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Top 10 Corporate Deals: The Final Piece of the Saga

Top 10 Corporate Deals: The Final Piece of the Saga

Hello, aspiring lawyers! Here’s the final piece of my Top 10 Corporate Deals series. I remember whenever I used to read or watch a top 10 list I always wanted to skip ahead directly to number 1. Well sure, I suppose you can scroll down directly to the bottom of the page, but you will miss a couple of very interesting deals which, in my humble opinion, deserved bronze and silver. Let us kick off with my personal favourite:

3. Nike’s acquisition of Umbro

The Headlines: ‘Nike swoops on Umbro for £285m’ The Telegraph, 23 October 2007.

Who’s involved: Baker & McKenzie for Nike Inc., Lovells (now Hogan Lovells) for Umbro plc.

Why you should know about it: Although this deal cannot compare to Bank of America’s acquisition in terms of influence, nor can it compare to HP’s acquisition in terms of value, it is nevertheless a very interesting transaction deserving a high spot on this list.

On 16 October 2007 Umbro made an announcement that it had been approached by Nike, who were interested in acquiring the Cheshire-based sports kit brand in order to expand its global leadership in football via Umbro’s strong presence in the world’s football market. Since its rapid expansion and audacious entry in the football market in the early 1990s, Nike has been involved in a head-to-head race for dominance with Adidas.

What Umbro had to offer was a strong relationship with England’s Football Association, with the diamond-shaped logo featuring on not only the England national team’s jerseys, but also those of Norway, Sweden, Glasgow Rangers and formerly Manchester United and Chelsea.

 

There is an ongoing battle between Nike and Adidas to sign up the very top teams.

– Nigel Currie, Brand Rapport

The idea was to retain the Umbro brand, so that it could operate as an independent Nike affiliate in the UK market.

The Umbro board recommended the 193.06p per share cash offer which represented a 61 per cent premium to the 120p closing Umbro share price on 17 October. However, the deal was still subject to shareholder approval and lengthy competition clearance in up to 12 jurisdictions, all of which needed to be done within the Takeover Code timetable. This transaction was particularly attractive to the media due to England’s failure to qualify for Euro 2008, which had a negative impact on Umbro’s revenues. These along with several other issues made the deal very intriguing.

The Football Association had the option to exercise its contractual right to terminate the supply of kit agreement with Umbro in the event of a change of control. However, after negotiations led by Nike it choose not do so. Instead, the FA embraced the Nike – Umbro tie up, stating that it will ‘benefit from the marketing expertise and financial strength of Nike.’

Furthermore, since the deal was structured as a scheme of arrangement, it required a special resolution (75 per cent of the votes) to be approved by the shareholders. As a result, two of Nike’s biggest sportswear competitors in the UK market – JJB Sports and Sports Direct, who were also shareholders in Umbro – managed to raise their shareholdings to approximately 25% in order to block the deal. In spite of the increased scepticism in the press, skillful negotiations by Nike’s counsels – Baker & McKenzie – ultimately lead to the closing of the deal in March 2008.

This deal serves as an example of how both in sports and in business it is all about getting the job done. Despite the deal being considered doomed by the press, Nike were able to close out in dramatic fashion. A well-deserved #3 spot, indeed.

2. Google’s acquisition of Motorola

The Headlines: ‘Google snaps up Motorola Mobility’ Financial Times, 16 August 2011

Who’s involved: Cleary Gottlieb Steen & Hamilton for Google Inc., Dewey & LeBoeuf for Lazard Frères (Google’s financial adviser), Wachtell Lipton Rosen & Katz for Motorola Mobility Holdings Inc.

Why you should know about this: In these modern times where everything is done over computers and people cannot imagine life without their mobile phone (not to mention Facebook) it is seems appropriate that a huge high-tech acquisition should be placed near the summit.

On 15 August 2011 it was announced that Google intended to buy Motorola for $12.5 billion, consisting of $40.00 per share (a 63% premium on the closing price of Motorola’s shares on the NYSE). The offer was unanimously approved by the Motorola board.

It has been reported that the main reason behind Google’s interest in acquiring Motorola is the latter’s solid collection of 17,000 wireless patents. By analogy with sports (which is all about trophies and bragging rights) the IT business is all about patent rights. Needless to say, all the major players are in a hunt for more patents to add to their collection and the battles to obtain those is fierce, sometimes even lethal. For instance, Google was recently outbid by an Apple-led consortium which acquired 6,000 wireless patents from Nortel Networks for the price of $4.5bn. As a result of this deal, Google is expected to strengthen its shield to protect the Android system from further lawsuits from Apple, Microsoft and Oracle. Although it was not initially expected that Google would retain Motorola’s device business, there are now strong indications that the search engine company will use said business in the hopes of developing an integrated hardware/software platform that could compete with Apple. However, the irony lies in the fact that in its acquisition of a mobile handset manufacturer Google effectively will become a competitor to its business partners, such as Samsung and HTC, who are using the Android system. Nevertheless, it is believed that this acquisition will put Google and Apple in a race for dominance in the IT market, and therein lays the problem.

