Power and Money

LBO Lawsuits: The Effect On Deals Like Ceridian

Okay, let's say you're a shareholder in a company, and that company's just gotten a takeover bid from a private equity firm. That offer represented a 13.6% premium to the stock's closing price yesterday. You may think to yourself: I've got myself a nice little profit here. But wouldn't a 19.3% profit be that much nicer?

No, I didn't pull those figures out from my fedora. That's the difference, according to Dealogic, between the average premiums in management-led buyouts versus non-management deals. And these days, shareholders are outraged by it, and bringing that rage to the courtroom.

Take the case of Ceridian. Just two weeks ago, it fielded an offer for $5b from Thomas H. Lee Partners and Fidelity National. The ink on the press release was barely dry when the Minneapolis Firefighters Association sued. And Ceridian is one of a series of lawsuits being brought to court by shareholders, alleging they are getting cheated.

Here's how the argument goes: Management stands to gain a lot if it leads the buyout themselves. Mr. CEO-dealmaker gets equity in the new, private company AND he gets to keep his job. If he sold to a rival company, chances are, he'd be handed a pink slip. So no wonder Mr. CEO-dealmaker takes a lower offer. Hence, the cry from shareholders that they are getting short-shrifted.

Yes there are go-shop clauses. Yes, independent committees can be set up. And yes, fairness opinions are solicited (although whether these reports are "fair" is another story, according to critics). But numbers are numbers. Thirteen point six percent is not 19.3%.

Many LBO lawsuits have landed in court before. But we've seen a wave of LBO's. A record-setting tsunami of deals. When there are deals, and especially when there are complaints of getting cheated, there are lawsuits. And the verdicts coming down over the next year or so could have ripple effects on the dance of the management-led buyout.

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