There is a coming tsunami of management buyout (MBO) bids that will be submitted to boards still relying on internal projections that were based on recession-level operating results. Most corporate boards don’t get wise to this “sand-bagging” until there are several periods of exceeding projections, after which, they finally might hold management’s projections to a little more scrutiny.
MBO bids are promoted as ‘providing liquidity’ and often take place just as the turnaround kicks in but Andrew Shapiro warns the offers are not being made for the benefit of shareowners, “but for prospective returns to the insider buyers.”
He provides as an example, sub-prime auto lender United PanAm Financial Corp. (UPFC.PK) (“UPFC”) entered into a merger agreement with its Chairman, Guillermo Bron, senior members of management, and a private equity firm, Pine Brook Road Associates (the “Insider Buyout Group”) to squeeze out all other UPFC shareholders for $7.05/share.
Without obtaining a pre-signing market check, UPFC’s directors entered into an agreement for the company to be sold to Chairman Bron and his Insider Buyout Group with costly deal protections, including no-shop restrictions and costly expense reimbursement and termination fees. All of these protections greatly chill or prevent UPFC shareholders from obtaining higher alternative bids. There is a long 1-year “tail” on the termination fee that provides a windfall to Bron and this Insider Buyout Group, if, even after shareholders vote to reject the proposed insider sale, UPFC’s enters into a transaction with someone else.
(United PanAm Financial: How MBO ‘Take-Unders’ Freeze Out Shareowners – Seeking Alpha, 2/6/2010) Disclosure: CorpGov.net publisher, James McRitchie, is an investor in Shapiro’s Diamond A Investors L.P.