The Art of the Deal

New York, April 12, 2012—The challenges of taking a public company private—as illustrated by last year’s $3 billion acquisition of J. Crew—was the subject of a panel discussion at Columbia Law School featuring attorneys from the top New York law firms who were involved in the deal.

Thomas E. Dunn, a partner at Cravath, Swaine & Moore, represented the special committee of J. Crew’s board, and Howard Sobel, co-head of the private equity practice at Latham &Watkins, represented Leonard Green & Partners, one of the buyers. Professor Robert Jackson Jr., who included the deal as a case study in his new corporate finance course, Counseling Investment Bankers, moderated the discussion, entitled “What’s in a Deal? Insiders Look at the J. Crew Acquisition.”

“Going-private” transactions like the J. Crew transaction present special challenges because of the role of company management, stricter Securities and Exchange Commission disclosure rules and the need for debt financing, Dunn said. The J. Crew deal, which closed in March 2011, had all these issues—and some of its own, he added.

Dunn (pictured left) noted that a senior executive at private-equity firm TPG, one of the buyers, sat on J. Crew’s board. In August 2010, the TPG executive began discussions with J. Crew CEO Millard (Mickey) Drexler about taking J. Crew private—conversations that Drexler waited six weeks to convey to the rest of the J. Crew board. Jackson noted that, especially in going-private transactions where the CEO is among the buyers, the courts have said that discussions like these must be had before the full board, whose duty is to ensure that public shareholders receive the maximum possible value. Dunn added, “When the CEO is on the same side as the buyer, it’s important to get the board involved early on.”

“Almost every public company transaction these days can end up with a shareholder lawsuit, going-private deals even more so” because of management’s involvement with the buyer, said Dunn. “The job of the special committee is to run an effective process. You know a huge spotlight will shine on everything you do.”

Cravath faced pressure to complete the deal quickly. J. Crew was just weeks away from announcing disappointing quarterly earnings and the potential buyers were concerned about volatile financial markets. Especially in a leveraged buyout like J. Crew, the “price depends on how much financing you can achieve and the cost of financing,” said Sobel (pictured right). “The act of lawyering is to design a program that works for the buyer and the seller.”

An agreement to sell J. Crew to private-equity firms TPG and Leonard Green was announced in late November 2010 at a 15% premium to the company’s stock price at the time. A shareholder lawsuit challenging the deal was settled earlier this year, with the buyers paying $16 million and agreeing to give shareholders additional protections to ensure that they received full value for their J. Crew shares.

This agreement extended the period after announcement for the company to seek other buyers, but no serious bidders emerged, said Dunn. Noting that Drexler was credited with much of J. Crew’s success over the past decade, Dunn added “it was important that the CEO agreed to remain open to working with other potential buyers.” Jackson noted, however, that the CEO’s early participation with TPG and Leonard Green may have troubling implications for the sale process. “It seems unlikely that other buyers would emerge after the CEO has decided on his preferred buyer,” Jackson (pictured left) said, concluding that it is “hard to know whether shareholders received full value when there was no competition among other potential acquirers.”

At the end of the discussion, Jackson asked the panelists about the legacy of the J. Crew deal. “Boards generally may not allow management to talk to potential private equity buyers at the initial stages of the transaction,” said Sobel. “But the pendulum may have swung too far … Management is a critical component of a deal.”

The event was sponsored by the Columbia Business and Law Association (CBLA) and organized by two first year law students, Angelica Agishi’14 and Tasiana Auguste’14. “We’re both interested in the arts and fashion,” said Agishi. “We were asking how you can get involved as a lawyer in something you love and what it’s like to be part of a deal.” CBLA, one of the largest student-run organizations at the Law School, is dedicated to the interaction between law and business.

Other events sponsored by CBLA this year included a panel discussion titled “The Attorney General/Federal Mortgage Settlement and Its Implications for Housing Finance” with Professor Jackson and James Millstein, CEO of Millstein & Co. LLC and former Chief Restructuring Officer at the Department of the Treasury. The moderator was James Tierney, Director of the National State Attorney General Program.