In a Weak Market for Mergers and Acquisitions, Signs of Strength

Paul T. Schnell has worked on some of the biggest mergers announced this year. Even so, he says that the business of buying and selling companies is in the doldrums, the likes of which he hasn't often seen in his three-decade career at Skadden, Arps, Slate, Meagher & Flom.

“I'd liken the M.&A. market to getting over an earthquake and its aftershocks,” he said. “And we had the biggest economic earthquake in 80 years.”

Four years after the financial crisis nearly shut down the markets, the mergers business has been slow to return to the heights it attained before 2008. Deal volume dropped 3.7 percent this year from 2011, to $2.36 trillion, according to Thomson Reuters data.

Despite the doldrums, Skadden has been the leading law firm in the deal industry this year, having advised on 206 d eals worth $326 billion as of Dec. 28. A year ago, it was No. 3.

During the 1970s and 1980s, the New York-based Skadden emerged as a powerhouse in advising on mergers and acquisitions, especially on more controversial deals involving hostile takeovers and proxy fights.

Leading the law firm through this period was Joseph H. Flom, who died early in 2011. He built a specialty in M.&.A. at a time when loosened antitrust laws and deregulation hastened a boom in corporate deal-making. On the back of its pioneering mergers practice, the firm expanded into other areas and geographies, becoming a model for the global mega-firm that today dominates the legal industry.

Mr. Schnell has been among the busiest lawyers at the firm, having advised on transactions like Anheuser-Busch InBev's $20.1 billion takeover of the rest of Grupo Modelo that it did not already own and Pfizer's $11.9 billion sale of its infant nutrition business to Nestlé.

A philosophy major given to professorial disquisitions - his ideal alternative job would be to teach philosophy in high school - Mr. Schnell ascribes the weak deal market to a collective battered psyche that is deterring many executives from going through on deals.

This year, there has been uncertainty over the presidential election, the economies of several European countries and the battle between President Obama and House Republicans over tax and spending cuts.

“You're still seeing a manic-depressive M.&A. market, one that's reacting strongly to positive news and then to negative news,” he said.

And despite a flurry of deals in the last weeks of the year, it's unclear whether the environment is picking up. Nonetheless, merger bankers and lawyers, an ever-optimistic lot, have said that the buzz among their clients for deals has been getting louder. The amount of deal volume announced in the fourth quarter is up 16 percent from the year-ago period, though the number of transactions is down 26 percent.

Deals can be completed, Mr. Schnell said. Directors are increasingly asking their management teams about potential opportunities. And advisers are keeping busy: Mr. Schnell recalled having to cut short a family vacation in London this spring, with business forcing him to keep long hours. “I got to know the graveyard shift very well,” he said.

Still many deals tend to be “bolt-on acquisitions” that add incrementally to an existing business. From June to August, for example, the dollar value of announced mergers plummeted to some of its lowest levels since 2007. Yet at 3,400, the takeover were the second-highest number of dea ls since the summer of 2007, according to data from Standard & Poor's Capital IQ.

“In uncertain times, it's harder to do a bet-your-company type deal,” he said. “Bolt-on acquisitions are safer-sounding and are a safer kind of deal to do.”

Bigger deals require some combination of special features, according to Mr. Schnell, including having well-known brands or serving as valuable entry points to new markets.

Modelo, with its Corona brand and its dominant position in the Mexican beer market, was perhaps an inevitable purchase for its bigger partner, Anheuser-Busch InBev. And the German conglomerate Joh. A. Benckiser had an opportunity to acquire well-known brands when it bought Peet's Coffee & Tea and Caribou Coffee for a combined $1.3 billion.

Not all announced deals are successful, ho wever. Mr. Schnell advised Coty, which is owned by Joh. A. Benckiser, in its unsuccessful $11 billion offer for Avon Products.

Banks are willing to finance deals again as well, including takeovers by blue-chip companies and leveraged buyouts by private equity firms and riskier junk-grade buyers. And more permissive forms of financing, like so-called covenant lite loans that carry fewer limits, are creeping back into the market.

