M&A: Pop stars of the bar

M&A: Pop stars of the bar: [National Edition]
Czarnecka, Marzena. National Post [Don Mills, Ont] 02 May 2007: FP15.

Abstract:  “Clearly the trend has just continued,” says William Braithwaite, an M&A practitioner with Stikeman Elliott. “Private equity is all over M&A activity in Canada. BCE is a classic example. In retrospect, what we were seeing nine or six months ago was just the beginning. Now, private equity is an integral part of the M&A fabric here. It affects a lot of things, from the way deals are structured to the way they are negotiated.”

“People who do deals with private equity buyers are really relying on the reputation and the track record of the buyer, not on the negotiated remedy,” says Mr. [Clay Horner]. “They always close on these deals. There hasn’t been a disaster where a private equity fund has reneged on a deal it had engineered and everyone is fighting about who should pay for the resulting billion-dollar drop in stock value.”

“There is a very fine line between hedge fund and private equity, and it is getting much more blurred,” says Mr. [Jay Swartz]. “They sometimes do the same thing. A company like Cereberus, for example, used to be a kind of a hedge fund. What is it now? Sometimes it’s hard to tell who is a hedge fund and who is a private equity player.”

Full text:  Deal lawyers are the bomb, aren’t they? No matter how critical the tax structuring may be, no matter how intricate the pensions, no matter how crucial the competition issues, it all comes down to the M&A lawyers. The pop stars of the bar, the negotiating machines that get the deals done.

Actually, it all comes down to the clients of the M&A lawyers, the legal dealmakers say with varying levels of becoming insincerity. But they do strut a little. It’s the rare tax lawyer who gets to be at the heart of a storm like the battle for Inco and Falconbridge. And it won’t be pension lawyers reaping the glory in the whirlwind surrounding BCE, regardless of the number of pension funds involved. M&A lawyers rule the roost.

Well, as much as the clients let them. And right now, Canadian M&A lawyers are still getting used to working with — or opposite — a different type of client. A deep-pocketed, aggressive, sophisticated, lean and mean negotiating machine type of client who gets deals done.

You know who we mean. Those private equity funds bent on buying up Canada, and the world.

“The continuing involvement of private equity in deals is top of the mind right now, both in terms of what is happening in Canada and in terms of what we are seeing globally,” says Clay Horner, an M&A partner with the Toronto office of Osler, Hoskin & Harcourt.

No kidding. Is there a private equity fund (or Canadian pension fund — but that’s another story) not sniffing around BCE? Or eyeing the distressed Canadian income trust sector? Or just generally roaming the world with an acquisitive eye?

Now, as lawyers of a certain vintage will tell you, private equity funds are nothing new. Their involvement in Canada goes back at least a decade. Jay Swartz at Davies Ward Phillips & Vineberg, for example, has been acting for U.S. private equity funds acquiring Canadian assets since the early 1990s. But the pitch of private equity activity in 2006 had even Mr. Swartz’s attention. And compared with what’s been happening in 2007, 2006 may look like a slow year.

“Clearly the trend has just continued,” says William Braithwaite, an M&A practitioner with Stikeman Elliott. “Private equity is all over M&A activity in Canada. BCE is a classic example. In retrospect, what we were seeing nine or six months ago was just the beginning. Now, private equity is an integral part of the M&A fabric here. It affects a lot of things, from the way deals are structured to the way they are negotiated.”

It begins with the end. “When private equity players are negotiating a deal, they are always looking forward to what their exit is going to be in a number of years,” says Mr. Swartz. For a strategic buyer, the deal is the thing. For a private equity player, it’s merely Act One.

As a result, says Mr. Horner, involved lawyers get to work on “really well-negotiated shareholder agreements that are essentially an entire deal the private equity funds are cutting between themselves and whatever other shareholders are involved. Before they close the deal, they negotiate how they are going to share power, decision making, dealing with extraordinary events, minority rights, all of these things are addressed in detail. These agreements are works of art.” (Honestly, the things lawyers get excited about.)

Then there’s the due diligence. “These people are very good at due diligence,” says Mr. Horner. “They have a very specialized, detailed and experienced approach to it.”

They have to. “They are fiduciaries of other people’s money, and they buy businesses in a variety of industry areas of which they have less knowledge than a strategic buyer would,” notes Mr. Swartz.

And, they’re deal-making machines — they exist to acquire, making them a really sweet client for a law firm to grab. Although, there is a string or two attached.

“Private equity clients are more proactive in managing the process and managing their lawyers, whereas a strategic buyer will often outsource the process to us,” says Mr. Swartz. In other words: they tell the lawyers what to do, not vice versa.

They are, after all, the real deal-making machines. Their reputation for getting deals done is such that the break fees negotiated on private equity deals are, well, tiny.

“People who do deals with private equity buyers are really relying on the reputation and the track record of the buyer, not on the negotiated remedy,” says Mr. Horner. “They always close on these deals. There hasn’t been a disaster where a private equity fund has reneged on a deal it had engineered and everyone is fighting about who should pay for the resulting billion-dollar drop in stock value.”

Speaking of reputation: Overshadowed by the billions and billions sloshing around in the pockets of U.S. (and other) private equity fund are their uppity cousins, the hedge funds. Remember them? They were going to destroy the markets as we knew them six months ago.

“They’re still here, they are having a big impact on the rules of the game, but they are no longer top of the mind,” says Mr. Horner. But don’t forget about them. Especially on deals involving deeppocketed private equity funds.

“They are part of the new reality of M&A,” says Mr. Braithwaite. “People are accepting that they are there and part of the fabric. They will clearly take positions in a takeover bid so that the shareholder universe changes very quickly after the announcement of a transaction. As a bidder, you are now dealing with a whole different group of shareholders. Professional shareholders.”

The more active of the hedge funds, of course, are doing more than taking positions on deals. They’re forcing deals. And, slowly, they are starting to do deals themselves, says Mr. Braithwaite, pointing to Harbinger Capital’s aggressive play for Calpine Power Income Fund in February.

Hey, isn’t that how the private equity funds got started?

“There is a very fine line between hedge fund and private equity, and it is getting much more blurred,” says Mr. Swartz. “They sometimes do the same thing. A company like Cereberus, for example, used to be a kind of a hedge fund. What is it now? Sometimes it’s hard to tell who is a hedge fund and who is a private equity player.”

But it sure is fun to do deals for them. Opposite them — well, fun’s probably not the right word. But being a legal pop star isn’t all about fun and games (or having a pretty face). It takes blood, sweat and tears, too.

Illustration

Black & White Photo: Tyler Anderson, National Post / Clay Horner, an M&A partner with Osler, Hoskin & Harcourt, says “people who do deals with private equity buyers are really relying on the reputation and the track record of the buyer.” ;

Word count: 1144

(Copyright National Post 2007)