ATRCOUN April 27, 20

January 2016 ▪ Volume 20 ▪ Issue 1 THE FORCE AWAKENS: A were signs of choppiness. The Dow plunged RESURGENCE OF M&A IN in September and the IPO markets have been LAWYER slow to gather steam, with very few successful 2015 IPOs in the fourth quarter. We hate to say it, but the current exuberant pace of M&A deals By Frank Aquila and Melissa Sawyer may not be sustainable unless the capital Frank Aquila and Melissa Sawyer are markets can continue to deliver new, up and partners in the Mergers & Acquisitions Group of Sullivan & Cromwell LLP. The coming companies into the mix of potential views and opinions expressed in this article buyers and targets. Meanwhile, the Fed’s de- are those of the authors and do not necessar- cision to raise interest rates will also surely ily represent those of Sullivan & Cromwell LLP or its clients. have an impact on the M&A environment as Contact: [email protected] or well. [email protected]. After close to a decade of anemic M&A, Best of Enemies: Activism 2015 was “the big year” that dealmakers have Developments been expecting for the last several years. Sig- Activism was somewhat old news in 2015 nicant deals took place across a wide range because activism has largely matured into be- The M&A of sectors and geographies. Dealmaking in ing the “new normal.” The level of engage- health care and life sciences continued to be ment between issuers, activists and institu- very active, but we also saw a lot of deals in tional investors has risen to dizzying heights, consumer and retail (Kraft/Heinz, AB InBev/ with all the attendant professionalization of SABMiller), media (Cablevision/Altice, Charter/Time Warner) and chemicals (Dow/ DuPont, Cytec/Solvay), to name a few IN THIS ISSUE: industries. Many of the deals were huge. The Force Awakens: A Resurgence of Before the ball dropped in Times Square, we M&A in 2015 1 saw more than 50 deals that exceeded $10 Solving the Valuation Puzzle in Life Sciences Transactions: The Pros and billion. Cons of the CVR 4 Rural Metro Goes to Dover: Delaware Notably, almost all of 2015’s big deals Supreme Court Arms 7 involved only strategic buyers. Industrial A Return To Evanston: FTC Revisits acquirors, rather than nancial sponsors, led Old Ground In Yet Another Hospital Merger Challenge 11 the surge in M&A activity. With acquisition From the Editor 13 leverage still essentially capped at six times EBITDA, sponsors are nding it hard to com- pete with the frothy synergy-driven pricing of- fered by strategic bidders. Some strategic buyers are also borrowing sponsor strategies by levering up their deals or nancing them with equity oerings. In fact, 2015 saw an increas- ing number of in-bound acquisitions by Euro- pean buyers nanced with rights oerings. Even amidst this strong M&A market, there 41852738 January 2016 | Volume 20 | Issue 1 The M&A Lawyer the eld that one would expect in the form of investor Setting aside the excitement around Pep Boys and relations advisors of various stripes. Hiring share- DuPont, many companies have already adapted to the holder engagement professionals is even more neces- activist playbook and are even defensively initiating sary given the dispersion of decision-making from ISS internal discussions about issues like capital alloca- to a large swathe of in-house governance tion strategies and board refreshment before an activ- professionals. The largest institutions now have re- ist appears. For that reason, some short-term activists may be nding it hard to identify “easy” targets for sources to perform a lot of independent analytics, rely- leveraged recap or M&A strategies. Instead, more ing less on ISS and other intermediaries to guide their activists may be nding themselves actually govern- voting decisions. Pension funds are also doing more ing operations over the longer term. We anticipate that direct investing, channeling fewer investments more patient operators like Starboard Value will through hedge funds and PE funds and pulling back continue to rise to the top of the heap in the activist from having to pay management fees and carry to landscape. Perhaps this trend will help to quell the ac- third-party money managers. ademic debate about the public policy implications of short-termism in activist investing. Of course, there were a few exciting moments on the activism front in 2015, like when DuPont defeated Spotlight: Pressure on Private Equity Nelson Peltz in a hard-fought proxy battle. But Du- Private equity funds continue to feel the heat on a Pont’s victory was bittersweet in a sense, since it was number of fronts. They have been subjected to en- followed in a matter of months by the resignation of forcement actions related to charging back monitoring DuPont’s CEO and, a few months later, by an agree- fees and broken deal costs to their limited