In recent years, there has been increasing criticism from regulators, academics, and others of the practice of directors relying solely on the investment bankers involved in the transaction at issue to provide fairness opinions with respect to that transaction.  The reason for this is clear:  a potential conflict of interest.  As one academic has explained, under the typical investment banking fee arrangement, “compensation is a success fee payable to the bank at transaction milestones such as announcement or completion,” and the “investment bank therefore has a hefty incentive to ensure that the contemplated transaction for which it will issue a fairness opinion progresses to completion.”  But, S. Davidoff writes that conflict arises where a bank is asked to opine and advise on a transaction that it stands to benefit from only if the transaction transpires. In fact, under the fee structure explicated above the bank will not be paid if it cannot find fairness.”

The reason directors secure fairness opinions, as BusinessWeek has explained, is to “give directors a shield in court when unhappy shareholders sue.  The opinions are evidence that the directors checked with outside experts to make sure that the deal is fair to shareholders whom they represent.”  As FINRA put it in November, 2007, fairness opinions “are routinely used by directors . . . to satisfy their fiduciary duties to act with due care and in an informed manner.”

While fairness opinions are regularly published in proxy materials relating to major transactions, the primary intended beneficiaries of fairness opinions are not shareholders, but rather directors.  The principle purpose of the fairness opinion is to provide directors with expert assurance that the consideration in the transaction is fair from a financial point of view so that the directors can better defend against any later charge that they failed to discharge their fiduciary obligations in this regard.

Four developments have served to heighten the focus on the conflicts present when the same investment bank that is at the center of a transaction also provides the fairness opinion.  First, in a December, 2005 opinion, the Delaware Chancery Court denied a motion by the directors of TCI for summary judgment dismissal of a complaint challenging their approval of TCI’s acquisition by AT&T.  The opinion stated that hiring the same financial advisors for both deal-making and fairness opinions “raises questions regarding the quality and independence of the counsel and advice received,” noting that “the contingent compensation of the financial advisor, DLJ, of roughly $40 million creates a serious issue of material fact” as to whether the directors could rely on DLJ’s fairness opinion.  In light of this development, Valuation Research advises that corporations “obtain fairness opinions from independent providers,” and that using the same bankers that are doing the deal to provide a fairness opinion may leave “the board members relying on a biased fairness opinion, and thus exposed to lawsuits.”

Second, in the wake of the TCI-AT&T decision, an increasing number of articles began to appear in scholarly journals, legal periodicals, and director-oriented publications highly critical of the practice of relying solely upon a fairness opinion from an investment bank that stands to receive a large fee if, but only if, the transaction is found to be fair and closes.  As one such article in the Los Angeles Business Journal, harshly asserted, “the investment bankers stand to make s lot of money on this deal, but only if it closes.  How, then can they be objective in determining whether the transaction is fair to . . . public shareholders?  The simple, inescapable answer is that they can’t and won’t.”

Third, under FINRA Rule 2290, effective December 8, 2007, fairness opinions must specifically disclose not only contingent-fee conflicts but also past and future business relationships that might lead to a potential conflict of interest when providing a fairness opinion.

Fourth, there has been an ongoing shift in the views of company executives and board members about independent fairness opinions.  This was confirmed in a 2006 survey conducted by Mergermarket at the behest of Houlihan Lokey Howard & Zukin, which reported that a “new fairness opinion paradigm” is emerging.  Specifically, the survey found that, while “24 months ago it was relatively uncommon for companies to actively seek independent (i.e., separate from their M&A advisor) fairness opinions,” now more than half of the executives and directors surveyed said they “were not comfortable having their M&A advisor also act as their fairness opinion provider.” In fact, the survey “respondents felt that the greatest impact of [FINRA Rule 2290] would be an increase in the number of corporations that require a second fairness opinion.”  