But lenders' eagerness usually extends only to smaller transactions, denting the ability of buyers like buyout firms to strike deals above $5 billion.

Some industries have been buoyed by other factors as well. Oil and ga s remains the busiest industry for mergers, accounting for 14 percent of all M.&A. activity in 2012, according to Thomson Reuters, driven by a seemingly limitless hunger for shale oil and gas properties.

Mr. Schnell remains optimistic about the deals business eventually bouncing back, having seen his share of ups and downs in the market, many spent alongside prominent colleagues like Mr. Flom and Roger S. Aaron. (The expansive office of Mr. Aaron, who died in February, is around the corner from Mr. Schnell's.)

Paraphrasing Mr. Flom, Mr. Schnell said that in most crises, one would wait for the pendulum to swing back. “But in this crisis, you were worried the pendulum would be knocked over,” he said.

That said, he added, “the longer I do this, the more I'm sure you can't predict where things are going.”

Porsche Wins Dismissal of Hedge Fund \"Short Squeeze\" Lawsuit

A New York state appeals court dismissed a lawsuit brought by hedge funds against Porsche on Thursday, handing the German automaker a big victory in the long-running legal battle over its controversial takeover of Volkswagen.

The Appellate Division decided that the hedge funds lacked jurisdiction to bring a lawsuit in a New York state court, ruling that there was an inadequate connections between New York and the facts of the case. The opinion reverses a trial court ruling this past summer that had upheld the action. The decision also mirrors a federal court ruling two years ago that bounced the hedge funds claim.

“The only alleged connections be tween the action and New York are the phone calls between plaintiffs in New York and a representative of defendant in German, and the e-mails sent to plaintiffs in New York but generally disseminated to parties elsewhere,” said the brief opinion. “We find that these connections failed to create a substantial nexus with New York, given that the events of the underlying transaction otherwise occurred entirely in a foreign jurisdiction.”

The litigation stems from historic “short squeeze” in the shares of Volkswagen in 2008. For years, hedge fund speculators had followed Porsche's protracted attempt to gain control of Volkswagen.

Several dozen hedge funds had put a large bet in place that Volkswagen would decline in value because they thought Porsche had stopped buying Volkswagen stock. But in October 2008, when Porsche disclosed that it owned a 75 percent stake in Volkswagen, shares of Volkswagen spiked and the funds absorbed huge losses when they closed o ut their negative bet, or short positions.

The hedge funds - a group that included Elliot Associates, Viking Global Equities, and Glenview Capital Partners - accused Porsche of misleading investors about its stake in Volkswagen. They argued that Porsche should have disclosed its Volkswagen position much earlier than it did, and committed securities fraud by making deceptive public statements about the holding.

They first filed a lawsuit in federal court. A federal judge in Manhattan dismissed that case in December 2010, citing a 2010 United States Supreme Court ruling - Morrison v. National Australia Bank - that severely limited shareholders' ability to sue a foreign company in the United States if that company's shares traded on an overseas exchange. The hedge funds have a ppealed that decision to the federal appeals court.

Meanwhile, after losing in federal court, 26 of the funds brought a parallel action in state court. The funds scored a win this summer when the trial court judge, Justice Charles Ramos, denied Porsche's motion to dismiss the case. But Thursday's appellate ruling puts the kibosh on the funds' attempts to sue the carmaker in New York state court.

But wait, there's more. Some of the funds that lost in federal court also sued in Germany, and those actions are pending. For Porsche, though, the prospect of litigating the dispute in its home country is not nearly as daunting. German courts typically don't award big damage like United States courts do, and there also aren't juries in Germany.

Representing Porsche in the case is Robert J. Giuffra, Jr., of Sullivan & Cromwell, who called the ruling “an important victory” for his client.

James B. Heaton III of Bartlit Beck Herman Plaenchar & Scott argued th e case for the hedge funds. He did not immediately respond to a request for comment.

Bank C.E.O.\'s on Thinning Ice

At least one of the three big bank chief executives to survive the financial crisis could be without a job by the end of 2013.

