account. People will view the all holders and best price rule in a stricter way than they would have six or 12 months ago, because what you’ve seen is a lot of bad press about people getting sweetheart deals. Look at all the cases about IPO allocations. Will that affect the way the SEC or the judge rules [when] concerned with the all holders and best price rule? Technically, no. But they’re human beings, and there’s no question at all that [recent press] will affect decisions. As you get older and you’ve been doing this for a longer period of time, those are the kinds of considerations that you’re more likely to take into account. Copyright �2002 TDD, LLC. All rights reserved.