Money Stuff: Keeping Mergers Under the Radar

The way mergers-and-acquisitions regulation works in the US is that if you want to buy a biggish company, you need to ask the government for permission first. [1] You fill out a form — called a “Hart-Scott-Rodino premerger notification filing” — and send it to the US Federal Trade Commission and Department of Justice, which will review it to see if your merger would create any antitrust problems. If the FTC and DOJ think it’s fine, then you can close your merger. If they don’t, they’ll call you up and ask you to make some concessions to preserve competition or sue you to stop the deal.

If you own a hardware store in a small town, and you want to buy the other hardware store in town, you could imagine someone saying “ah, that raises competition problems,” but in practice there is a size cutoff for this sort of thing: The FTC and DOJ concern themselves with biggish acquisitions, not every transaction for every business. The size cutoff changes each year but is currently $133.9 million. If you buy a company for $130 million, you don’t have to file the form; if you buy a company for $135 million, you do.

You also have to file the form if you buy $133.9 million of stock, with certain exceptions, which sometimes trips up activist hedge funds or index funds or Ryan Cohen. You do not have to file the form, probably (not legal advice!), if you just hire someone with an employment contract that involves paying her $133.9 million, which these days is often a reasonable substitute for M&A.

Most of the times that I have thought about this topic, it has been for deals that are well above the threshold. But right around the threshold you can get some weird effects. Let’s say you want to buy a company for $150 million, but you think the antitrust regulators will object. You’d rather not file the form, hoping not to attract the regulators’ attention. There is a standard playbook in situations like this, which we discuss from time to time. It goes like this:

1. You go to the target’s owners and say “we know your company is worth $150 million, but if we pay you $150 million we’ll have to make an HSR filing and the regulators will stop the deal, leaving you with nothing. So what if we paid you $125 million instead?”
2. The target’s owners say “no, we really want $150 million.”
3. You say: “Well, what if we paid you $125 million, but then also, unrelatedly, we gave you a $25 million Christmas present? Then we will have done a $125 million deal, which does not require an HSR filing, but you will have $150 million.”
4. You do the deal for $125 million, you file nothing, and if anyone asks it was a $125 million deal.
5. You also give the target’s owners $25 million, and if anyone asks it was a Christmas present.

I do not think you could run this playbook on a $1 billion transaction — that’s a big Christmas present — but around the cutoff, maybe. Not legal advice. It doesn’t work. But people try! [2] The FTC announced on Monday:

The Federal Trade Commission secured $12 million in penalties to settle charges alleging that Edwards Lifesciences Corp. acquired medical device maker JC Medical from Genesis MedTech Group Limited without complying with the notification and waiting period requirements of the Hart-Scott-Rodino Act (HSR). ...

Today’s settlement resolves allegations that Edwards and Genesis sought to avoid federal antitrust review of Edwards’ acquisition of JC Medical, which was in trials to bring to market transcatheter aortic valve replacement devices that treat a heart condition called aortic regurgitation (TAVR-AR devices). …

According to the complaint, Edwards was concerned that HSR review would significantly delay closing on the acquisition of JC Medical, especially in light of its concurrent negotiations to acquire [JC Medical’s only competitor, JenaValve Technology Inc.].

To avoid HSR review, Edwards and Genesis agreed that Edwards would pay $115 million, plus milestone payments, for JC Medical, which fell just below the minimum size-of-transaction threshold of $119.5 million required at the time to trigger HSR review. Edwards, however, also agreed to a contemporaneous $25 million investment in Genesis in connection with the JC Medical acquisition, according to the complaint.

From the complaint:

Edwards wanted to avoid filing under HSR for the JC Medical acquisition by keeping the price below the $119.5 million threshold.

However, [JC’s owner] Genesis valued JC Medical from $125-150 million and was unwilling to accept an offer below the HSR filing threshold.

Thus, in April 2024, JC Medical proposed that, in addition to Edwards paying $115 million plus milestone payments for the voting securities of JC Medical, Edwards would make an investment of $10-35 million in Genesis to close the gap.

On April 27, 2024, JC Medical sent two term sheets to Edwards: one for JC Medical and one for the Genesis investment. The transmittal email made clear that both were part of a single transaction and stated that the Genesis investment would be concurrent with the closing of the JC Medical acquisition.

Documents and testimony show that Edwards and Genesis considered the Genesis investment part of the deal but did not count it for HSR purposes.

Edwards told JenaValve that there was no HSR review for the JC Medical acquisition because it was “below the threshold! Intentional[.]”

There are a few specific circumstances where the pay-less-and-throw-in-a-Christmas-present approach works, but most of the time the regulators notice.

