New Deals With Old-Style Risk

Author: Steven Davidoff

The following is an excerpt from an article in the New York Times that mentions the paper that the author co-wrote with Matt Cain, assistant professor of finance.  To read the entire article visit: New Deals With Old-Style Risk

Risk-taking is back in mergers and acquisitions.

The evidence is in two recent announced deals: Sealed Air’s $4.3 billion purchase of Diversey Holdings and Ashland’s $3.2 billion purchase of International Specialty Products. Both transactions show that the financial crisis is now memory and strategic acquirers are willing to take on substantial leverage to complete deals. But all is not the same as before. These deals also show how transaction terms have shifted in response to the crisis.

The financial crisis taught harsh lessons. The most prominent transaction collapse involving a strategic acquirer and target was Finish Line’s highly leveraged effort to acquire Genesco. Finish Line faced bankruptcy when its financing to acquire the larger Genesco collapsed. The reason was that Finish Line failed to negotiate any financing condition in its contract with Genesco.

Genesco sued in a Tennessee court to force Finish Line to complete the transaction, a case Genesco won at the trial court level. Genesco and Finish Line subsequently settled their dispute and terminated the combination, at a cost of about $70 million to Finish Line.

Finish Line was lucky to pay so little, and was able to do so only when it became clear that the acquisition would indeed bankrupt Finish Line. Both companies were left heavily damaged by the dispute.

The aborted Finish Line/Genesco deal highlighted the problem of uncertain financing during the financial crisis. This was a problem that hit private equity particularly. In a new paper that I have co-written with Matt Cain and Antonio Macias, we estimate that private equity deals constituting $168 billion in 2007 alone were terminated during the financial crisis. Terminations of strategic transactions were far fewer in number and value.