The deal is still subject to approval from the competition authorities in the United States and the European Commission, which have set a deadline on 13 February 2012 to decide whether to approve it. As reported in the Financial Times, the Android operating system claimed a staggering 48% of the global smartphone market in the last quarter.

In light of this, American consumer advocacy group Consumer Watchdog has decided to make life difficult for Google by sending a letter to the European Commission asking it to disallow the acquisition as it allegedly violates antitrust law.

The letter stated that Google controls ‘95% of the mobile search market’ and that there was ‘evidence it is pressuring handset manufacturers to favour Google applications when using the Android operating system. Allowing the Motorola Mobility deal would provide Google with unprecedented dominance in virtually all aspects of the mobile world’.

In fact, the constant desire by powerhouses such as Apple and Google to upgrade their patent collections has been the subject of concern by the US Department of Justice and other competition authorities, as they have grounds to believe that these assets may be used in a way which may undermine fair competition in various markets.

In conclusion, this deal, although not cleared yet, is a must-know because of its immediate and future impact on the global IT market. In fact, one might argue that it is a modern day version of the Exxon Mobil merger (#5 on the list). As the world has developed in the last 15 years, Big Oil has effectively given way to Big IT.

1. Kraft’s acquisition of Cadbury

The Headlines: ‘Cadbury and Kraft agree £11.6bn deal’ Financial Times 18 January 2011.

Who’s involved: Clifford Chance for Kraft Foods, Slaughter and May for Cadbury.

Why you should know about this: There are several ways to measure a corporate deal: value, press coverage, influence on the consumer, attractiveness of the product involved, drama, and degree of difficulty are among the main ones. Well, this deal has all of these characteristics, but the one which really stood out was impact. The impact of this transaction would not only be limited to the consumer or the UK’s food market.

On 7 September 2009 an announcement was made pursuant to Rule 2.4 of the City Code on Takeovers and Mergers that Kraft was interested in buying Cadbury for 745p per share (consisting of 300p in cash and 0.2589 in Kraft shares). This was rejected by the Cadbury board. This announcement is called an announcement of a possible offer, and as per Rule 2.4 it does not oblige Kraft (the bidder) to make a firm offer. In contrast, once an announcement of a firm intention to make an offer (Rule 2.5) is made the bidder is obliged to make an offer. Since this was a hostile takeover situation, Kraft’s announcement of a possible offer had put Cadbury into a difficult position. Taking into account the media speculation, such an offer creates an uncertainty for the target company, and since once rejected by the board it is put directly in front of the shareholders this may pressure the board to engage with the bidder and come up with a deal.

Thus, such announcements are often perceived as unconscionable since, firstly, they put enormous pressure on the target company and, secondly, in contrast to announcements under Rule 2.5 they generally do not trigger a period of deadlines where the bidder has to make an offer. However, the Code permits the target company to request the Panel on Takeovers and Mergers to impose a deadline on the bidder to either make an offer or recant. This is known as the put-up or shut-up deadline. If the bidder does not make an offer within the deadline, he will be restricted from making another offer for a period of six months.

On 30 September it was announced that Kraft had until 5 pm on 6 November 2009 to make a firm offer. Dramatically, four hours before the PUSU deadline Kraft made a firm intention announcement to make an offer for the same price. This started another time period of 28 days within which Kraft had to make the offer. Kraft issued the offer on the last possible day – 4 December 2009. However, the American company also took advantage of the provisions in the Takeover Code which effectively allowed it to make amendments to the offer until 19 January 2010. Not surprisingly, the final offer was made on that same day.  In order to make amendments to its offer and add more favourable terms to the target shareholders, Kraft had sold its frozen pizza business.

On the other hand, Cadbury had issued two defence documents against Kraft’s bid. As a result, the collective perception was that the takeover would remain hostile to the end and subsequently fail. However, 15 minutes before the 19 January deadline the final offer was issued, which stated that Kraft would buy Cadbury for 840p per share (500p in cash and 0.1874 Kraft shares).  This offer was recommended by the board, and due to the retraction of other companies with potential competing bids, it was approved on 2 February 2011.

The chocolatier acquisition’s most significant impact, as far as lawyers are concerned, was being the ‘inspiration’ for the change in the Takeover Code. The Panel of Takeovers and Mergers implemented the new code on 19 September 2011. Among the main changes are: shortening the PUSU deadline and the offering of some form of protection for employees who are affected by the transaction. Whenever a transaction has the effect of changing the way future M&A deals are performed in the Square Mile, it most certainly deserves the top spot in any ranking. Therefore, this deal is a must-know for any aspiring wannabe commercial lawyer, especially those who are fans of Cadbury’s wide variety of tasty chocolates.

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