The prolonged takeover battle for the GFI Group, a New York brokerage firm and clearinghouse, has been littered with missteps by Michael Gooch, its founder and executive chairman, raising the question of why supposedly intelligent leaders time and again do dumb things when they sell their companies.
From the beginning, there was a whiff that something was awry when GFI announced that it would be acquired for $4.55 a share by the CME Group, which operates the Chicago Mercantile Exchange, the Chicago Board of Trade and the New York Mercantile Exchange. At the same time, the companies announced that GFI’s wholesale brokerage and clearing businesses would be sold separately to GFI’s management, including Mr. Gooch, for $165 million in cash.
The side deal to Mr. Gooch and his partners is a clear conflict. Mr. Gooch and his team were benefiting from buying the brokerage business, but they also have a duty to represent GFI’s shareholders. The conflict is that Mr. Gooch might favor selling GFI to CME at a lower price to capture that business. This might be particularly the case because Mr. Gooch has a 38 percent stake in GFI, giving him substantial influence over the sale process.
Lawyers and courts have ways to deal with these issues, though. The acquisition of GFI was approved by a special committee of independent directors, and the deal was made contingent on approval by a majority of GFI’s shareholders other than Mr. Gooch.
Many deals have warts and are still good for shareholders. Given these protections, the deal with CME was met with some initial skepticism but not widespread condemnation, including from me.
Unfortunately for Mr. Gooch, simply announcing a deal does not mean getting it done. Instead, Mr. Gooch and GFI were thrust into “deal world” and the harsh scrutiny that comes with it.
First came the lawsuits that accused Mr. Gooch of self-dealing because of the brokerage sale.
Next, BGC Partners, which is run by Howard W. Lutnick, emerged on the scene, buying 13.4 percent of GFI’ s shares before announcing a hostile bid of $5.25 a share in cash.
This is where Mr. Gooch’s plan started to go off the rails.
The normal procedure is that the special committee considers the latest bid. Sure enough, the special committee considered the BGC deal and declared it to be superior.
But that was not the last word. CME had negotiated to match any bid made by BGC, and it did so. Then BGC raised its offer to $5.45 a share, and after some back and forth, BGC ended up at $6.10 a share, or about $778 million, and CME settled at $5.85 a share. Most of the money for CME’s revised offer came from an $89 million increase in the price that Mr. Gooch and his partners agreed to pay for the brokerage business, prompting the question of why they did not offer that much in the first place.
Answers perhaps came when BGC filed the documents for shareholder approval of its transaction. The company disclosed that Mr. Gooch had agreed to negotiate solely with CME, a dictate that the special committee followed. Indeed, BGC had approached GFI many times over the previous three years about an acquisition but was turned away.
Mr. Lutnick put it aptly, though self-interestedly, when he wrote that “throughout this process, BGC’s involvement has been the only reason GFI shareholders have been offered significantly greater value for their investment” because CME raised its bid only when BGC did “drastically,” illustrating that the original offer undervalued GFI.
Despite a seemingly flawed process, math aficionados will realize that BGC was still offering more money.
Here is where the situation truly went awry.
The GFI special committee voted to recommend the higher BGC bid, but the panel is only a subset of the full board, which overruled the special committee and recommended the CME bid. The special committee had two directors, who voted for the BGC deal. On the other side was Mr. Gooch and his partner, Colin Heffron, who backed the CME offer. The tiebreaker was another supposedly independent director, Marisa Cassoni, who quit the special committee in December, citing “personal reasons.” (She was struck by a bus in London, according to a report in The New York Observer.) She voted to support the CME bid. This meant that three members on the five-member board overruled the two-member special committee.
The three directors’ reasoning was that BGC’s offer was speculative and subject to significant conditions. Initially, the BGC offer did have copious conditions. But Mr. Lutnick refined his bid and reduced the conditions to a handful intended mainly to ensure that he controlled the company if his deal closed. And in December, Ms. Cassoni, before she stepped down from the special committee, supported the BGC deal with worse conditions. Indeed, in those earlier votes, Mr. Gooch and Mr. Heffron had abstained.
And so initial skepticism blossomed into opposition. Institutional Shareholder Services, the advisory group, recommended that shareholders reject the deal, asserting that shareholders essentially had nothing to lose by holding out for an “economically superior offer.”
Facing defeat and grasping at straws, Mr. Gooch even invoked his former wife. “My ex-wife, Diane Gooch, is a significant stockholder of GFI,” he wrote in a letter to shareholders, “and is also willing to take a reduced sales price for her more than 15 million shares.” He continued that “her vote of confidence in the CME merger” should lead other shareholders to support the bid.
Predictably, her endorsement failed, and GFI shareholders rejected the CME deal last week. In response, BGC stated that “we are prepared to move quickly to complete this transaction.” (Its offer technically expired at 5 p.m. on Tuesday, but BGC could decide to extend it.)
You would expect that this would chasten Mr. Gooch and his board. But instead, GFI issued a statement that it would “explore strategic alternatives with any and all interested parties to maximize shareholder value for all shareholders. These alternatives could include, among others, joint ventures, mergers and/or acquisitions.”
Seriously?
Mr. Gooch has built this business since he founded it in 1987, an admirable task. There is no doubt that having built it, Mr. Gooch wants to sell the business as he wishes.
But that ignores reality. Corporate executives and even boards lose control of their companies once they start down the sale path. Once a decision to sell has been made, the intricate system of law takes over, dictating that boards are in charge of the process, particularly the independent directors.
Mr. Gooch doesn’t seem to have realized this. A process that initially seemed to be going right has been exposed by the harsh light of the deal world to be less than ideal. We await the GFI board’s next steps, but assuming BGC does not go away, the Delaware courts are not likely to tolerate what is happening. Mr. Gooch may try to block a transaction, but the board has a general duty to shareholders, and it is hard not to see that it requires the directors to revisit the BGC offer, if it is still on the table.
As part of the CME deal, Mr. Gooch agreed that he would not sell his interest for a year. This creates a roadblock, but one that could be overcome by perhaps paying CME to let Mr. Gooch out of the arrangement. This would take money out of shareholders’ pockets, but at this point, the price must be paid.
It’s a lesson for everyone. Corporate executives should regard the GFI mess as a cautionary tale about the limits of their supremacy.