While fairness opinions are regularly published in proxy materials relating to major transactions, the primary intended beneficiaries of fairness opinions are not shareholders, but rather directors.  The principle purpose of the fairness opinion is to provide directors with expert assurance that the consideration in the transaction is fair from a financial point of view so that the directors can better defend against any later charge that they failed to discharge their fiduciary obligations in this regard.  Under new FINRA Rule 2290, however, the directors will be put on specific notice of conflicts, if there are any, that may call into question the reliability of the fairness opinion.   The disclosure of such conflicts, in turn, will raise questions as to whether the directors receive any benefit from relying on the fairness opinion.  Indeed, plaintiffs’ lawyers will likely argue that, because of the newly-mandated disclosures, the directors were on notice that the fairness opinion was not reliable and thus acted improperly in purporting to rely on it.  In such circumstances, directors will likely increasingly conclude that, to better protect themselves, they would be well served to secure an independent fairness opinion.

Donald G. Kempf Jr. is a senior advisor at Broadpoint Gleacher Securities Group.  He has previously been general counsel at Morgan Stanley and a partner at Kirkland & Ellis.

Companies that made repeat acquisitions outperformed the world index by 8.1 percent.

Though global M&A activity dropped by 40 percent in the first half of 2009—down to $941 billion—the authors of the study assert that continued synergy efforts are the right choice.

“Companies with M&A in mind should be emboldened by our analysis: fortune favors the brave,” wrote the authors. “Fears that M&A is riskier post-Lehman seem to be misplaced.”

The study covered 204 acquisition deals, beginning with Lehman Brother’s bankruptcy filing last September.

Pfizer offered to divest some or all of its animal health business assets to ease EU regulatory concerns of its merger with the pharmaceutical company Wyeth. The European Commission, the 27-state antitrust regulator, has until July 20 to review the Pfizer’s $65 billion acquisition of Wyeth, according to Bloomberg. Shareholders of Wyeth are also expected to vote on the merger on July 20.

Pfizer would not state specifically what assets it would divest for competitive reasons. It has said before that such action may be necessary. However, any divestiture of its animal health business assets is not expected to be more than 10% of its $4 billion annual revenue.

Pfizer’s acquisition of Wyeth would offset any revenue loss when Pfizer’s Lipitor drug begins facing generic competition in 2012. Lipitor contributes $12 billion to Pfizer’s annual revenues. Pfizer will gain the pneumonia vaccine Prevnar and depression pill Effexor from the deal. According to Pfizer’s Chief Financial Officer, Frank D’Amelio, the merger will help sustain Pfizer’s 2008 sales and profit levels through 2012. Pfizer expects the deal to close by year’s end. 

A report released yesterday by the Conference Board Governance Center provides a checklist of issues for directors to consider in the event of an unsolicited takeover offer.

Some 47 percent of merger activity in 2009 was accomplished by means of hostile takeovers, up from 24 percent in 2008. “Today’s market conditions permit some companies to be ‘put in play’ more easily than before,” says Frederick H. Alexander, author of the report.

Certain company conditions, such as undervalued share prices and liquidity issues, can invite “bargain hunting” by acquirers. Certain pro-shareholder measures taken over the last few years, such as the elimination of poison pills, may have weakened these companies’ defense against takeover, according to the report.

In a statement, Icahn said his investment entities might acquire more shares, and hinted that a board shakeup may occur at the company’s shareholder meeting in September.

“The Icahn Affiliates may seek to add nominees designated by the Icahn Affiliates to Lions Gate’s board of directors, which could include expanding the size of the board of directors of Lions Gate and/or removing individuals from the board of directors of Lions Gate,” the statement said.

Icahn is still second to former advisor Mark Rachesky for the largest stake in the company. Bizjournals reported in March that Rachesky had begun working towards having a representative named to the Lions Gate board.

The board of directors at Data Domain told stockholders yesterday that competitor EMC’s unsolicited buyout offer of $1.8 billion is insufficient and not in the best interests of shareholders.

