Crocodile Tears?
The gospel according to the Delaware Chancery Court is that a board of directors owes a duty to obtain the highest price for shareholders once a decision to sell the company has been made. So it was a surprise to learn that Leo Strine, an outspoken member of the Delaware Chancery Court, said at a recent M&A conference that the duty to squeeze out every last penny in every takeover was “not productive for society.”
Sounds like blasphemy. For years the Delaware courts have been advocates for the view that once a decision to sell has been made, the role of the directors is to pursue the best price with singular intensity. The consequences of this orthodoxy are on display today. During the LBO heyday, this approach led to acquisitions, such as the purchase of cyclical technology manufacturer Freescale by a Blackstone-led private equity consortium, with borrowed funds totaling 8.5 times the company’s EBITDA. Clearly, the need to service this massive amount of debt from the cash flow of a cyclical company with high cap ex requirements will likely crowd out other uses of cash, such as hiring more engineers, investing in research and development, or just weathering a cyclical downturn in the economy.
Despite these dire consequences, on display everywhere today, the view that the good of society is best served by paying shareholders the very last dollar in an acquisition still prevails. I guess it’s fair to ask where that last dollar went. If it went back into the market, then today it is very likely much less than it was a year ago. Vice Chancellor Strine may therefore be right in asking whether the benefits of the singular focus on shareholder returns is the most productive result for society.
We are of course going through a severe deleveraging phase in the history of finance capitalism, and the prevailing mood is to question the wisdom of the past. In all likelihood, this too will pass. As the poet Elvis Costello has said:
“History repeats the old conceits,
The glib replies the same defeats,
Keep your finger on important issues
With crocodile tears and a pocketful of tissues.”
