Photo provided by Cleary Gottlieb
As an aspiring ultra-marathon runner, Cleary Gottlieb partner Ethan Klingsberg has a taste for speed. But when it comes to his M&A practice he longs for the days when people would sit down and negotiate deals in the same room, or at least the same time zone.
“I've done a half-dozen deals with some firms and never met a single lawyer from these firms in person,” Klingsberg said. “I try to encourage boards to meet in person as much as possible. But, due to the speed of deals and the ability to connect virtually, even key board meetings are not always in person. This trend puts a lot of pressure on counsel to communicate well and build trust.”
Klingsberg, however, appears to be impervious to the deal-making pressure as he managed to execute about two dozen deals in 2011 and early 2012, including Google’s $12.5 billion acquisition of mobile-device maker Motorola Mobility Holdings, Alpha Energy’s $8.5 billion merger with Massey Energy and Home Depot’s first major acquisition since 2006. At the same time, Klingsberg was also engaged in fighting takeover battles on behalf of clients including Family Dollar Stores, Inc., which he successfully defended against a $7.7 billion hostile buyout proposal by Trian Fund Management.
Klingsberg may lament the lack of face time, but it’s obvious he’s always gearing up for the next mad dash to the finish line.
Lawdragon: Last year, your firm had a role in two of the largest deals in the technology industry, the $4.5 billion Nortel auction and the $12.5 billion Google/Motorola Mobility acquisition, which you personally handled. Are we going to see more big-ticket deals such as those in the coming months, and if so, what’s driving that trend?
Ethan Klingsberg: We're also handling SONY's buyout of Ericsson's mobile handset business. We're hoping the big tech deals will keep coming. Large tech companies are generally cash-rich and have investors and boards that are more interested in seeing this cash used to grow the company's prospects, as opposed to the dull and depressing alternative of special dividends and share buybacks. The other driver is the value attributed to speed and being the first mover in this sector. Many of the products and operations that are being bought in tech could be developed in-house over time, but it's not necessarily worth waiting and the first entrants in a space can have a benefit that organically developed alternatives may have trouble competing against. Take these factors, together with a very healthy dose of desire to be the best, and you end up with a hot M&A market.
LD: Recently, there has been a slew of acquisitions by major players targeting web/social media startups (Facebook's $1 billion acquisition of Instagram and Zynga’s $223 million purchase of OMGPOP, to name a few). You handled a similar deal earlier this year when you advised Home Depot on its acquisition of online site Red Beacon, a 3-year-old web startup that connects consumers to local contractors for home maintenance and repairs. What’s the difference, or is there a difference, between acquiring a brick-and-mortar company versus a web/social media startup?
EK: Well, I don't know whether the guys at Red Beacon are walking around wearing orange aprons in the office. But remember, Home Depot is the product of a very exciting, start-up success story and I think Frank Blake and his team at Home Depot were drawing on that legacy when they bought Red Beacon. The culture of each corporation is unique and not necessarily derivative of its size, age or business lines. Some cultures nurture a fearless, efficient and flexible approach to M&A. Some are more methodical and rigid. Fact is, in every takeover there is a degree of culture-clash going on between the acquiror and target and our job is to bridge that gap by permitting everybody to understand the real issues and the ways to resolve them that may not be a "win" for all sides, but will get everybody to where they need to be. In some deals, the gaps are larger than others, but that is as often a product of personalities as it is the nature of each side's business lines.
LD: Even with the bad economy (or maybe because of it), many companies are sitting on piles of cash. What impact does this have on your practice, if any?
EK: We spend a lot of time working with boards of directors on this issue. For example, the excellent condition of the balance sheet at our client, Family Dollar Stores, was a primary reason that the hedge fund, Trian Partners, came in attacking the board and announcing an unsolicited takeover offer. A common misconception is that hedge fund insurgents target only underperforming or distressed companies. In fact, the boards and managements that are most frequently attacked by activists are those overseeing companies characterized by steady cash flows and healthy balance sheets. In the mid 2000s, healthy balance sheets often signaled likelihood for being an LBO target. Now this state tends to signal a need to prepare for a hedge fund insurgency. Generally, we counsel that boards should explore, and push outside advisors and management to help them understand, whether more aggressive uses of excess cash may be appropriate and communicate their conclusions and reasoning to investors. This effort can do more than traditional anti-takeover mechanics to protect a company from interference by an activist who purports to know more than the incumbent directors and management about what to do with the excess cash and who, in the face of a seemingly passive board, could generate enough momentum to steer the company in radical directions that are not prudent.
LD: Have exit strategies for some companies that are likely targets for acquisitions been affected by the lottery-like nature of the current IPO market?
EK: Not sure it is a lottery, so much as a need to have a very special story to pull off a successful IPO in this country. The difficulty of obtaining credit lines for startups and the uncertainty and length of the road to an IPO have led many VC and other early stage equity investors to view M&A as the favored exit, even though this approach usually accelerates the exit to a time that is arguably premature from the perspective of permitting a company to develop its prospects. The JOBS Act has raised hopes that getting to market will be cheaper for most private companies and, while that may be true, some of the ideas in the JOBS Act may end up being shunned by Wall Street underwriters. And those companies that are doing just fine while private may even end up steering clear of the IPO market due to some of the flexibility in the JOBS Act. But even if the availability of capital markets financing grows, you will always see M&A as an attractive liquidity event for private investors.
LD: What do you consider is the most interesting deal you’ve handled in your career?
EK: In 1998, I spent months in South Korea working on the first foreign investment in its banking system -- a seminal transaction by Goldman Sachs. The government was giving us a hard time, the target, Kookmin Bank, was giving us a hard time, and there were lots of cultural rules that we were expected to follow. We had a great team there from Cleary and Goldman, lots of camaraderie. In the end, we broke some of the cultural rules, but that was the right thing to do to get the deal done. There's a time to play along and there's a time to disrupt in the deal-making business.
LD: For an M&A lawyer, you actually have a highly diversified practice and have represented companies in the retail industry, investment banking, private equity and technology industry. Was that by design or did it just happen? And what’s the secret in diversifying your practice?
EK: Client relationships are a great way to become aware of industries, business lines and organizations. You've got to start with the premise that you are advising people and, once you have that awareness, you can expand into multiple sectors if you have the patience to do your homework.
LD: When you have time to do something for fun, what do you do?
EK: Mostly, my kids and I try to figure out ways to go on adventures together. In addition, I've got the running bug. I ran the NYC Marathon, NYC Half Marathon and two 10Ks (not the Exchange Act form) races in the last six months. I aspire to ultra-marathons over the next decade to affirm that life really is absurd.