March 26, 2023

DealBook: Berkshire Hathaway to Acquire the Rest of IMC for $2 Billion

Warren Buffett, chairman and chief executive of Berkshire Hathaway.Cliff Owen/Associated PressWarren E. Buffett, chairman and chief executive of Berkshire Hathaway.

Berkshire Hathaway has agreed to buy the 20 percent of the IMC International Metalworking Companies that it does not already own for $2.05 billion, giving it full control of the company.

The deal was announced on Wednesday, just days before Berkshire holds its annual shareholder meeting, where Warren E. Buffett is expected to tell investors that he remains on the hunt for big deals.

It is the second big acquisition by Mr. Buffett’s company this year, following the blockbuster $23 billion takeover of H.J. Heinz by Berkshire and 3G Capital.

By buying the rest of IMC, an Israeli tool maker, from its founding Wertheimer family, Mr. Buffett is completing an acquisition that he began seven years ago. Berkshire’s initial purchase of an 80 percent stake for $5 billion was one of the largest takeovers of an Israeli company in that country’s history.

In a statement, Mr. Buffett attributed the 64 percent rise in IMC’s valuation over the seven years to the tool maker’s enormous growth.

“Since the time IMC entered our lives, my partner, Charlie Munger, and I have enjoyed Berkshire’s association with the company, the Wertheimer family, and the company’s management team,” Mr. Buffett said in a statement. “We look forward to continuing our stewardship of this unique company founded by the Wertheimer family in Israel 60 years ago and nurtured into a truly global enterprise.”

Berkshire was advised by its usual law firm, Munger, Tolles Olson. The Wertheimers were counseled by Wachtell, Lipton, Rosen Katz.

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DealBook: Blackstone Names Baratta as Global Private Equity Head

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The Blackstone Group said on Wednesday that it had named Joseph Baratta, one of its senior deal makers, as head of its global private equity operations.

Mr. Baratta, who is based in London and oversees the firm’s European private equity operations, will move to New York in September, Blackstone said in a statement.

The promotion was announced one day before Blackstone is to release its second-quarter earnings. The private equity industry has largely been treading water this year, as uncertain markets and gun-shy corporate boards have made the business of buying and selling companies more difficult. Last quarter, Blackstone’s leveraged buyout arm reported $170.7 million in revenue, down 38 percent from the year-ago period.

While private equity is no longer Blackstone’s biggest business — now it is its enormous real estate arm — it remains the division for which the firm is best known. In the statement that announced Mr. Baratta’s appointment, the asset manager said that its 73 investments and pending deals combined would be the equivalent of the 13th-biggest company by revenue on the Fortune 500 list, with $117 billion in revenue.

Both the firm and its investors are still betting that leveraged buyouts will pick up. Blackstone’s most recent buyout fund closed in January with $16 billion in capital commitments.

Mr. Baratta joined Blackstone in 1998, and in 2001 moved to London to help build the firm’s private equity business for Europe. Among the deals he oversaw include Blackstone’s takeovers of SeaWorld Parks and Entertainment and the Merlin Entertainment Group.

“Joe Baratta embodies the best of Blackstone — high integrity, strong investment acumen, a focus on the needs of our limited partners and a great developer of talent,” Hamilton James, the firm’s president, said in a statement. “He has been a key part of the leadership team at Blackstone and I look forward to having him broaden his role within the private equity group.”

Mr. Baratta previously worked for the investment firms Tinicum Incorporated and McCowen De Leeuw Company, as well as at Morgan Stanley in its mergers department. He graduated from Georgetown University.

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DealBook: Europe’s Woes Continue to Hamper Takeovers

Traders at the bourse in Madrid on Tuesday.Andrea Comas/Reuters

LONDON – When is the right time to initiate a takeover?

That question is confronting companies looking for acquisitions amid the European debt crisis. Despite a growing number of opportunities, the market volatility and the weak financing environment continue to thwart efforts across the Continent to complete deals.

