$85 billion about cover it? Nope – AIG needs another $38 billion for now

Last month the Federal Reserve loaned AIG $85 billion for two years in return for a hefty interest rate and a warrant agreements to purchase 80% of AIG.  The objective was to give AIG enough breathing room to have an orderly disposition of its assets without a fire sale bringing the global financial system to its knees.  Now we know that the fire has spread far beyond AIG, even while it still burns within AIG’s walls.

It turns out that the price tag, for now, isn’t an $85 billion loan for which the federal government (and taxpayers) might stand a chance to at least cover the loan, let alone make a profit.  Tack on another $37.8 billion extended by the Federal Reserve Bank of New York to provide badly needed liquidity.  In exchange, AIG is giving the New York Fed investment-grade, fixed-income securities that it had previously lent out to other institutions for a fee. Those institutions are now returning these securities and want their money back, further accelerating the liquidity crunch at AIG.

AIG has already drawn down some $60+ billion of the credit line in the past two weeks to cover its cash requirements.  Let’s all hope that enough stability returns to the financial markets over the next several months to alllow an orderly disposition of its assets.

Carl Icahn and ImClone pull off $6 billion merger agreement with Eli Lilly

Eli Lilly & Co. has agreed to buy ImClone Systems Inc. in an agreement and plan of merger (link is to sample merger agreements, as the Eli Lilly – ImClone merger agreement hasn’t been made public yet) for more than $6 billion.  The merger would broaden Eli Lilly’s pipeline of cancer treatments and represents a blow to Bristol-Myers Squibb, which had marketed ImClone’s cancer drug Erbitux under a Development, Promotion and Marketing Agreement.

 

The deal prices ImClone at $70 per share in cash, more than 50% higher than its price in July before Bristol-Myers made its first bid.  Both boards have approved and recommended that ImClone stockholders tender their shares.  ImClone’s chairman, Carl Icahn, who owns about 14% of ImClone stock, has agreed to vote in favor of the Lilly deal.  Icahn had taken over the position back in 2006, at which time the stock was trading in the mid-$30/share range.

 

The agreement and plan of merger has not yet been made publicly available, but if you need to find other merger agreements or marketing agreements drafted by top law firms, you can find them at www.RealDealDocs.com.

Citigroup – Wachovia Exclusivity Agreement Dispute

There were some major developments over the weekend in the attempted Citigroup acquisition of Wachovia’s banking operations.  Wells Fargo stepped in on Thursday with what many consider to be a superior proposal (search through merger agreements clauses for superior proposals here) for all of Wachovia’s assets, only to have Citigroup claim that it has an exclusivity agreement with Wachovia (see the alleged citigroup-wachovia-exclusivity-agreement here).  This copy of the exclusivity agreement was faxed out of the New York office of Davis Polk according to the fax number at the top of the document – I’ll leave that for someone else to chase down.

Citigroup was able to obtain a preliminary injunction halting the Wells Fargo acquistion from a New York state court judge late Saturday night, although this ruling was temporarily blocked by a federal district court on Sunday, with a hearing scheduled for Tuesday.

Exclusivity agreements (also known as no shop agreements) are commonly entered into in conjunction with merger agreements, and as the name suggests they are generally used to provide a buyer with protections that the potential seller won’t be able to continue to shop around for a better deal.  The strength of the protections is a matter for negotiation, but it’s generally agreed that there are certain “fiduciary outs” for the seller in the event that the company to be acquired receives a superior proposal. 

The Citigroup-Wachovia exclusivity agreement, assuming it is valid, bars Wachovia from seeking out another buyer, providing information to another buyer, or entering into talks that might enable another buyer to make a bid.  Wells Fargo has claimed that it did not receive any new information from Wachovia and that it had simply continued its analysis from previously received information, so there was no violation by Wachovia of the exclusivity agreement.  Wells Fargo had reportedly passed on the Wachovia deal in late September based on concerns about Wachovia’s troubled loan portfolio.

A potentially major reason for Wells Fargo’s change of heart – the IRS changed a regulation which may make it increasingly likely that stronger banks will continue to snap up troubled smaller institutions.  Under the change, banks may take tax deductions on loan losses recorded as a result of a takeover.  Assuming this applies to the estimated $74 billion in loan costs that Wells anticipates, this could have a favorable tax impact running into the tens of billions of dollars for Well.s

Citigroup and Wachovia deal falling apart as Wells Fargo steps in

I had to re-read this alert twice, it was so surprising. 

 

 

Citigroup is pushing hard, with the support of regulators, to finalize its $2.2 billion asset purchase agreement (samples linked, actual agreement not available yet) for the banking operations of Wachovia, but it seems that Wachovia’s board has now thrown its support to what it considers a superior proposal from Wells Fargo.

 

Under the new deal, Wells Fargo would acquire all of Wachovia’s assets including its vast deposit network, its huge brokerage business and its investment management division for a reported $15 billion.  Wells Fargo had walked from the discussions late Sunday night after it uncovered issues around part of Wachovia’s loan portfolio, but it is back with the support of Wachovia’s board.

 

Citigroup is working to enforce what it claims is are exclusivity or no shop agreements with Wachovia (also links to samples), while Wachovia is publicly embracing the Wells deal.  The Fed, meanwhile, is in a tough position, as it continues to back the Citigroup deal, in spite of the fact that the Citigroup requires loan guaranties from the Fed, while the Wells Fargo deal does not.  In any event, both Citigroup and Wells Fargo are raising capital to cover their own portfolio losses while fighting over the Wachovia assets.