Goldman Sachs's Lloyd Blankfein, JPMorgan Chase‘s Jamie Dimon and Brady Dougan at Credit Suisse have each suffered setbacks in the past year or more. The two U.S.-based bosses have done a better job of shrugging those off. But Mr. Dougan looks vulnerable.

Holding on to the top role at a bank during the financial crisis has required guts and skill. The survivors' club halved in size in 2012: Deutsche Bank's Joseph Ackermann, Citigroup's Vikram Pandit and Robert Diamond at Barclays all left their banks â€" though for very different reasons.

Mr. Blankfein has weathered almost three years as the lightning rod for criticism of Wall Street's role in the crisis and of its excessive pay. He's not out of the woods: Goldman's return on equity for the first nine months of the year was a disappointing 8.8 percent. But for now, calls for his head have all but ceased.

Mr. Dimon, meanwhile, was knocked in 2012 by some disastrous trades that stripped shareholders of $6 billion of revenue. This blow to his reputation as a prudent risk manager forced him to reshuffle his executive team, putting two of them in the race to succeed him. But for now he has a good hold on the reins of a firm that still cranked out an 11 percent return on equity in the first three quarters.

Across the Atlantic, Mr. Dougan's summer flip-flop over whether to raise the capital deemed necessary by the Swiss central bank made him look weak and may have strained relations with the regulator. And UBS's October decision to quit most fixed-income trading called his strategy of sticking with the business into question. His rival's shares soared by a fifth.

Some major shareholders still support Mr. Dougan. And he has no obvious successor. But investor support can be fickle. And unlike his two American counterparts, Mr. Dougan does not hold the chairmanship. Citi showed in October how effective that role could be when Chairman Michael O'Neill ousted Mr. Pandit. None of the three crisis survivors should feel too secure in the corner office. But Mr. Dougan has the most to worry about.

Dominic Elliott is a columnist and Antony Currie is an associate editor at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

Accountants Skirt Shareholder Lawsuits

The accountants who service publicly traded companies are likely to have something to be thankful for this year: shareholders are not filing federal securities fraud lawsuits against them.

Just 10 years ago, public company accountants were in the cross hairs of shareholders, regulators and prosecutors. A criminal indictment destroyed Enron's auditor, Arthur Andersen. Congress created a new regulator, the Public Company Accounting Oversight Board, to oversee the profession. And in dozens of lawsuits in the years afterward, shareholders named accountants as co-defendants when alle ging accounting fraud.

But things have changed. According to NERA Economic Consulting, which tracks shareholder litigation and reported on the decline in accounting firm defendants in its midyear report in July, not one accounting firm has been named a defendant so far this year. One of the study's co-authors, Ron I. Miller, confirmed that the trend has continued at least through November.

That prompts the question, why don't shareholders sue accountants anymore?

“To the extent that firms have been burned for a lot of money, they have some pretty strong incentives to try to behave,” Mr. Miller said. “That's the hopeful side of the legal system: You hope that if you put in penalties, that those penalties change people's actions.”

The less positive alternative, he added, is that public companies “have gotten better at hiding it.”

From 2005 to 2009, accordin g to the NERA report, 12 percent of securities class action cases included accounting firm co-defendants. The range of federal securities fraud class action cases filed per year in that period was 132 to 244.

The absence of accounting firm defendants this year can probably be explained at least in part by court decisions; the Supreme Court has issued rulings, as in Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc. in 2008, making it more difficult to recover damages from third parties in fraud cases.

So perhaps more shareholder suits would take aim at accountants, if the plaintiffs believed that their claims would survive a defendant's motion to dismiss. And it is possible that plaintiffs will add accounting firm as defendants to existing cases in the future, if claimants get information to support such claims.

Over all, fewer shareholder class action lawsuits are based on alle gations of accounting fraud, as opposed to other types of fraud. The NERA midyear report found that in the first six months of 2012, about 25 percent of complaints in securities class action cases included allegations of accounting fraud, down from nearly 40 percent in all of 2011.

Perhaps the Sarbanes-Oxley Act, the legislative response to the accounting scandals of the early 2000s, actually worked, Mr. Miller said.

