Top Stories

4th Annual Distressed Investing Conference and Turnaround Awards Gala

Take advantage of the Early Bird Rate and Save $200.

Register Today by Clicking Here.

To View Event details, Click Here.

Where Market and Risk Meet

Howard Shecter

If you are serving on a corporate board and your team needs to appraise risk there is one attorney who might be of particular help.  Howard Shecter recently joined Reed Smith in January 2010 as Senior M&A Partner.  Shecter is also a member of the Corporate & Securities Group at the firm.  Shecter's deal making acumen is demonstrated by the breadth and depth of deals he has closed over the years.  His extensive deal portfolio includes:

• Counsel to Sierra Health Services in its $2.6B sale to UnitedHealth Group.
• Counsel to Playtex Products in its $1.9B sale to Energizer Holdings.
• Counsel to Digital Insight Corporation in its $1.3B sale to Intuit, Inc.
• Counsel to Deb Shops in its $395M sale to Lee Equity Partners.
• Counsel to management of SunGard Data Systems in its $11.3B LBO by seven private equity firms led by Silver Lake Partners and KKR.

Shecter is also an expert on corporate governance, joint ventures and strategic alliances, and the negotiated resolution of business disputes.  Shecter earned his J.D. from the University of Pennsylvania Law School and his A.B. from Harvard College. 

Recently, he took the time to share his insights on the current middle market environment and his thoughts on corporate governance. 

M.A.:  Given market conditions, (rising but still not steady equities) do you think all stock deals make sense?

H.S.:    Some all stock deals make very good sense under current market conditions.  Many buyers have seen their stock price rise over the past several months, and debt financing is still difficult to obtain.  From the target company's perspective in an all stock deal, my advice would be to conduct thorough due diligence  to understand the business and financial metrics underlying the buyer's stock price and multiple and negotiate for full stock resale rights.

M.A.:  How best, from a legal standpoint, can corporate buyers (and sellers) prepare for the new year/2010?

H.S.:  Corporate buyers should seek to extend their credit lines to try to have some headroom available to fund external growth opportunities and should consider using their equity as currency for deals if their stock price has returned to a more appropriate level.  Sellers should anticipate increased M&A activity over 2009 and should review their defensive profiles to guard against unsolicited bids;  they should also assess their companies valuations over the next several years in the current economic environment under various business cases (aggressive, mid and conservative).

M.A.:  What do you think of the strength of banks in terms of participating in M&A in 2010?  And which senior lenders do you see taking the lead on M&A (middle market) deals?

H.S.:  I think we will see the larger banks seeking to play a more active role as senior, secured lender in the deal market, while at the same time insisting on more conservative debt/equity ratios and more restrictive covenant terms.  I also believe that a number of investment banks will pare down their risk profiles and focus more on advisory fee work and be much less active in arranging bridge financing on deals.  This is what Morgan Stanley has announced recently, for example. 

M.A.:  Is PE coming back in 2010; if so, to what extent?

H.S.:  PE will definitely come back stronger in 2010.  In fact, a number of PE firms closed sales or refinancings of mid-market portfolio companies at the very end of 2009 and are primed to be more active in 2010.  There will be fewer PE deals at the largest end of the deal spectrum, but there should be fairly active deal flow in the mid-market range. 

M.A.:  SPACs are one example of legal structures that help in facilitating M&A deals, particularly in the middle market.  Can you think of any new vehicles that are in the legislative process that dealmakers would consider a useful tool for closing deals?

H.S.:  I believe that the drivers in the deal market will be strategic buyers first, both domestic and cross-border, and PE firms second. I do not expect sovereign wealth funds to be active buyers in the near term.  Also, I do not believe that there will be any new vehicles or structures on the scene that will make an impact on the deal market.

M.A.:  What do you foresee for corporate governance going forward in 2010?  (In particular, proxy access, Dodd's retirement, the state of Delaware, and any other pressures on deal-making.

H.S.:  The focus of corporate governance is now on risk management.   Boards are actively evaluating enterprise risk management issues more carefully and more thoroughly than ever before - and for good reason.  Lawyers, accountants, consultants and other professionals are very busy creating and helping to implement the Board processes to enable outside directors to understand and assess enterprise risk issues.

M.A.:  There are two particular types of risks that dealmakers should consider. One is enterprise risk and the other is financing risk. Can you tell us what dealmakers should focus on with regard to these risks?

