Jilted M&A target opens books on data room angst

Vista Outdoor

30/07/2024 13:00

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
    By Jeffrey Goldfarb
       NEW YORK, July 29 (Reuters Breakingviews) - Drilling
deeply is an essential part of the oil business, even for
Phillips 66  PSX.N , which refines and transports the fossil
fuel. In the case of its M&A due diligence, a jilted takeover
target accuses the $60 billion company of going too far. It is
now due in court over allegations of stealing trade secrets
during a lengthy probe of closely held Propel Fuels. Even before
money changes hands, dealmaking is fraught with risk.
    Phillips 66, which denies the charges, lost its attempt to
have the case thrown out, clearing the way for a trial to start
next month. It stands accused of gleaning precious intelligence
from nearly a year of due diligence on Propel and its unique
plant-based diesel, then rolling out a competing product
after abandoning a plan to buy the company at the eleventh hour.
The stakes are sizeable: Propel is seeking $1 billion, equal to
about 8% of the EBITDA Phillips 66 generated last year. And such
penalties can be tripled in California.
    Propel’s lawsuit sheds light on the angst that afflicts
corporate sellers over granting access to the hallowed data room
to review confidential documents. It’s an essential step,
typically a necessary prelude to locking in financing and other
deal terms.
    Refusing entry and haggling over what’s disclosed can be a
negotiating ploy. When ammunition and camping gear maker Vista
Outdoor  VSTO.N  spurned a $3 billion offer from MNC Capital,
both sides squabbled over whether sufficient access had been
granted for the buyout shop to secure the necessary funds.
Sometimes hesitance reflects justifiable paranoia. Technology
startups may be giddy when deep-pocketed industry titans like
Apple come knocking, but also must be careful to avoid sharing
too much about their proprietary advancements.
    Acquisitive chief executives also have plenty to lose from
insufficient vetting. HP’s $11 billion takeover of Autonomy and
Quaker Oats’ nearly $2 billion acquisition of Snapple are two
particularly notorious case studies. Deal practitioners say
due-diligence-based assessments of integration, revenue
synergies and employee retention are prone to the greatest
inaccuracies, according to a survey by consultancy Bain.
    Confidentiality agreements are supposed to preserve the
sanctity of the process. Even so, Propel probably acquiesced too
much, including by terminating its normal oil supply contracts
on what it says was a promise from Phillips 66 to handle the
orders instead. Regardless of what happens in the courtroom, the
lawsuit provides an important reminder of the valuable contents
inside a data room.

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    CONTEXT NEWS
    A California judge on July 17 rejected arguments by oil
producer Phillips 66 that former takeover target Propel Fuels
waited too long to file charges of misappropriation of trade
secrets, clearing the way for a trial to start on Aug. 26.
    Propel, which developed and sells plant-based diesel fuel,
is seeking $1 billion in damages, which can be tripled under
California law, over allegations that Phillips 66 used
confidential business methods and strategies gathered during the
due diligence it was conducting for a planned acquisition in
2018. Propel contends that Phillips 66 abruptly pulled out of
the deal and started its own competing business soon after.
    Phillips 66 denies Propel’s allegations.

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 (Editing by Jonathan Guilford and Pranav Kiran)
 ((For previous columns by the author, Reuters customers can
click on  GOLDFARB/ 
jeffrey.goldfarb@thomsonreuters.com))