Steven M. Davidoff (“The Deal Professor”) is one of my favorite writers on M&A deal issues, and he has written about the recent termination of the Diamond Foods acquisition of Procter and Gamble’s Pringles at the New York Times DEALBOOK. His article, entitled “The Lessons Learned From Diamond’s Pringles Fiasco” can be found here. (Diamond Foods is a local Northern California company, and I have, in a previous life, represented executives in the snack foods business, so I have tracked developments in this case with particular interest.)
Diamond agreed to buy Pringles last year, but Pringles was in fact larger (as measured in sales), so Diamond agreed to issue $1.5Billion in common stock (and, as one result, its own shareholders would have owned only 43% of the “new” company). Unfortunately, the increased scrutiny that followed announcement of the deal has led to concerns over accounting irregularities, and the Diamond Audit Committee recently concluded that its financials for 2010 and 2011 needed to be restated. (For Diamond’s press release concerning the Audit Committee’s findings, go here.) Accordingly, the transaction was terminated; the press release issued by Diamond indicated it was a “mutual” decision.
For my privately held potential Sellers, here are my views of the two key takeaways:
- When you are accepting stock as part of the purchase price, remember that it means that you are also a “BUYER”! That means, in turn, that you have to do all the due diligence that any Buyer would do. The fact that the Buyer was, in this case, a public company, was probably seen as being of some comfort, but, as soon became evident, that was not enough. There is simply no substitute for doing the tough due diligence work on any company that proposes to sell you stock. Also keep in mind that in many instances you will be required to hold onto your stock, or most of it, for several months. That means that if there is any bad news that is soon to leak out, your stock will likely be much less valuable when you are able to sell it.
- If there is any period of time between the signing and the closing, strongly consider the use of appropriate “conditions” in the purchase agreement. Apparently this transaction had a no “material adverse change” (also known as a “MAC”) clause, and the fact that Diamond was required to restate its financials clearly meant that there was such a change. But, as Mr. Davidoff suggests, the parties could have agreed to an additional, much more precise condition, such as a minimum level for Diamond’s stock. (When the transaction was first announced, Diamond was at about $52/share; it current trades at about $23/share.)
[Fortunately for Procter and Gamble, it has already found another suitor for the Pringles business: Kellogg has agreed to purchase it for significantly more than Diamond offered. See the story here. (And I suspect that Kellogg's offer had much to do with Proctor and Gamble's agreeing to a "mutual" termination with Diamond of the former deal.)]