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Replies to post #105988 on Biotech Values
10/11/10 5:49 PM
…there are rumblings in the Delaware courts that the judges are trying to find a situation in which they can order a poison pill pulled. Vice Chancellor Leo E. Strine Jr. even set out the circumstances where he might do so in his recent opinion on Barnes & Noble. There he stated that when a bidder makes an all-stock, noncoercive bid and wins a staggered board election, it may be appropriate to order a pill redeemed if a bidder is going to have to wait a year and bear the market risk of the bid.
The circumstances that Vice Chancellor Strine is talking about are rather narrow and do not perfectly fit this deal. In this case, Airgas’s next meeting is only a little more than three months away, and the Air Products bid is a cash one, meaning that Airgas’s shareholders will lose any interest in the combined company.
In this light, the best argument for pulling the poison pill is that Airgas has not put forth a compelling reason for the delay. Reviewing the trial records, Airgas appears to rely on two main substantive reasons: first, that the SAP data management system that it is putting in place will benefit its shareholders considerably, and second, that there will be a cyclical upturn in the economy. Airgas also argues that the bid intrinsically undervalues the company and that it needs more time to scare up more bidders and bargain on price.
The SAP argument appears to be thin. I actually cannot believe that Airgas would make a claim that a takeover should be delayed because of an SAP implementation that has been going on for years [LOL].
This leaves price and the economy. Unfortunately, for the latter, Jan Hatzius, the top economist at Goldman Sachs (which is banker for Airgas), issued out a report last week with a gloomy assessment of the economy. He estimated there was a 25 to 35 percent chance of a double-dip recession. The alternative was what Goldman called a “fairly bad one” in which economy would grow only 1.5 percent to 2 percent over the next six to nine months. So, the economy is a shaky proposition at best.
This leaves price. There is an argument that once you get solely to price considerations, it is time for the shareholders to decide. In prior poison pill cases, there has been a coercive threat (two-tiered tender offer) or firm business strategy (time) that mitigated rejecting the bidders proposal and keeping the pill in place. Here it appears that there is only price and the economy. This is much shakier ground. The reason is this: The board should get some deference because it has its own knowledge of the company that puts it in a unique position to assess its prospects and dictate the company’s future. However, the economy is not one of these conditions; shareholders can make their own judgments on this based on the same information available to the board.
As for price, with all of the information out there in the form of financial analysis, this also goes by the wayside. The Delaware Chancery Court has previously said as much in the case of Interco.
Interco was a 1980s case in which a target (like Airgas, it was represented by Wachtell, Lipton, Rosen & Katz) was ordered to redeem a poison pill. In that case, the takeover contest was in the endgame and the poison pill was being used to prevent shareholders from choosing to take up a hostile offer. Lifting the pill was justified since as the court stated that “the negotiating leverage that a poison pill confers upon this company’s board will, it is clear, not be further utilized by the board to increase the options available to shareholders or to improve the terms of those options.”
Shareholders should therefore be left to decide between the two options based on the information provided to them. This all makes sense, but may be much further than the Delaware courts is willing to go.
AI