 

A Wells Fargo – Wachovia combination would once again dramatically alter the landscape, returning Citigroup to a second tier retail banking player and giving Wells Fargo enormous access to retail and brokerage branches on the East coast in particular.  Interestingly, Wells Fargo had indicated as late as early September that it preferred to do a small deal, if any, but the buying opportunities have simply been too good.  I recall that Wells Fargo’s Chairman and former CEO Dick Kovacevich said he felt “like a kid in a candy store” 2 weeks ago.  More undoubtedly to come.

Oil and Gas Shortages to ease in Southeast

In the wake of Hurricanes Gustav and Ike, gasoline supplies have been incredibly tight in the American Southeast because refineries throughout the Gulf region were shut down due to a combination of evacuations and damage.  Even as prices eased nationally alongside the general decline in oil prices, gas stations in the Southeast regularly report shortages and even the complete lack of gasoline.

According to a number of published reports, gasoline shortages will be eliminated in the next 10 days as the refineries have come back on line and gasoline shipments resume up the main pipelines, and (hopefully) drivers ease off of the natural tendency to hoard, which throws everything askew. 

For those of you in the gasoline, oil, or fuel supply business, I thought it would be helpful to link to a number of different types of sample agreements and contracts from top law firms, including:

• general supply agreements – a listing of thousands of supply agreements of all types from top law firms
• oil and gas supply agreements - links to specific agreements dealing with oil and gas suppliers
• fuel supply agreement - a sample fuel supply agreement

If you’re looking for other types of legal agreements or contracts, or the ability to find specific deal clauses or provisions by type of agreement, go to www.RealDealDocs.com – it’s the best source for documents for legal and business professionals I’ve seen.

No Merger or IPO exits for venture backed companies

The downturn in the financial markets has another victim – exits are way down for venture backed companies.

Dow Jones VentureSource reported Tuesday that mergers and acquisitions activity and initial public offerings for venture-backed companies are on pace to close out the year at their lowest level in the past ten years.  Only one company went public in the third quarter, compared to 11 in the third quarter last year, and there were only 247 acquisitions of venture backed companies in the first nine months of 2008, down 25% from the 327 acquired in the first three quarters of 2007.  In just the third quarter, there were only 66 mergers or acquisitions, down 45% from the 116 deals in the quarter from one year ago.  These deals are typically structured as asset purchase agreements or stock purchase agreements.

I’ve written about potential upticks in strategic merger activity separately as the lack of cheap debt was forcing private equity to the sidelines, but it appears that this is not the case.  We’ll have to wait and see what happens.

One thing is sure, though.  As exits continue to be tougher to achieve, and as they take an average of nearly nine years to achieve instead of the 5-6 we saw in the late 1990s, it’s likely that deals will be tougher to get and deal terms are likely to change as venture capital investors look for alternative mechanisms to liquidity.  And if you need money right now, watch out.  In our board meeting with our venture investors last week, it was clear that a large number of entrepreneurial firms were going to fail in the next several months due to a lack of funding more than any other cause.  That’s tough to hear, because frequently the VC-funded model is to spend to buy growth as aggressively as possible, with the explicit objective to do another funding round after certain milestones are achieved.  Funding risk has always been there, but with the chair pulled out from a lot of companies that followed this model, lots of jobs are going to be lost.

How the credit crisis hits home

It’s been difficult for people to figure out how the big liquidity crisis in the financial markets affects them.  That, along with justifiable outrage for the underpriced risks that the large investment banks took during the credit boom over the past four years, has led many to loudly protest the huge Wall Street and bank bailout which will be taken up again by the US Congress this evening.

I thought it would be helpful to briefly walk through how and why this credit crisis affects everyone in this country. 

At its simplest, the whole financial system in the United States depends on banks lending each other money, so that they can provide credit to consumers and small businesses to buy cars and equipment, homes and office space, or to stock up on holiday merchandise or even to meet payroll.  When that credit dries up, the whole economic system from consumers to producers starts to contract, which means jobs get cut, home prices continue to shrink, and companies cut back on investment.  That’s what’s happening today – let’s talk about why that is in a few simple steps:

1. In normal times, when there is “liquidity” in the credit markets, major investors (banks, pension funds, sovereign wealth funds, etc.) routinely transfer money between each other and to corporations so that they have the money they need when they need it.
2. Banks in particular lend to each other at very low rates (this is the source of the LIBOR interest rate a lot of consumer and corporate debt is tied to – the London interbank offer rate).  However, this isn’t happening currently, for 2 reasons:  banks have a lot of capital tied up in bad mortgage-based assets, so they need to hang onto their cash, and they are worried about other banks not paying failing and not paying the money back.  So the overnight rates on this type of interbank lending are at all time highs, and even then the banks are reluctant to provide the money.  This is why the Federal Reserve and other government central banks are pushing huge amounts of cash into the system.
3. Since banks still don’t have much money to lend, and they want to avoid more bad loans in an uncertain market, money isn’t made available to homebuyers or businesses.  As I mentioned, businesses frequently use short-term borrowing to support production costs or even payroll.
4. These pressures quickly ripple throughout the economy, which can affect you in the form of:  stock losses (your 401k), job losses, more declines in home prices, tougher credit terms to buy or lease a car, higher credit card rates, etc.

Fixing this credit crisis, however it’s done, is essential to avoiding a much more severe downturn.  It won’t cause an economic boom, but at least it will help get the financial system back off the ground.