Linkedin IPO Raises Governance Issues

question 104

Essay

Linkedin IPO Raises Governance Issues


Various antitakeover defenses raise shareholder rights issues.
Critics argue such measures entrench existing management.
Firms employing such measures argue that they allow the founder to retain control, attract and retain key managers, and enable the firm to continue its business strategy.
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Investors often overlook governance structures when the prospect of future profits is high. This may have been the case when Internet social media company LinkedIn completed on May 9, 2011, the largest IPO since Google’s in 2004. With 2010 revenues of $243 million and net income of $15 million, the eight-year-old firm was valued at $8.9 billion, nearly 600 times earnings.

Investors in the IPO received Class A shares, which have only one vote, while LinkedIn’s pre-IPO shareholders hold Class B shares, entitled to 10 votes each. The dual share structure guarantees that cofounder and CEO, Reid Hoffman, will own about 20% of LinkedIn and, in concert with three venture capital firms, will have a controlling interest. In contrast, public shareholders will have less than 1% of the voting power of the firm. Different classes of voting stock allow the founder’s family to preserve and protect their desired corporate culture, to preserve continuity of policies and practices, to attract and retain key managers, and to enable the current board and management to look beyond quarterly earnings pressures. The dual structure also allows founders to cash out without losing control of the companies they started.

LinkedIn also adopted a staggered board, which effectively requires at least two years before a majority of the firm’s current board can be replaced. To make it more difficult to eliminate the staggered board defense, LinkedIn shareholders must vote to change the firm’s certificate of incorporation after the board recommends such a vote. Once the recommendation is made, all LinkedIn shares (Class A and Class B) have only one vote. However, the removal of the staggered board is still unlikely, because the firm’s certificate of incorporation requires that more than 80% of all shareholders approve changes in the staggered board structure.

The firm also added bylaw notice provisions—to discourage shareholder activists—more onerous than would be required in SEC filings, when a shareholder has more than 5% ownership interest in a public firm. If it is later determined that the shareholder has misstated the facts in any manner, LinkedIn’s bylaws allow the board to disqualify the proposal or nomination. Finally, according to LinkedIn’s charter, any shareholder lawsuits must be litigated in the state of Delaware, where the laws are particularly favorable to corporations.

These measures raise questions about the rights of pre-IPO investors versus those of public shareholders. Do they allow the firm to retain the best managers and to implement fully its business strategy? Do they embolden management to negotiate the best deal for all shareholders in the event of a takeover attempt? Or do they entrench current management intent on maintaining their power and compensation at the expense of other shareholders?
Discussion Questions:

Mittal Acquires Arcelor—A Battle of Global Titans in the European Corporate Takeover Market