partners. ment to sell the whole company to Dow. More re- There have been a number of changes adopted, and cently, Carl Icahn’s pledge to top any counteroer even more proposed, to limit the upside for fund from Bridgestone to acquire Pep Boys, up to $1 bil- managers in the form of carried interest. More strik- lion, set a oor on the price of the company, and set ingly in the pure M&A context, we see very few large the stage for a dramatic and very public end to the bid- leveraged buy-outs of public companies these days. ding war for Pep Boys. No doubt the economics of those deals simply are not The M&A Lawyer West LegalEdcenter 610 Opperman Drive Eagan, MN 55123 K2016 Thomson Reuters For authorization to photocopy, please contact the West’s Copyright Clearance Center at 222 Rosewood Drive, Danvers, MA 01923, USA (978) 750-8400; fax (978) 646-8600 or West’s Copyright Services at 610 Opperman Drive, Eagan, MN 55123, fax (651) 687- 7551. Please outline the specic material involved, the number of copies you wish to dis- tribute and the purpose or format of the use. This publication was created to provide you with accurate and authoritative information concerning the subject matter covered; however, this publication was not necessarily prepared by persons licensed to practice law in a particular jurisdiction. The publisher is not engaged in rendering legal or other professional advice and this publication is not a substitute for the advice of an attorney. If you require legal or other expert advice, you should seek the services of a competent attorney or other professional. Copyright is not claimed as to any part of the original work prepared by a United States Government ocer or employee as part of the person’s ocial duties. One Year Subscription E 10 Issues E $ 905.00 (ISSN#: 1093-3255) 2 K 2016 Thomson Reuters The M&A Lawyer January 2016 | Volume 20 | Issue 1 that attractive at the moment due to leverage limits, incremental and will not immediately accelerate among other things, but the omnipresent specter of change-in-control dynamics. club deal litigation and “entire fairness” review certainly acts as an additional deterrent. Trainwreck: The Regulatory Environment for M&A Inside Out: Proxy Access Developments Regulatory approvals continued to be a sticking It is no surprise that 2015 proved to be the year of point for many large transactions, as evidenced by the proxy access proposals. The SEC made clear early in government blocking the Staples/Oce Depot deal the year that it would take a hands-o approach when and the GE/Electrolux deal. In a sense, the blockage it comes to proxy access proposals. This approach is of announced deals is a worst-case scenario for M&A allowing proxy access to ourish through private ac- practitioners that tests all of their plans to deal with tion after the SEC’s proposed proxy access rule, Rule the unpredictable. If the transaction agreements work 14a-11, failed to get lift-o. Specically, the SEC as they should, the parties can walk away and move initially indicated that it was reviewing issuers’ eorts on to other things without a protracted dispute. Be- to exclude proxy access proposals on the basis that cause the recent large transactions that got blocked they conict with management proposals. In a follow- ended with a zzle, with the agreements working as up, the SEC conrmed that issuers can only exclude a expected, the market absorbed the news relatively shareholder proposal on the basis that it conicts with quickly and the parties were able to move on with life. a management proposal if shareholders could not rea- Many deals never rise to that level, however, and sonably vote on both proposals. In practice, when ap- simply collapse under the weight of antitrust or other plied to proxy access, for example, there are very few, regulatory complexity. Rarely an issue in private if any, proxy access proposals that could ever be equity buy-outs, antitrust approvals can be the death excluded on the basis that they are conicting. of many large strategic combinations. The uncertainty these approvals can generate will probably only get Since issuers cannot readily exclude proxy access worse in 2016 since it is an election year in the U.S., proposals, the New York State Comptroller and regu- and to some degree this may quell the current M&A lar proponents like James McRitchie and John Chev- fervor amongst strategics. edden, among others, have started sending proposals to issuers of all dierent sizes and industries. Those Appropriate Behavior: Developments in issuers are now wrestling with whether to adopt their Delaware Law own competing proposal before they mail their proxy Delaware gave a little and took a little this year, so statement, to take two alternative proposals to a vote to speak.

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