Attack of the M&A ambulance chasersDecember 23, 2010: 10:57 AM ET
At 8 a.m. this morning, private equity firm Leonard Green & Partners announced that it has agreed to buy fabric and crafting retailer Jo-Ann Stores Inc. (JAS) for approximately $1.6 billion.
Soon after, I tweeted the following:
"Over/under on time until some law firm announces "investigation" of Jo-Ann Stores buyout? I say 3 hours."
My message wasn't intended to suggest that either Leonard Green or Jo-Ann management had done anything untoward. Not only does the buyout offer represent a 34% premium to yesterday's closing price for Jo-Ann shares, but it is more than $13 per share higher than Jo-Ann has ever traded.
Instead, my tweet reflected the sad reality that virtually every single take-private buyout is quickly "investigated" by class-action attorneys in seek of litigious shareholders.
The first "investigation" was announced at 9:56 a.m., which means that the NY Times scribe Michael de la Merced was actually closer to the actual time. And a bunch more have since followed.
Most of the "investigating" attorneys either didn't pick up the phone or declined to comment. Noah Wortman of Rigrodsky & Long, for example, took my call but ended it the moment I introduced myself as a reporter ("we have a policy of not speaking with the press").
One who did, however, was Tripp Levy (head of eponymous New York City law firm Tripp Levy PLLC). In his press release, Levy writes:
The investigation concerns, among other things, whether the consideration to be paid to Jo-Ann shareholders is grossly unfair, inadequate, and substantially below the fair or inherent value of Jo-Ann. The investigation further concerns whether the directors of Jo-Ann may have breached their fiduciary duties by not acting in Jo-Ann shareholders' best interests in connection with the sale process of Jo-Ann.
I asked if he had any evidence to support his suggestions, and he said that the investigation was commenced following a "quick and dirty look at deal multiples of competitors." I asked for names, to which he could only give me Gymboree, which Bain Capital recently acquired for $1.8 billion.
The Gymboree deal was transacted at a 7.8x multiple to EBITDA, while Leonard Green's offer for Jo-Ann's comes in at around a 7.6x multiple to EBITDA. Not exactly the type of difference that would prompt accusations of being "grossly unfair." Maybe he was talking about the stock price premium, which was 57.4% for Gymboree, compared to Jo-Ann's 34%. Or maybe he was actually thinking about the 8.6x mutliple to EBITDA that Leonard Green and TPG offered for J. Crew (JCG), although the stock price premium there was just 16%.
Or maybe, just maybe, we're talking about the M&A world's version of automated ambulance chasers. After all, three more "investigations" have been announced just since I began writing this post 20 minutes ago. No way that many law firms have clients who woke up this morning, saw they were being offered more for their stock than it had ever been worth and thought: "I need to call my attorney. This is grossly unfair."