In addition to EMC, NetApp is also eyeing Data Domain, having already made a $1.9 billion cash/stock offer. NetApp and EMC have been engaged in a bidding war, with Data Domain obligated to pay a $57 million termination fee to NetApp should the company go with EMC.

Goldman Sachs is reportedly blocking Blackstone Group’s Steve Schwarzman and Henry Kravis of Kohlberg Kravis Roberts from participating in the auction of Sara Lee’s household and personal-care business, reports The New York Post.

According to two people close to the auction process, both firms had expressed interest in purchasing the division, but Goldman has told interested parties that they must bid for the entire operation and cannot partner with private-equity firms to complete a transaction.

The household and personal-care segment of Sara Lee’s business makes up about 18 percent of their $13 billion in annual sales, and the company reportedly hopes to sell it for more than $3 billion. So far, Colgate-Palmolive, Clorox, and SC Johnson have expressed interest. One source reports that they may only be interested in pieces of the business, however, and would want to purchase with a partner, possibly a private-equity firm.

The established regulatory view is that private equity, with its risky plays, secrecy-at-all-costs culture, and vast pool of dollars, does not mix well with the staid thrift banks that are the humble base of the economic pyramid. The overarching rule, as enforced by the Federal Reserve—and as mandated by the Bank Holding Company Act of 1956—is that bank holding companies cannot engage in non-banking activities. “A conglomerate that owns a bank cannot be engaged in traditional commercial pursuits,” says University of Connecticut law professor Patricia McCoy. “The Fed’s concern here is that by allowing private equity into the banks, they’re eroding the traditional wall that exists between banking and commerce.”

PE firms, which generally have their eyes set on many industries beyond commercial banking, of course would prefer to run thrifts with the same iron grip they use on other riskier ventures. To prevent this, the Fed limits non-bank holding companies to controlling positions of under 25 percent, which requires the type of private equity group-deal seen in the BankUnited takeover. “Banking is a fairly high-risk venture these days,” says McCoy, “and being able to control management and make investment decisions and handle risk is essential for PE firms.” However, as is often the case, the promise of profit can persuade buyout firms to adjust their expectations.

Though the credit climate is gradually thawing, capital is stillrelatively scarce, and regulators would love to see some of the $1trillion in dry powder that global PE firms have collected inanticipation of a healthy investment climate, go into the banking sector.

“I’m not sure [PE firms] need control of the banks,” says Lawrence D. Kaplan, general counsel at Paul Hastings and a former regulator with the Federal Home Loan Bank Board (now the Office of Thrift Supervision [OTS]). “I think most firms view the banking sector as underpriced, and financial institutions now have terrific opportunities to get returns for investors.”

The introduction of PE firms into the banking sector is also advantageous for regulators eager to get commercial banks back on track. Though the credit climate is gradually thawing, capital is still relatively scarce, and regulators would love to see some of the $1 trillion in dry powder that global PE firms have collected in anticipation of a healthy investment climate. Says Walter J. Mix III, managing director of consulting firm LECG, “The size of the banking and savings and loan problem exceeds the FDIC funds’ capacity, and the banking sector will need private as well as government capital in order to improve credit availability.”

In order for that money to make its way through the thousands of U.S. commercial lenders, regulators are going to have to come to an agreement on just how PE firms interact with small banks. “The issue for the regulators is that they want a well-qualified board of directors and management with the requisite banking experience,” says Mix. “In this type of market, that especially means experience with credit and liquidity.” While the Fed has so far taken a hardline stance, the OTS has proven itself more willing to allow leeway among the approximately 800 thrifts it regulates. Earlier in the year, the OTS approved the takeover of thrift Flagstar Bancorp by distressed assets specialist MatlinPatterson Global Advisers. For $350 million, MatlinPatterson got a 70 percent stake in the Troy, Michigan bank, going against the Fed’s opposition to PE firms taking majority stakes.