Yesterday I listed three main ways that big banks can make money from stock trading, which are (1) intermediating clients’ trades, (2) financing clients’ stock portfolios and (3) collecting fees for helping corporate clients issue stock. I forgot another big but indirect one: If you run an initial public offering for a big tech startup, you are going to make a lot of its employees rich and liquid overnight. Those people will have questions like “should I sell my company’s stock and diversify” and “should I use a swap fund to diversify without paying taxes” and “should I invest some of my newfound wealth in non-traded business development companies” and “did I hear something about a sports gambling ETF” and “can I borrow money to buy a yacht,” and your private wealth management division will be well suited to answer those questions and collect fees. And because you are leading the IPO — because the company’s leaders trusted you to provide financial advice and execution — you are naturally in a good position to pitch your services to the employees. If you’re good enough to manage the IPO, you’re good enough to finance the employees’ yachts.

Bloomberg’s Hannah Levitt reports:

It’s not just Morgan Stanley’s IPO bankers that are benefiting from the frenzy of companies going public in recent weeks.

The bank hauled in $148 billion of net new assets in its wealth-management business in the second quarter, over half of which were tied to IPOs, according to a statement Wednesday.

SpaceX’s record-breaking listing earlier this year proved to be a field day for Morgan Stanley and its Wall Street peers that helped take it public. …

Morgan Stanley’s win in the wealth-management space is a testament how long-lasting the riches from technology IPOs can be for banks. Founders and employees with large stakes in the companies are often seeking to find avenues to invest their latest riches.

SpaceX is interesting because, as far as I can tell, 100% of the stock owned by employees is still subject to lockup agreements preventing them from selling, so the employees are not yet quite rich and liquid. But:

1. Never hurts to be prepared, and
2. In my old career as a derivative structurer, people used to come to me and say things like “our client is subject to an ironclad lockup agreement preventing her from selling, pledging, hedging, borrowing against, transferring any economic interest in, or otherwise doing anything at all involving her stock, and we were wondering if there was some sort of … derivative? … that would let her sell it now?” I would always sigh and say “wrong number,” but maybe Morgan Stanley has some ideas. [3]

Speaking of the SpaceX lockup. SpaceX sold about 5% of its stock in its initial public offering last month; the other 95% is subject to lockup agreements and doesn’t trade yet. There are a variety of lockup agreements, with Elon Musk and some other big shareholders (roughly 63% of the pre-IPO stock in total) subject to a one-year lockup and the remaining shareholders (employees, etc.) subject to 180-day lockups. [4] But those lockup agreements have some partial early releases, allowing holders to sell some stock before the lockups expire. In particular:

1. The people with the 180-day lockups can sell 20% of their stock — about 7% of SpaceX’s total stock, and considerably more than it sold in the IPO — any time starting on the second trading day after SpaceX publishes its financial results for the second quarter. [5]
2. They can sell another 10% of their stock — about 3.5% of the total stock, and almost three-quarters of the IPO size — at the same time, if the stock’s closing price is  “at least 30% greater than the public offering price … for at least five of the ten consecutive trading days ending on” the earnings release date.

The second quarter ended on June 30; I don’t know when SpaceX will release earnings, but expectations seem to be for early to mid-August. So the 10-trading-day measurement window will start in late July or the beginning of August. The IPO price was $135 per share, making the target stock price (130% of the IPO price) $175.50. SpaceX closed consistently above that target in its first full week of trading in mid-June, but it never got there again; this week it has been in the $130s. Womp womp, reports Bloomberg’s Carmen Reinicke:

SpaceX shares slumped to their lowest level since the rocket, satellite, and artificial intelligence company went public as investor fanfare quickly evaporated in the month since its trading debut.

The stock fell as much as 2.9% to $132.15 on Wednesday, breaking below the $135 per share level that it sold them to investors at last month as part of a record $86 billion offering. SpaceX shares have been subject to volatility usually associated with new IPOs, surging nearly 50% over their first three days of trading, only to lose nearly a quarter of their value over the next three sessions.

One way to think about this is that the August lockup release is looming and could more than double the supply of SpaceX shares in the market, so investors are getting positioned for that. We discussed index rebalancing last week: Last Monday, Nasdaq 100 index funds needed to buy tens of millions of SpaceX shares right at 4 p.m., which would predictably have the effect of pushing up the stock price a lot. But the stock price didn’t go up that much at 4 p.m. last Monday, because everybody knew about that index demand in advance, and the market was positioned for it: Big hedge funds bought the shares in advance, so they could deliver them to the index funds at 4 p.m. without disruption. There is not quite an equivalent lockup-release trade, because it is harder to predict (1) how many shares these SpaceX employees will sell and (2) when they’ll sell. Still, if you had an idea like “I’m going to sell SpaceX stock now, while there’s not much supply, and buy it back in a few weeks, when the supply has doubled and it has gotten cheaper,” you might not be alone.

Another way to think about this is that the August lockup release could more than triple the supply of SpaceX shares in the market, if the stock gets above $175.50 for a while. But if it doesn’t, it won’t. You could imagine a thought process like: “I like SpaceX, and I think it is worth $200, but I’d prefer for the supply to be a little constrained for a while. I’ll buy it at $135, sure, but if it starts creeping up, I will stop buying, because I don’t want it to cross $175.50 and release a bunch more shares.” It is arguably good for the price of SpaceX stock in the medium term if the price stays low in the short term.

