In the spring of 2010, Vulcan Materials Inc. CEO Don James was seriously studying the next big deal—a merger by the Birmingham-based company with its next largest competitor, Raleigh, N.C.-based Martin Marietta Materials Inc., number two in the business of mining and processing construction materials, mainly rock for roads.
James’ last big deal was still the subject of much shareholder grumbling—the $4.6 billion acquisition of Florida Rock Industries Inc. Completed in 2007 at the height of a construction boom, it came just in time for the 2008 recession and construction cave-in.
Vulcan’s net earnings plunged from a near historic high of $450.9 million in 2007, then bottomed with losses of $96.5 million in 2010 and $70.8 million in 2011. The dividend has been slashed by 58.7 percent of its 2007 level.
James had approached Martin Marietta several times during the 2000s. It was a natural combination, assembling hard-to-license rock quarries across the country into a U.S. market share of about 15 percent.
In spite of the logic, a deal would require some strategic calculations—mainly, losses from antitrust divestitures and gains from synergies. And it would require the awkward mating dance of two cocksure CEOs determined to keep their jobs and hometown headquarters.
The first CEO James vied with was Steve Zelnak. James and Zelnak “were not pals, but wary rivals with an awkward relationship, ” according to the judge who was soon to reprise the history, giving an unusually detailed look inside merger negotiations. According to court documents, when Zelnak brought a young Ward Nye aboard as COO in 2006, Nye was even cooler to the idea of a merger, since it would scotch his chance at becoming CEO. When he did become CEO, in 2010, he warmed again to James’ overtures. They began meeting in earnest again in the spring of 2010, with Nye thinking that chances were better than ever for his supplanting the older James (61 years old, 13 years at the helm) as CEO.
The two companies signed a two-year confidentiality agreement and began sharing strategic, proprietary information. It was a new level of seriousness, involving two years of swapping key information and dickering over the analysis.
But it was also two years of grinding recession, and during that time the table tilted in Martin Marietta’s favor. From June 2010 to June 2011, Vulcan’s stock declined 22 percent while Martin Marietta’s gained 9 percent. Instead of Vulcan being the dominant player in a stock-for-stock merger, it was Martin Marietta that would be the acquirer paying a premium.
After almost two years of negotiations, on June 27, 2011, James met in the Atlanta airport with Nye and told him to forget it—at least until the market leveled out.
Even before the meeting, Nye and his management had begun planning for their alternative: a hostile bid.
And when Martin Marietta launched its bid, it came on like gangbusters. December 31, Nye sent what is called a bear hug letter to the Vulcan board—a letter making an unsolicited exchange offer. And the same day, the company announced a proxy bid and filed forms with the SEC. The S-4 form was heavily slanted in its description of James and Vulcan management’s performance and larded with details—also slanted—gathered during negotiations with Vulcan.
Much of this information was still covered by the two-year nondisclosure agreement with Vulcan, but Martin Marietta crafted a special Catch-22. They had to disclose this confidential information, because the SEC filings, triggered by their hostile bid, required it.
Martin Marietta preempted complaints by Vulcan by rushing to file as plaintiffs against Vulcan in the most prestigious court of corporate law—the Delaware Chancery Court. Martin Marietta asked for a declaratory judgment that it could proceed with a hostile bid, owing to the sanctity of shareholder rights and the meritocracy of the marketplace. They were more successful in running their business, they argued, and the shareholders should be allowed to vote.
Rather than ask for compensation for damages—usually the only remedy in a case of tort law—Vulcan asked the judge to intervene in the hostile bid. To bust up Martin Marietta’s play in the free market seemed punitive, a remedy usually excluded in cases of contract law, noted columnists with the New York Times’ Dealbook and the Wall Street Journal’s Dealpolitik.
Attracting media attention, at the center of the case was the most respected and influential judge in U.S. business law, Delaware Court of Chancery Chancellor Leo Strine.
“Pretty much anything Strine does is significant, ” says University of Alabama business law professor Andrew Morris. “He’s an important judge, and Delaware is the leading jurisdiction in corporate law. For business lawyers, he’s as famous as anybody on the Supreme Court, and they probably think better of him.”