“There's been a lot of complaining about SOX, and certainly the compliance costs are high for smaller publicly traded companies,” he said, but accounting fraud “is to a large extent what SOX was intended to stop.”

Public company accountants still have potential civil liability to worry about, said Joseph A. Grundfest, a former commissioner of the Securities and Exchange Commission who teaches at Stanford Law School. Regulators, he said, are investigating potential misconduct involving accounting firms.

“There's some coal in that stocking,” Professor Grundfest said, “because all of the major public accounting firms have their knickers in a knot with the S.E.C. over accounting practices involving their China affiliates.”

Jonathan D. Glater, who for several years covered the legal profession and law schools for The New York Times, now teaches at the University of California, Irvine, School of Law.

$2 Billion Fiber Optic Network Deal

BOXBOROUGH, MA and NEW YORK, NY--(Marketwire - Dec 27, 2012) - Lightower Fiber Networks, the premier metro fiber and bandwidth provider in the Northeast, and Sidera Networks, the leading provider of tailored, high-capacity communications services to large enterprise, carrier and data center customers, announced that they have signed a definitive agreement for a transaction valued at over $2 billion led by Berkshire Partners, a Boston-based investment firm, and management, to acquire and merge both companies. M/C Partners and Pamlico Capital acquired Lightower from National Grid plc in August 2007. Pamlico Capital, a significant Lightower investor, and ABRY Partners, a significant Sidera investor, will remain as investors in the new company. The combined c ompany will be led by current Lightower CEO, Rob Shanahan. The merger is pending regulatory approval and is expected to close in the second quarter of 2013.

"Lightower and Sidera together will offer customers an industry-leading, fiber-based network with a deeply experienced team supporting it," stated Rob Shanahan, CEO of Lightower. "Both companies have a shared vision of network excellence, customized solutions and superior customer support. Once merged, we will offer customers more services, more routes and more access options with the same high levels of performance, diversity, reliability and support that our customers have come to expect from us."

Following the merger, the combined company will operate a high-performance, fiber-based network throughout the Northeast, Mid-Atlantic and Midwest, with connections to critical landing sites and exchanges internationally. The combined network will offer customers over 20,000 route miles and provide access to more than 6,000 on-net locations, including commercial buildings, data centers, financial exchanges, content hubs and other critical interconnection facilities.

"This combination is highly complementary," commented Mike Sicoli, CEO of Sidera. "The broad reach and scale of our combined network, the cumulative expertise of our dedicated employees and our shared passion for customer service and satisfaction will set the new company apart and deliver tangible benefits to our customers."

"Berkshire is excited to be working with both Lightower and Sidera -- two great companies and two great teams," explained Randy Peeler, Managing Director of Berkshire. "We have invested in the telecommunications infrastructure space for nearly 20 years and believe that the combined company, with its incredibly robust network, is well positioned for continued growth serving customers with an ever-increasing need for high-performance bandwidth."

More Customer Options with More Routes and More Access

The merger of the two networks accelerates the strategies of both companies to provide best-in-class, fiber-based networking solutions to enterprise, carrier and government customers. The combined company will provide customers with enhanced access to a unique, diverse and dense high-performance network that can serve the most demanding application requirements. The combined network will have both a larger footprint and greater density throughout the Northeast, Midwest and Mid-Atlantic regions, while dramatically increasing the number of data centers, financial exchanges and interconnection facilities that are served with fiber-based access.

Lightower and Sidera both currently offer fiber-based networking solutions comprised of Ethernet, dark fiber, wavelengths, Internet access, private networks and colocation services. Both companies also offer industry-specific solutions such as ultra-low latency connections for financial services firms, video transport for media companies, wireless backhaul for wireless operators, as well as diverse cloud, content and data center connectivity.

Additional terms of the deal were not disclosed.

Current Lightower Fiber Networks investors include M/C Partners, Pamlico Capital and Ridgemont Equity Partners. Current Sidera Networks investors include ABRY Partners and Spectrum Equity Investors.

