In the areas of high technology and telecommunications, two of the three largest mergers of 2008 benefitted from timing: Their terms were nailed down well before the market meltdown of last fall. Talks on all three of the highest-value mergers of 2008 in those fields were under way by April. The two deals that sped to agreements by June are closed now, but the one that got snagged in September on the U.S. credit crunch is still waiting.
Hewlett-Packard and Electronic Data Systems closed their $13 billion transaction in August, and the wireless companies Verizon Communications and Alltel wrapped up their $28 billion deal in January of this year. These deals were, respectively, the 10th and fourth largest of all 2008 announced merger deals involving U.S. targets, excluding stock-repurchase transactions, according to data provided by Thomson Reuters.
Embarq, which planned to find a buyer by September, was tripped up by the Lehman Brothers Holdings Inc. collapse that month and expects to close its $11.5 billion merger with CenturyTel this year. That deal ranked as the 13th largest announced deal of 2008, not counting buybacks.
The different experiences show how negotiations and terms got tougher as transactions neared and passed September, the month that global financial markets were thrown into turmoil and the availability of bank credit was choked. While financing flowed easily through the first half of 2007, it was clear by 2008 that volatile debt and stock markets were going to make getting deals done more difficult. Then the bottom fell out in September.
“We were very focused on the difficulties in the debt market and how do you do a deal when it’s all counting on financing,” said Larry Makow, a corporate partner at Wachtell, Lipton, Rosen & Katz whose team started working on the Alltel/Verizon combination in April.
The Alltel/Verizon agreement creating the largest U.S. cellular phone company was signed in June after what Debevoise & Plimpton partner Jeffrey Rosen, who was representing Verizon, called a peak in talks during a two-week “intense period” of negotiations. The sheer size of the merger was a challenge, he said. Verizon’s bid included cash, so financing was a key issue at a time of uncertainty for raising funds in the debt markets, Rosen said.
Although Alltel was willing to allow Verizon to defer the closing if financing didn’t come through, the two agreed there would be a “substantial” termination fee if Verizon didn’t follow through on divestitures to get regulatory approval, said Makow, who represented Alltel in the talks.
“It was a hard negotiation,” Makow said. “Nobody gets 100 peercent of what they want.” Rosen called it a “spirited negotiation.”
Ultimately, the financing came through, as did the regulatory approvals that included a Federal Communications Commission sign-off in addition to the usual Department of Justice antitrust approval.
The only easy part was the lack of shareholder approvals necessary, given that Alltel was largely owned by a private equity consortium and Verizon made the purchase through its Verizon Wireless unit, which is a joint venture with Vodafone Group.
STEALTH NEGOTIATIONS OVER EDS
Hewlett-Packard’s bid to buy EDS grew out of EDS initially seeking to buy Hewlett-Packard’s information technology services group, said Serge Benchetrit, the Willkie Farr & Gallagher partner who led the team for EDS.
Once the talks were under way in January 2008, the most important task was stopping leaks about the discussions to keep customers from being concerned about changes in their services or from pushing for better terms under the circumstances, he said.
“The strategy was really to keep the information flow to a limited number of people,” Benchetrit said.
To that end, information was exchanged among only a handful of business executives and a few legal department professionals at the companies, each of which had tens of thousands of employees in many countries, Benchetrit said.
“You have to make sure you keep things on track,” said Benchetrit, who couldn’t sleep regularly for five months because of the adrenaline flow that accompanied the deal, the largest on which he had ever played a lead role.
Ultimately, the Wall Street Journal broke a story on the talks before the deal was done, speeding up the agreement in May by a few days, said Chris Austin, a partner at Cleary Gottlieb Steen & Hamilton who represented Hewlett-Packard.
Closing the deal in August was perfect timing, Benchetrit said. “There was an overall sense for anyone in the financial world and the corporate world that things were unraveling,” he said.
HELD UP BY LEHMAN COLLAPSE
Centurytel and Embarq weren’t so lucky. As Embarq steamed toward the conclusion of an auction of the company, with bids due on Sept. 18, Lehman, a bank involved in the deal, filed for bankruptcy protection on Sept. 14. The blow led Embarq to suspend the auction process. Cravath, Swaine & Moore partner Robert Townsend, who was leading the firm team representing Embarq, switched gears to steer the company away from cash bids in the new environment.
“The board quickly decided that the only kind of deal that made sense was an all-stock deal,” Townsend said.
The merger agreement also had to be restructured to ensure that not more than a majority of shareholders would be required to approve the deal at each of the companies and to avoid triggering the refinancing of additional debt, he said.
For lawyers who were representing Centurytel, just one-third the size of Embarq and smaller than some competing bidders, there was as much focus on estimating other bids as there was on coming up with a Centurytel offer, said Eric Robinson, the Wachtell partner leading the Centurytel team. The challenge was to restructure the initial combined stock and cash proposal that relied on significant financing into a new stock bid that suited a dried-up credit market with declining stock values, Robinson said.
The team also had to come up with a unique governance structure that allowed Centurytel to run the combined company and have one more board member even though it would own a smaller stake in the enterprise.
“We were working with the bankers to come up with different structures that would allow us to make the bid and to be attractive enough to Embarq to reopen the process,” Robinson said. Centurytel persuaded Embarq to reopen the process and it beat out one remaining competitor. Still, the combination is waiting on federal and state regulatory approvals and will close in the second quarter if all goes as planned.
Related chart: Top announced U.S. target M&A deals of 2008