I sometimes think that there are traditionally two sorts of financial institutions:

1. Ones with a lot of money, and
2. Weird ones.

Obviously this is oversimplified. But loosely speaking, it used to be that there were giant insurance companies and commercial banks with lots of money that they needed to deploy, but they only wanted to deploy it in investment-grade corporate bonds, and if you showed up at their doorstep with a complicated structured finance transaction, they’d turn you away. And then there were, like, some rapscallions at Drexel Burnham Lambert with some fun ideas, but they didn’t control huge pools of capital. 

So the big boring institutions mostly financed a lot of big boring stuff, and the weird institutions did weird stuff at small scale. Also, though, the weird institutions intermediated trades to the big ones. Drexel found lots of capital to invest in junk bonds. It’s just that it had to market the bonds to the insurance companies; it didn’t have billions of dollars of insurance money itself. The weird institutions could do innovative deals, but they’d have to find someone else to buy them, so some of the edges got sanded off the innovations.

One story that I sometimes tell about the years since 2008 is that “banks have gotten boring,” but a possible counter-story is that the weird institutions have gotten big. I write sometimes about how the big multistrategy hedge funds have gotten into lines of business that used to be done by banks: The hedge funds are to some extent successors to the weird prop-trading and special-situations groups that used to flourish at banks, but they have tens of billions of dollars to play with and are not constrained by any sort of traditional bank culture or regulation.

Or: In the olden days, big insurance companies were supposed to be sleepy and boring and conservative, but then Apollo Global Management Inc. came along. Arguably Apollo’s central innovation was putting some Drexel guys in charge of a big insurance company. Bloomberg’s Laura Benitez writes about Apollo’s ambitions, which are in large part “doing weird financing trades but with tons of balance sheet”:

Apollo maintains it’s not just cutting massive checks. It’s bringing the complexity that once marked its own leveraged bets to a new arena, finding novel ways to fund companies without burdening their balance sheets, including Broadcom and Anthropic in the costly artificial intelligence race.

The view inside Marc Rowan’s Apollo is that its playbook is primed for the AI boom. The firm’s ambitions are measured in the trillions, and these precedent-setting deals are fueling its bravado.

“We were the only ones able to speak for the full $35 billion [Broadcom/Anthropic data center deal],” Jamshid Ehsani, the Apollo partner who helped structure the deal, said in an interview. “We have a toolbox that others don’t, permanent capital from our insurance ecosystem, and that differentiates us from everybody else.”

“Perhaps no move was more consequential,” Benitez writes, than Apollo’s acquisition of Athene, its insurance-and-annuities company, which gives it piles of permanent capital to do deals with. But not boring deals:

In the Broadcom-Anthropic deal, which Ehsani called one of Apollo’s most complex ever, the asset manager used its Atlas SP unit to raise the capital and worked with others including Blackstone. Apollo structured the transaction to keep the debt off of Broadcom’s balance sheet while still carrying a guarantee from the blue-chip company.

Apollo’s selling point is offering firms a range of flexible terms that help them solve financing problems and, in return, it can command higher pricing. These types of deals typically yield almost 3 percentage points more than Treasuries.

Also:

Inside Apollo, however, the swashbuckling culture that fueled its rise remains.

“No one is bored,” [CEO Marc] Rowan said at a Bloomberg event in March. “No one is complaining about the lack of buccaneering.”

That is kind of the sweet spot, no? Tons of money but also tons of buccaneering.

We talked yesterday about debanking. Basically:

1. Banks try to make loans that they think will get paid back.
2. There are any number of risk factors that might make someone less likely to pay back a loan.
3. Bank regulators, who are in part political creatures, will tend to emphasize some risks more than others, possibly because of good-faith bank risk assessment but also possibly for other reasons.
4. If a bank regulator says “hey you know crypto companies are pretty risky, just saying,” then at the margin banks will be less likely to lend to crypto companies.
5. The Trump administration has gone around pretending to think that this is bad, but it has its own political views, and now banking regulators are issuing guidance saying “hey you know undocumented immigrants are pretty risky, just saying” so as to cut those immigrants off from the banking system.

Meanwhile, the banks themselves of course do their own risk assessments and have their own ideas about which sorts of customers are risky. The goal of this stuff is to nudge the banks toward thinking certain customers are riskier than they otherwise would. 

Or the opposite: Regulators can put out guidance saying “hey you know actually crypto companies are pretty safe and it would not be good banking practice to discriminate against them,” and that would nudge the banks’ risk assessments the other way. I suppose that is, approximately, what the Trump administration is doing with its “debanking” probes.

A reader pointed me to guidance that the Biden administration put out in 2023 saying, in effect, “hey you know actually undocumented immigrants are pretty safe and it would not be good banking practice to discriminate against them.” (It actually said that considering immigration status might “overlap with or … serve as a proxy for” illegal discrimination based on race or national origin.) The Trump administration withdrew that guidance this year. So until this year, it was kind-of-illegal for banks to consider immigration status as a risk factor, and now it is kind-of-illegal for them not to.

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