Jilted M&A target opens books on data room angst
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
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