Ending five months of maneuvering, Arcelor agreed on June 26, 2006, to be acquired by larger rival Mittal Steel Co. for $33.8 billion in cash and stock. The takeover battle was one of the most acrimonious in recent European Union history. Hostile takeovers are now increasingly common in Europe. The battle is widely viewed as a test case as to how far a firm can go in attempting to prevent an unwanted takeover.
Arcelor was created in 2001 by melding steel companies in Spain, France, and Luxembourg. Most of its 90 plants are in Europe. In contrast, most of Mittal's plants are outside of Europe in areas with lower labor costs. Lakshmi Mittal, Mittal's CEO and a member of an important industrial family in India, started the firm and built it into a powerhouse through two decades of acquisitions in emerging nations. The company is headquartered in the Netherlands for tax reasons. Prior to the Arcelor acquisition, Mr. Mittal owned 88 percent of the firm's stock.
Mittal acquired Arcelor to accelerate steel industry consolidation to reduce industry overcapacity. The combined firms could have more leverage in setting prices and negotiating contracts with major customers such as auto and appliance manufacturers and suppliers such as iron ore and coal vendors, and eventually realize $1 billion annually in pretax cost savings.
After having been rebuffed by Guy Dolle, Arcelor's president, in an effort to consummate a friendly merger, Mittal launched a tender offer in January 2006 consisting of mostly stock and cash for all of Arcelor's outstanding equity. The offer constituted a 27 percent premium over Arcelor's share price at that time. The reaction from Arcelor's management, European unions, and government officials was swift and furious. Guy Dolle stated flatly that the offer was "inadequate and strategically unsound." European politicians supported Mr. Dolle. Luxembourg's prime minister, Jean Claude Juncker, said a hostile bid "calls for a hostile response." Trade unions expressed concerns about potential job loss.
Dolle engaged in one of the most aggressive takeover defenses in recent corporate history. In early February, Arcelor doubled its dividend and announced plans to buy back about $8.75 billion in stock at a price well above the then current market price for Arcelor stock. These actions were taken to motivate Arcelor shareholders not to tender their shares to Mittal. Arcelor also backed a move to change the law so that Mittal would be required to pay in cash. However, the Luxembourg parliament rejected that effort.
To counter these moves, Mittal Steel said in mid-February that if it received more than one-half of the Arcelor shares submitted in the initial tender offer, it would hold a second tender offer for the remaining shares at a slightly lower price. Mittal pointed out that it could acquire the remaining shares through a merger or corporate reorganization. Such rhetoric was designed to encourage Arcelor shareholders to tender their shares during the first offer.
In late 2005, Arcelor outbid German steelmaker Metallgeschaft to buy Canadian steelmaker Dofasco for $5 billion. Mittal was proposing to sell Dofasco to raise money and avoid North American antitrust concerns. Following completion of the Dofasco deal in April 2006, Arcelor set up a special Dutch trust to prevent Mittal from getting access to the asset. The trust is run by a board of three Arcelor appointees. The trio has the power to determine if Dofasco can be sold during the next five years. Mittal immediately sued to test the legality of this tactic.
In a deal with Russian steel maker OAO Severstahl, Arcelor agreed to exchange its shares for Alexei Mordashov's 90 percent stake in Severstahl. The transaction would give Mr. Mordashov a 32 percent stake in Arcelor. Arcelor also scheduled an unusual vote that created very tough conditions for Arcelor shareholders to prevent the deal with Severstahl from being completed. Arcelor's board stated that the Severstahl deal could be blocked only if at least 50 percent of all Arcelor shareholders would vote against it. However, Arcelor knew that only about one-third of shareholders actually attend meetings. This is a tactic permissible under Luxembourg law, where Arcelor is incorporated.
Investors holding more than 30 percent of Arcelor shares signed a petition to force the company to make the deal with Severstahl subject to a traditional 50.1 percent or more of actual votes cast. After major shareholders pressured the Arcelor board to at least talk to Mr. Mittal, Arcelor demanded an intricate business plan from Mittal as a condition that had to be met. Despite Mittal's submission of such a plan, Arcelor still refused to talk. In late May, Mittal raised its bid by 34 percent and said that if the bid succeeded, Mittal would eliminate his firm's two-tiered share structure, giving the Mittal family shares ten times the voting rights of other shareholders.
A week after receiving the shareholder petition, the Arcelor board rejected Mittal's sweetened bid and repeated its support of the Severstahl deal. Shareholder anger continued, and many investors said they would reject the share buyback. Some investors opposed the buyback because it would increase Mr. Mordashov's ultimate stake in Arcelor to 38 percent by reducing the number of Arcelor shares outstanding. Under the laws of most European countries, any entity owning more than a third of a company is said to have effective control. Arcelor cancelled a scheduled June 21 shareholder vote on the buyback. Despite Mr. Mordashov's efforts to enhance his bid, the Arcelor board asked both Mordashov and Mittal to submit their final bids by June 25.
Arcelor finally agreed to Mittal's final bid, which had been increased by 14 percent. The new offer consisted of $15.70 in cash and 1.0833 Mittal shares for each Arcelor share. The new bid is valued at $50.54 per Arcelor share, up from Mittal's initial bid in January 2006 of $35.26. The final offer represented an unprecedented 93 percent premium over Arcelor's share price of $26.25 immediately before Mittal's initial bid. Lakshmi Mittal will control 43.5 percent of the combined firm's stock. Mr. Mordashov would receive a $175 million breakup fee due to Arcelor's failure to complete its agreement with him. Finally, Mittal agreed not to make any layoffs beyond what Arcelor already has planned.
-Using the information in this case study, discuss the arguments for and against encouraging hostile corporate takeovers

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Definitions:

Gross Domestic Product

A measure of the economic activity produced within a country over a period of time, including the total value of all goods and services produced.

Consumption Expenditures

The total amount of money spent by households and individuals on goods and services for personal use.

Investment Expenditures

Funds spent on acquiring or upgrading physical assets like buildings, machinery, or equipment to boost production.

National Income

The total amount of money earned within a country, including wages, rent, interest, and profits, often considered a measure of the country's economic health.