The FDIC, too, has shown its willingness to cooperate with private money. Says Kaplan, “We may see a willingness of the FDIC to allow private equity buyout deals, and if this happens, it’s going to put pressure on the Fed to hammer out a deal with other regulators to determine when such buyout deals would qualify as sound.” Besides the BankUnited deal, the FDIC approved the sale of $13.9 billion worth of IndyMac assets to a group of private equity investors that included J.C. Flowers and Paulson & Co. Following the close of the BankUnited deal, the regulator pointed to an upcoming policy shift: “Due to the interest of private equity firms in the purchase of depository institutions in receivership, the FDIC has been evaluating the appropriate terms for such investments. In the near future, the FDIC will provide generally applicable policy guidance on eligibility and other terms and conditions for such investments to guide potential investors.”

Clearly, the tide is shifting in favor of more and more private equity firms that want a stake in the banking sector. With trillions in banking assets on its books, the Fed may need to reevaluate the merits of PE buyouts as apply to the heretofore sacrosanct area of commercial banking. Says Kaplan, “The Fed’s going to have to look at potential buyouts on a case-by-case basis, and to look through the legal precedents, but they can’t ignore that PE has the cash and because of that we can’t rule them out.” Mix says that it’s possible for private equity to make a bigger footprint in the banking industry without a complete overhaul of the rules: “I wouldn’t foresee a policy change unless Obama or Congress specifically directs such a change. Regulators are going to try and make it work with the tools they have.”

The move is the latest in a three-way conflict between Validus, IPC, and Max Capital Group, which is looking for control in IPC along with Validus. IPC shareholders voted last week to reject a Max Capital merger, setting up IPC for a possible takeover.

Validus has offered $1.72 billion, almost twice the $912 million offered by Max Capital.

The current offer is $2.75/share, 23 percent over Friday’s closing price of $2.23. In spite of the housing market slump, shares in Cavalier have more than doubled in value so far in 2009.

“Given the current economic conditions and the tough operating environment of the manufactured housing industry,” said Cavalier CEO Bobby Tesney, the takeover offer “represents a tremendous opportunity to maximize shareholder value.”

Southern Energy is a subsidiary of Clayton Homes, itself a subsidiary of Berkshire Hathaway. Clayton is the country’s top producer of housing units in the United States.

Activist investor Carl Icahn is considering making another attempt to take over bankrupt auto parts supplier Delphi Corp, Reuters reported on Saturday.

The report, which cited an unnamed source with direct knowledge of the matter, said that Icahn is considering another run now that a federal bankruptcy court judge has allowed other bidders for the company.

Judge Robert Drain told Delphi on Wednesday to open the sale of its assets to other potential bidders who could compete with an offer by Platinum Equity. Suitors now have until July 10 to make competing offers for Delphi.

“Why did a private business deal, announced in September, and approved by shareholders in December, with no mention of government assistance, end up costing taxpayers $20 billion in January?” Rep. Edolphus Towns (D-NY) asked at a hearing featuring an appearance by Lewis on Capitol Hill.

Officials wanted Lewis to explain why Bank of America did not inform its shareholders of its growing concerns with the losses at Merrill Lynch.

Lewis acknowledged that there were suggestions that Bank of America management would be replaced if they went through with the plan to stay away from the Merrill Lynch acquisition. However, he said that officials did not pressure the company to withhold such information from shareholders.

The comments came at a hearing before the House Committee on Oversight and Government Reform. Lewis maintained that the bank and government regulators believed that going through with the deal was the “better course” to abandoning the transaction.

He said that he did not feel that the federal officials acted improperly in pressuring the firm to complete its acquisition. “I do not. I would say they strongly advised and they spoke in strong terms, but I think it was with the best intentions,” Lewis said.

