By far the biggest one was Berkshire Hathaway's (BRK.A) $44 billion deal for railroad company Burlington Northern Santa Fe (BNI). Others include Hewlett-Packard's (HPQ) deal to buy 3Com (COMS) for $2.7 billion, which was announced late Wednesday, and the $5.2 billion deal by private-equity firms TPG Capital and the CPP Investment Board for IMS Health announced on Nov. 5. If the trend continues, deal flow could easily surpass January, when the $68 billion Pfizer/Wyeth (PFE) deal was announced, pushing deal activity to $86.6 billion.
But along with the increased deal activity is coming an increase in shareholder lawsuits, or at least investigations into whether each company's board of directors did the right thing in approving the respective deals. When the Berkshire Hathaway/Burlington Northern deal was announced on Nov. 3, the Dallas-based Kendall Law Group wasted little time in announcing its investigation of the deal. That same firm is also investigating several other recent smaller deals, including Peet's (PEET) deal to purchase Diedrich Coffee (DDRX) and the IMS Health deal.
Indeed, at least six law firms are investigating the IMS Health deal, despite the fact that the news caused the stock to increase by 22% and the company touted a 50% increase over where the stock was trading on Oct. 16, which was when speculation over a potential deal began to percolate.
While it's true that each time there's an uptick in M&A activity, there's also often a corresponding uptick in investigations and lawsuits -- after all, without any deal announcements, there's nothing to investigate -- the rush to announce an investigation seems different this time around. Adding fuel to the fire is that while the market is up overall, some companies continue to struggle. 3Com, for example, has never been able to get its stock anywhere near the level where it was trading in 2000, during the run-up to the last tech bubble.
Greg Nespole, a partner at Wolf, Haldenstein, Adler, Freeman and Herz, a New York City law firm that has announced investigations of several recent deals, including Burlington Northern and IMS Health, said there are several factors behind the increased interest by attorneys like him. "There's lots of dry powder out there -- money sitting on the sidelines -- and people are becoming antsy to spend it," Nespole says. "Private-equity firms, in particular, are trying to buy before the prices get too high."
When it comes to deal-making, among the things that trigger alarm bells for Nespole are all-cash deals where a controlling shareholder owns the company and the company will be taken private following the deal. Nespole cited Station Casinos, which went private in 2006 and filed for bankruptcy earlier this year, as a prime example. While Wolf, Haldenstein initially announced plans to investigate Berkshire Hathaway, Nespole says the firm's investigation so far has caused him to believe that it's not really worth challenging the deal by filing a lawsuit. "Berkshire is paying a reasonably strong price and the deal is good for the economy and good for the people who work for Burlington Northern."
Judging by the number of investigations already launched, many of Nespole's colleagues in the shareholder litigation space simply don't agree.