The outlook remains bleak. So far this year, the combined value of European takeovers has fallen 23 percent, to $266 billion, compared with the same period last year, according to the data provider Thomson Reuters.

The drop in deals comes despite efforts by international companies to find bargains resulting from Europe’s financial woes.

As shares prices in Europe have plummeted, local companies have become takeover targets for overseas rivals eager to scoop up undervalued businesses. And many private equity firms, which are facing problems refinancing debt-laden deals struck before the financial crisis began, also want to offload companies to new owners, often at discounted prices.

“People are traveling around Europe, kicking the tires on businesses in the hopes of finding a good deal,” said a leading banker at an investment bank in London, who spoke on the condition of anonymity because he was not authorized to speak publicly. “The problem is knowing what the right price should be. Every day, the financial crisis throws up a new obstacle, and that makes valuing a takeover target almost impossible.”

The deal uncertainty is linked to growing skepticism that Europe will not be able to weather the crisis. Greek voters go to the polls on June 17, which may lead to the country turning its back on austerity measures that are conditions of its multibillion-dollar bailout. Investors are concerned that Spain and Italy may also be unable to meet their debt obligations. The problems facing these Southern European countries are likely to be felt across the rest of the Continent.

Faced with such dire economic conditions, companies are wary to spend their cash in Europe. Analysts say they are fearful that asset prices will continue to fall because of the Continent’s financial problems. So far this year, the Euro STOXX 50, an index of leading companies in the euro zone monetary union, has fallen 23 percent. Further drops in share prices are expected, as companies struggle from a reduction in consumer spending and concerns about countries’ abilities to pay their debts.

Amid the volatility, companies and financial firms are preferring to take a back seat until there’s more certainty about how to value potential acquisitions, according to another London-based investment banker.

“It’s better to sit tight than spend money on a deal that could have been cheaper if you had waited,” said the banker, who spoke on the condition of anonymity because he was not authorized to speak publicly.

Despite the uncertainty, some companies are pushing ahead. Investment bankers say deals have primarily focused on so-called bolt-on acquisitions in industries, which offer companies short-term financial benefits with minimal risk.

In March, for example, United Parcel Service agreed to buy the Dutch shipping company TNT Express for 5.2 billion euros, or $6.8 billion, in an effort by the American company to increase its market share in Europe and open inroads into China. Last month, the Canadian computer services company CGI Group also acquired the British information technology company Logica for £1.7 billion, or $2.6 billion, as CGI expanded its footprint in Europe.

Beyond these deals, however, the pipeline for new acquisitions is expected to remain weak until companies have more clarity on Europe’s economic future.

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DealBook: For Wall Street Deal Makers, Sometimes It Pays to Be Bad

Deal ProfessorHarry Campbell

Instead of awarding F’s for the worst deals and deal-making of the year, I am going to focus on two of the year’s biggest buyouts. The first: J.Crew’s $3 billion buyout by its chief executive, Millard S. Drexler, and the private equity firms TPG Capital and Leonard Green Partners. The second: Del Monte Foods’ $5.3 billion acquisition by Kohlberg Kravis Roberts Company, Vestar Capital Partners and Centerview Capital.

Both acquisitions showed that sometimes being bad pays very well.

In the J.Crew deal, Mr. Drexler spent seven weeks planning a management buyout of the retailer with TPG and Leonard Green before he informed the J.Crew board of his intentions. At the last minute the buyout group lowered the price it was offering, making a “take it or leave it” offer that appeared to cow the J.Crew board into a lower-price deal. The Delaware judge overseeing the litigation that was later brought over the matter observed that the conduct of Mr. Drexler and his friends was “icky.”

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In the case of Del Monte, the investment bank Barclays Capital, which was representing Del Monte, was accused of bringing together Del Monte’s eventual private equity buyers, K.K.R., Vestar Capital Partners and Centerview, turning possible competing bidders into allies. Barclays subsequently moved from representing Del Monte to providing financing for the buyers. Another Delaware judge wrote a scathing opinion in which he questioned the conduct of both Barclays and the Del Monte board for allowing Barclays to arrange and finance this bidding consortium.