The emails and documents subpoenaed from the Fed show that the regulator pressured BofA CEO Kenneth Lewis as the executive expressed his reluctance to take on the debt of the ailing Merrill. One exchange showed Bernanke accusing Lewis of using the threat of pulling out from the deal as a “bargaining chip,” saying that BofA’s arguments for doing so were “not credible.”

Another correspondence showed that Federal Reserve Bank of Richmond President Jeffrey Lacker told employees that Bernanke “intends to make it even more clear” that in the event of a deal backout, “management [would be] gone” should the bank apply for bailout funds.

The congressional investigation is being led by the House Committee on Oversight and Government Reform and Representative Edolphus Towns (D-NY). Lewis is expected to appear today before the Committee to detail BofA’s acquisition of Merrill, which concluded on January 1.

The Kauffman paper advises that VC companies—which invested almost $30 billion last year into start-ups—reduce their investment to the $12 to $15 billion range. Venture capital must “shrink its way back to health,” says the report.

VC spending increased by a factor of five between 1996 to 2001 in the midst of the Silicon Valley tech boom, leading to “a collapse in performance from which the sector has never recovered.” The flux of money has in turn led to overpriced valuations, which has itself led to lower profits.

Figures from the National Venture Capital Association show that VC contracted last year in the United States, with about 882 firms controlling $197 billion, versus 1,019 firms controlling $258 in 2007.

The potential deal for Ab-Tex, a Texas-based bottler of major soft drink brands such as Pepsi, Dr. Pepper, Mountain Dew, and 7UP, would add to a string of acquisitions made by the bottler. Pepsi Bottling successfully acquired Better Beverages on June 1, one of four deals completed or announced since last September.

PepsiCo has been making moves to acquire its bottler, in which it already owns an approximately 33 percent stake. PepsiCo’s $4.2 billion offer was rejected by Pepsi Bottling last month.

Pepsi Bottling Chairman and CEO Eric Foss said his company’s latest acquisition would lead to better efficiency as well as open up new markets for the company. The deal is expected to close in the third quarter.

The potential deal for Ab-Tex, a Texas-based bottler of major soft drink brands such as Pepsi, Dr. Pepper, Mountain Dew, and 7UP, would add to a string of acquisitions made by the bottler. Pepsi Bottling successfully acquired Better Beverages on June 1, one of four deals completed or announced since last September.

PepsiCo has been making moves to acquire its bottler, in which it already owns an approximately 33 percent stake. PepsiCo’s $4.2 billion offer was rejected by Pepsi Bottling last month.

Pepsi Bottling Chairman and CEO Eric Foss said his company’s latest acquisition would lead to better efficiency as well as open up new markets for the company. The deal is expected to close in the third quarter.

Although Bartz and Microsoft CEO Steve Ballmer have discussed a partnership in the past, Bartz had a more independent tone yesterday, saying that Yahoo was a “damn big important site,” and that Wall Street interest in the possible deal had been “overdone.”  She held that some observers had also overestimated the cost savings that would be involved in the deal.

Microsoft’s attempts to purchase Yahoo last year never came to fruition, however the software company has said it remains open to a deal that would strengthen its search capabilities.

Intel plans to acquire Wind River Systems for $884 million as the semiconductor giant moves to boost its presence in handheld devices, reports The Wall Street Journal.

Wind River helps companies develop and manage device software. Intel would pay $11.50 a share, a 44 percent premium to Wednesday’s closing price. But Wind River traded about the offer as recently as late August.

In October, Wind River acquired South Korean mobile application-development firm Mizi Research; the latest move following the company’s reorganization last year.

Intel plans to acquire Wind River Systems for $884 million as the semiconductor giant moves to boost its presence in handheld devices, reports The Wall Street Journal.

Wind River helps companies develop and manage device software. Intel would pay $11.50 a share, a 44 percent premium to Wednesday’s closing price. But Wind River traded about the offer as recently as late August.

In October, Wind River acquired South Korean mobile application-development firm Mizi Research; the latest move following the company’s reorganization last year.