H.S.:  First, one can improve the chances that a company is going to be able to achieve a sale by having a responsible board of directors that has its arms around a company's risk profile. So that when a buyer comes along and says, for example, "Gee, I am really worried about your foreign exchange exposure...," you have an answer.  "Here's how we have looked at it, and here is what we have found.  This is our plan; and this is what we have done to deal with it and to mitigate that risk." 

You do this sixteen times for whatever the issues are that might present. 

For example, if I were a buyer and I came into a company and asked, "Gee what about this and this?"  And the seller said, "We all don't know about this business risk. That is a risk you take if you buy our business."  That's one reaction that would give a buyer pause.  But if the seller says, "Yes, we thought about that and here is what we have done to make sure that risk doesn't come around and blow up on us."  So, to the extent to which the target company has thought through these risks, and have developed strategies to deal with them [it helps].  You cannot eliminate risks, but you can at least manage them. And, if you have thought a particular risk through, you can persuade a buyer that the risk is a manageable one.  If your answer is, "I don't know, I never thought about it..." or "It doesn't happen very often...," then the buyer is going to be nervous and may take that into account in the purchase price or something else. 

On financing risks, especially now, it is a very difficult issue because financing is not readily available and one of the things that the target board has to assess when accepting one deal rather than another deal is: How likely is this deal going to be closed?  Is this buyer going to be able to get to closing with this financing condition satisfied?  You can't accept at face value the buyer's undertaking to get financing. You have to say what will this financing do to the buyer's balance sheet?  And, how likely is it that the buyer is going to be able to go to the commercial banks or institutional lenders and get this financing?

One of the covenants that I have companies address is the commitment letter, or a draft of a commitment letter. Let's know at least what the parameters are of the financing package that will enable this deal to get done before we sign the deal.  If we can.  Then we can look at it and see if these are customary terms.  Are there any unusual provisions?  What are the conditions that might not be satisfied?  It is important to understand that; and then there are other things can be done as well.  The seller has the right to arrange for alternate financing if the buyer's financing falls through.  Or the seller can make sure there is a backup plan.  Now, one may not always be able to do this, but there are a variety of things one can think about in order to get a deal done.  For example, what is the target company's paramount objective, once it puts itself up for sale? 

Then there is the anti-trust issue.  Is there one buyer [for example] that is likely to have an anti-trust issue that would delay the deal more than another buyer, [and so forth]? 

M.A.: You lecture on acquiring privately held companies.  Do you have any specific thoughts on the buying and selling of these entities, especially as folks on both sides of the deal are very focused on valuation in today's market?

H.S.:  You are correct in citing valuation issues as being central to the private company deal market.  The economic crisis has made that process especially difficult, and I would expect to see more earn-out features in the private company deal market to take account of the difficulties on both sides in coming to a common understanding of fair value in today's environment.  The valuation process  is challenging enough even in more stable times.

M.A.:  China is on the rise but what are some of the legal issues (in broad strokes) that dealmakers should consider when attempting to close deals in this country?

H.S.:  The China issues I worry about today are the political risk issues, especially in light of the Google situation, the heightened risks of enforcing an agreement in a country with little legal jurisprudence to offer precedents, and the impact of environmental and product safety concerns in certain industries. 

M.A.:  Finally, you have an impressive array of deals in your portfolio that span the course of your career.  Does any one deal stick out in your mind; if so what deal and why?

H.S.:  The one deal that sticks out in my mind was when I represented Union Pacific Resources Group in its $10 billion merger with Anadarko Petroleum.  There were two reasons why this deal is memorable.  First,  from the time we received Anadarko's initial bid to the signing and announcement of the deal, less than 10 days elapsed, and everything - negotiations, diligence, agreement preparation, several  Board meetings, preparation of the lengthy press release and SEC filings - took place in a very compressed time frame.  Secondly, in the middle of all that, while I was in Union Pacific's headquarters in Fort Worth, a huge tornado struck and destroyed  or disabled a number of buildings in downtown Fort Worth and  disrupted power to the City.  We were in the general counsel's office when the tornado hit and blew out many of the building's  windows.  The building started swaying in the high wind, so I led the Union Pacific  team down the fire stairs  40 or so stories to the street.  We ultimately found electricity in the pilot's office at the small airport outside of town  where the Company maintained its planes, and for the next several days the deal team operated from those cramped quarters, sharing a few phone lines, using one fax machine and printer and taking turns charging our laptops.  A post script:  that deal was eventually cited as the Deal of the Year in terms of increasing stockholder value. 

M.A.:  Thanks Howard.