I’ll simply reprint my April 3, 2009 item — on remarks made by a Goldman Sachs & Co. internal lawyer at Tulane that day — fascinating, given the new perspective — I’ve left everything the way it was, as of April 3, 2009:
April 3, 2009: Goldman Sachs Lawyer Makes Startling Disclosure At Tulane. . . .
Apparently there was a deplorable excess of testosterone flowing — at a panel-discussion during Thursday’s corporate law seminar at Tulane University, to wit:
A senior writer for Corporate Control Alert is quoted on The Deal.com as having heard the Goldman lawyer (an adviser on the contemplated deal) describe one proposed (but not prevailing) structure for the Merck Schering-Plough reverse merger as including a direct borrowing, by the target (Schering), from the acquiror’s (Merck’s) banks. That borrowing was to be used to fund a pre-closing cash payment to Schering-Plough shareholders. Astonishing. He recounts it, thus:
. . . .To address the funding uncertainties posed by the $41 billion deal, Schering considered borrowing money directly from Merck’s banks and paying it to Schering shareholders before the deal’s close. The scheme would have given Schering a direct claim against the banks funding the deal, rather than have the buyer be in contractual privity with the banks. . . .
[To be sure we all follow what was proposed, here, let me re-cast this, in a more familiar setting, as an illustrative (if not perfectly-analogous) example: if this structure were employed as you went to sell your home, it would give you — the seller, the right to get half of the cash, for your house, well before the closing, and then to sue the buyers‘ bank — if that bank didn’t give you the cash, before the closing — while the title-report was still being prepared, and the prior real estate tax payments were still being confirmed. Doesn’t that seem rather extraordinary?]
Okay — now, I have at least three reactions: (1) Such a pre-closing payment, in cash, of $10.50 per share, would smell quite a bit like a “settlement” payment — to the institutional shareholders. Collectively, institutions hold something north of 70 percent of all outstanding Schering-Plough shares — the proposed “settlement payment” would arguably be offered to take care of all the matters I have blogged about these past 14 months. Why do I say so? Because payments in cash, so far in advance of a merger are almost unheard of, in public company transactional practice — especially in any deal near this size. That leads me to my next reaction:
(2) Such a pre-closing payment would essentially “gut” the deal of half of its value — making it nearly impossible to break it up, with a higher offer. It would effectively eviscerate the synergy value of the deal, pre-close — by paying over $17 billion out to the “old” Schering-Plough shareholders, and leaving only the “husks” for closing day — in the form of the actual share exchange values (the .5767 shares of Merck). And that leads to my third reaction:
(3) This proposed structure — paying so much out, in cash, so significantly in advance of closing — would have almost certainly been a breach of the Schering-Plough officers’ and directors’ fiduciary duties (among them the duty to determine that this was the highest, best offer available). Consider that such a mechanism would effectively (a) line the Schering officers’ pockets with brand new cash, pre-close, and (b) preclude any other bid, by obligating Schering to repay the banks some $17.33 billion ($10.50, times 1.65 billion Schering-Plough shares) — even if Schering didn’t nominally end up acquiring Merck (via the reverse merger — which is, in substance, the wipe-out of Schering). And that structure — if endorsed by Merck’s officers and directors — would arguably be a breach of the fiduciary duties owed by Merck’s directors and officers, to the “old” Merck shareholders, as well. Wild.
To be fair, though, the Goldman lawyer plainly offered it as anecdotal evidence of the choppiness of the deal-funding credit markets, at present. I do think he “said the soft part a little too loudly“, in so doing. That is, his statement has all the earmarks of a very-rushed, or not very-well-vetted, “do the deal, at all costs” feel to it.
Now — is it possible that the Goldman Sachs lawyer was simply “selling wolf tickets” — at Tulane, yesterday? Sure. It’s possible. It seems unlikely, though. It seems like just the kind of soup CEO Hassan, and his Top Six would cook up. [Note that it would have given each of them a very-nice, pre-closing, gift of cash (for over half of the then-NYSE-price of their shares!), to boot. Can you say “self-interested“? Yep. You certainly can.]
Finally, this is — if true — a detail that we likely would not have learned from the publicly-filed merger proxy filings (when they are filed, in a few weeks’ time). So, this is a selective piece of disclosure, at least arguably. And it is, to my eye, at least arguably material — given the insight it offers — to the extremely-motivated approach Schering’s CEO and team seemed to be taking, to get this deal “cashed-out” early.