After a month of hearing evidence and two weeks of opinion writing, on May 7, Strine dropped a 10-pound hammer on Martin Marietta—a 139-page ruling that lashed Martin Marietta’s transgressions in painful particulars.
“It is a detailed finding that lays out exactly the behavior of Martin Marrietta, ” says Morris. “You can sit down with this opinion and make a checklist of the things not to do.”
Check: Park your CEO ego.
“I don’t buy into Martin Marietta’s self-delusions, ” Strine wrote. “The reality is that Nye emerges in the record as being preoccupied with his own future as a public company CEO as much as, if not more than, James. Nye did not want to be demoted, even during a transition period, and evinced a willingness to forego a 20 percent premium for Martin Marietta stockholders in the exchange ratio to ensure he was slotted as CEO right away.”
Two weeks later, hedge fund manager David Einhorn, a legendary mover of stocks, told the Ira Sohn Conference in New York he recommended shorting Martin Marietta, whose stock then plunged 6.8 percent. Nye, said Einhorn, was a “megalomaniac.”
“Petty” too, Strine might have added. Part of Nye’s reasoning why the headquarters of the combined companies should be in Raleigh and not Birmingham, wrote Strine, was Nye’s assertion “that an aggregate company should be closer to ACC basketball than SEC football.”
Check: Don’t throw a rock and hide your hand.
“Martin Marietta has cloaked much of its decision-making process in secrecy, ” wrote Strine. “At trial, Nye would not answer key questions about what informed his or his board’s decisions about key issues because he said he could not do so without disclosing privileged communications from counsel.”
Check: Don’t spew secrets in memos and emails.
Messages among Martin Marietta management about a crucial meeting on March 8, 2011 put the lie to the company’s claim that it reached its assessment of synergies independently. “The meeting was lengthy, and Vulcan shared specific information about headcount, revenue, and profit centers that was not publicly available, ” wrote Strine. Martin Marietta gobbled up details, as well, from Vulcan’s new enterprise resource planning (ERP)—expensive system software that tracks like a colonoscope the guts of all operations, a big item Martin Marietta didn’t have and would save them tons in a merger.
Martin Marietta’s CFO, Anne Lloyd, “left the meeting pumped up, ” said Strine. “Some of that information Lloyd found ‘stunning, ’ specifically the function-by-function and facility-by-facility information she had received about employee headcount and numbers.” She and Nye agreed they could jack up the synergies from $200 million to $300 million.
Check: Keep a leash on your Mad Men.
“It is plain that the public relations advisors were given a blow-by-blow of Nye’s and Lloyd’s view of the negotiations with Vulcan and access to other Evaluation Material, ” Strine found, “and they advised Martin Marietta management how the process and substance of information sharing and negotiation could be translated into a public communications strategy that would exert pressure on Vulcan to accept an unsolicited bid from Martin Marietta.”
Pumped by too many episodes of “Mad Men, ” maybe, it was two of the top financial communications firms on Madison Avenue—Kekst and Company and Joele Frank, Wilkinson Brimmer Katcher—who advised Martin Marietta to use its disclosures to the SEC to get the jump on Vulcan and selectively use confidential information as the first shot in a propaganda campaign. In that campaign, Strine wrote, “Martin Marietta has filled a variety of push pieces, investor calls, and entreaties to journalists with a dog’s breakfast of Transaction Information and Evaluation Material.”
Check: Don’t tee off Judge Strine.
The bottom line was that—although conservative and reluctant to get in the middle of a marketplace event—Martin Marietta’s breach of its confidentiality agreement was so extravagant that Strine had no problem ordering Martin Marietta to stop all action in pursuit of a takeover for a period of four months.
Four months seems like a reasonably short period of time, but it effectively puts any takeover of Vulcan by Martin Marietta down the road to 2014. They were blocked from trying to seat four board members at this year’s annual meeting on June 1. And since Vulcan has a staggered election of board members, it will take at least until June 1, 2014 for Martin Marietta to seat a majority of the board.
Chris McFadyen is the editorial director of Business Alabama.
By Chris McFadyen