Is Paulson’s superior offer for Steinway pitch perfect or will shareholders continue to sing the same tune?

August 19, 2013

L-378667_RTR23GK8A lot of recent discussion among M&A attorneys has centered around the trend of shareholders suing to block public mergers or acquisitions over $100 million. Well, the latest development in the acquisition of famed musical instrument manufacturer Steinway Musical Instruments Inc. may provide new perspective on some of these shareholder claims.

Following private equity firm Kohlberg & Company’s $35 per share acquisition offer for Steinway on June 30, the instrument maker received a superior bid from hedge fund Paulson & Co on August 14.  This superior offer can either be seen as undermining shareholders’ complaints about the Kohlberg acquisition or validating them — or maybe both.

Shareholder suits

Within days after Steinway and Kohlberg announced the proposed deal, a number of Steinway’s shareholders filed lawsuits in the Delaware Chancery Court seeking to block the $438 million Kohlberg acquisition. The Steinway plaintiffs asserted that Steinway’s directors had breached their fiduciary duties by engaging in a flawed process and agreeing to an inadequate purchase price that undervalued the company.

Steinway shareholders also took issue with certain deal provisions, alleging, among other things, that the 45 day go-shop period was too restrictive because it allowed Kohlberg to match any topping offer and required Steinway to pay a termination fee.

Despite the Steinway shareholders’ various claims, the Kohlberg deal terms were seemingly not as “onerous and preclusive” as their complaints allege: Steinway received a $40 per share alternative offer from Paulson during the go-shop period that valued the company at $512 million. Steinway’s board determined that the Paulson offer was superior to Kohlberg’s and notified Kohlberg.

After Kohlberg chose not to exercise its matching rights to make an offer greater than Paulson’s, Steinway accepted Paulson’s higher offer and terminated the Kohlberg agreement. Steinway announced that it will pay a $6.7 million termination fee to Kohlberg to enter into the Paulson merger agreement.

The fact that Steinway shareholders will receive a whopping $5 per-share more consideration than the original offer due to a superior proposal suggests that the go-shop provisions were not as restraining as the Steinway shareholders allege. In reality, it was quite the opposite — the go-shop provisions resulted in a much higher bid for the Steinway shareholders. This may be good news for would-be acquirers. Competing, superior bids like the Paulson bid suggests that at least in this case, the shareholder lawsuit was, in part, somewhat of a mechanical, standardized action with little substance.

On the other hand, the alternative offer for Steinway also added some credibility to Steinway shareholders’ claims that the original Kohlberg offer was inadequate and undervalued the company.  Maybe these shareholders have the right to say “we told you so” after all.

Of course, any celebration by Steinway’s board in the face of the competing offer will likely be short-lived.  If current practice is any indication, odds are that a new wave of Steinway shareholder lawsuits will emerge, claiming that Paulson’s $40 per share offer undervalues the company as well before any deal is finalized — keeping attorneys involved with the deal busy for many more months to come.