In both deals, litigation was brought before the takeovers could be completed. As a remedy, both deals were reopened and new bidders invited to ensure that there was full and open bidding for the companies.

No new bidder emerged for either company.

This was no surprise.

In J.Crew’s case, Mr. Drexler is the creative force behind the preppy clothing company. But Mr. Drexler repeatedly expressed his desire to work only with TPG and Leonard Green while sometimes saying halfheartedly that he might work with others. Without his cooperation, no other bidder was likely to appear.

Del Monte lacked a “secret sauce” executive, but there were few natural bidders for the company, leaving only private equity firms. Unfortunately, there was slight chance of a private equity firm bidding against K.K.R. and its partners. One reason is financing. It is quite difficult to put together a multibillion-dollar financing package for a bidding war. The financing banks just don’t want to write a blank check.

Reopening the bidding was thus a hollow penalty.

There were also monetary penalties, to be sure. In the J.Crew case, there was a $16 million litigation settlement for shareholders. The settlement in Del Monte was higher, at $89.4 million. About half of the Del Monte settlement money came from Barclays.

But it was also small change. Even the bigger Del Monte settlement was only about 1.7 percent of the transaction value. J.Crew was about 0.5 percent. And much of the money will be paid by insurance.

Being bad has largely paid off for these buyers.

This is not to say there were no repercussions. Both cases have changed Wall Street practice. Boards of target companies facing management buyouts have strived to run cleaner sale processes to prevent another J.Crew-like situation. Boards have also become more wary of their investment bankers. In the wake of the Del Monte case, boards are less willing to allow “staple financing,” where the target’s bankers offer a financing package to potential buyers.

As for the buyers of J.Crew, at the judicial hearing to approve the litigation settlement, Martin Vogel, an objecting former shareholder, complained that this settlement was “nominal.” It would not make a future executive think twice before engaging in the same conduct. Mr. Vogel is right.

But the problem is what to do about the penalty. Depriving shareholders of a buyout, even at a bad price, would punish them.

Perhaps the answer is to establish meaningful penalties paid out of the pockets of the bad actors. In the case of Del Monte, this appeared to have happened. Barclays was deprived of its fee, and that is why bankers on Wall Street have all had to slog through classes on the Del Monte case. The worst nightmare of a banker is to lose a $45 million fee. With real money at stake, the bankers have an incentive to change their conduct.

Nothing of the sort happened in J.Crew. The small settlement was apparently structured to be paid by insurers, and even then a quarter of it went to lawyers’ fees. Mr. Drexler and his buying consortium are getting off almost scot-free.

The difference between the two cases reflects in part a quirk in the law.

In the Del Monte case, Barclays was party to the litigation while not being one of the principals in the deal. But in J.Crew, the lawsuit was aimed squarely at the J.Crew board and its chief executive. Without delving into the intricacies of Delaware law, establishing a case against the J.Crew board and Mr. Drexler would have been difficult. In the case of Del Monte, the same rules applied to the Del Monte board, but the law on Barclays’ liability was different and uncertain.

But the law should not depend upon such distinctions. Delaware wants to protect directors and officers from liability to ensure that they operate the business without undue fear of personal liability. There are good reasons for these rules, at least in some measure. It is only when you examine the differences between J.Crew and Del Monte that you realize that sometimes these laws act to protect conduct that is, to say the least, “icky.”

The J.Crew case rewards a chief executive for his poor conduct, letting him keep the company without real penalties except reputational damage. But reputation is fleeting on Wall Street, and Mr. Drexler, TPG and Leonard Green do not seem too bothered by the controversy. Why should they? They now own J.Crew.

Perhaps in the new year, it will be time to get serious about penalizing, rather than rewarding, deal makers for their bad conduct.

Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.

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