About Lightower Fiber Networks
Lightower Fiber Networks is the premier metro fiber and bandwidth provider in the Northeast, offering over 6,600 fiber route miles coupled with comprehensive transport, alternative access and nationwide long-haul services. Lightower's fiber footprint extends from New England, to eastern New York State, New Jersey, Long Island and New York City. With access to over 3,500 service locations, Lightower offers unparalleled regional density, performance, scalability, security and reliability in the Northeast. Lightower Fiber is headquartered in Boxborough, MA. For more information, visit www.lightower.com or call 888-LT-FIBER.

About Sidera Networks
Sidera Networks, LLC, www.sidera.net, is the premier provider of tailored, high-capacity communications services to large enterprise, carrier and data center customers with a focus on how customers connect to cloud services and access or distribute content. Sidera Networks offers a comprehensive suite of facilities-based services including: Ethernet, SONET, Wavelength, Dark Fiber, Internet Access, Colocation and more. With a fiber-optic network leveraging unique rights-of-way that delivers connectivity to the major metropolitan areas from Maine to Virginia and out to Chicago, as well as access to Toronto and London, Sidera is committed to delivering cost-effective, custom solutions coupled with superior industry expertise, service and support. Learn more about Sidera at www.sidera.net or call 877-669-6366.

About Berkshire Partners
Berkshire Partners LLC, the Boston-based investment firm, has invested in over 100 middle market companies since 1986 through eight investment funds with aggregate capital commitments of over $11 billion. Berkshire has developed specific industry experience in several areas, including communications, consumer products and retail, business services, industrial manufacturing and transportation. Within communications, the firm has particular expertise in infrastructure investments including Crown Castle International (NYSE: CCI) and The Telx Group. Berkshire has a strong history of partnering with management teams to grow the companies in which it invests, with the goal of consistently achieving superior investment returns. The firm seeks to invest $50 million to $500 million of equity capital in each portfolio company. For additional information, visit < a href="http://ctt.marketwire.com/?release=969464&id=2424535&type=1&url=http%3a%2f%2fwww.berkshirepartners.com%2f">www.berkshirepartners.com or call 617-227-0050.

Toshiba in Talks to Sell Westinghouse Stake

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Trying to Hold On to Merger Advisers

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SeaWorld Files to Go Public

SeaWorld Entertainment, the Blackstone Group-controlled theme park operator famous for its killer whales, filed for an initial public offering on Thursday.

Under the terms of the listing, Blackstone, which bought the theme park group from Anheuser-Busch InBev in 2009 for around $2.7 billion, will keep a majority of the voting rights in SeaWorld. The company did not provide a specific timeline for the I.P.O.

In the filing, SeaWorld said the offering would raise as much as $100 million, but that was a figure used to calculate the registration fee and could chang e. Reuters reported earlier this month that the offering could raise as much as $600 million, citing unnamed sources.

SeaWorld is one of the largest entertainment park operators in the U.S. after the Walt Disney Company. It operates 11 theme parks across the United States, including the Busch Gardens parks in Williamsburg, Va., and in Tampa, Fla., and Sesame Place in Langhorne, Pa., as well as Sea World parks in Orlando, Fla., San Diego and San Antonio, Texas. The company says it has “the largest group of killer whales in human care,” with 28.

The parks attracted 24 million visitors during the 12 months through Sept. 30, according to the filing with the Securities and Exchange Commission. The company generated $1.2 billion of revenue during the first nine months of 2012, according to the filing.

SeaWorld said the money raised through the offering would be used to repay debt, make a one-time payment to a Blackstone affiliate and for other business activities.

Goldman Sachs, JPMorgan Chase, Citigroup , Bank of America Merrill Lynch, Barclays and Wells Fargo are leading the underwriting of the SeaWorld offering.

SK Capital to Buy Units from Clariant for $551 Million

The private equity firm SK Capital agreed on Thursday to buy three divisions from the Swiss chemical company Clariant for a combined 502 million Swiss francs ($551 million). The sale includes Clariant's textile chemicals, paper specialties and emulsions businesses, and is expected to close by the end of the second quarter of next year. Read more »