Maybe Jorge Cosmen, deputy chairman of National Express, should have waved this paper in front of the board of the UK transport group.
Transactions involving companies sharing board members perform significantly better than other deals, according to a study published earlier this year by researchers at the University of North Carolina.
This should not be a shock. Restrictions on non-public information aside, the residual knowledge of a person familiar with the innards of a target is a clear advantage for a buyer.
And while Mr Cosmen and CVC’s spurned bid for the bus and rail operator was not a strategic transaction, there are rather obvious comparisons to make with a buy out group teaming up with a board member of a targeted company – even in an arms length transaction.
When connected firms collide, Ye Kai and Merih Sevilir argue in the abstract to the research paper, they pay significantly lower takeover premiums, lower fees to investment banks, and post-transaction performance is higher.
[They ]pay significantly lower takeover premiums in connected transactions, consistent with the view that board connections help acquirers avoid overpaying for target firms. In addition, financial advisory fees paid to investment banks are lower in connected acquisitions. Board connections are also positively related to the operating performance of the new firm and negatively related to the probability of forced CEO turnover, suggesting that connected transactions generate better performance in the long run.
For CVC, a private equity house known for being especially diligent in its due diligence, the tie up with Cosmen would have an obvious appeal.
But the story, as we know, turned sour. The CVC-Cosmen family consortium pulled out of the deal at the eleventh hour, something it had done in 2005 in its bid for Sainsbury.
While one can only speculate on the conversations Mr Cosmen had with his partners, such informational advantages are a double-edged sword, even if National Express had to open its books to CVC anyway. At least in this instance Mr Cosmen could blame CVC for the deal break and retain his seat on the board.
And having a boardroom buddies has never stopped PE buyers leveraging companies to within an inch of their life, thus threatening any future performance.
Board members looking to engage flaky private equity firms should choose their words carefully.
In other news, on Tuesday morning in London Cosmen disclosed he had raised his stake in National Express to 19.7 per cent ahead of Friday’s EGM rights issue showdown.
Related links:
Board Connections and M&A – Law Professors M&A blog
Cosmens raise National Express stake – FT
Lina Saigol: Tiring of fast and loose ploy
Deal break, National Express edition – FT Alphaville