Faculty Scholarship Digest
Dale A. Oesterle
Dale A. Oesterle, Are Leveraged Buyouts a Form of Corporate Arbitrage, 3 BROOK. J. OF FINANCIAL & COMM. L. 53 (2008).
Dale’s starting point in this article is that the boom, following the passage of the Sarbanes-Oxley Act of 2002, in companies being “taken private” through purchase by buyout funds was driven in part by a superior rate of return that buyout funds were able to achieve with their acquisitions. The article suggests that much of that superiority is attributable to the freedom private groups have to tailor boards of directors to change the management structures and styles of the companies from methods that are virtually required, de jure or de facto, for public companies and thereby to maximize returns. Before turning to the specifics of those structures and styles, the article gives an overview of different kinds of private equity funds (buyout, venture capital, and hedge), the nature of leveraged buyouts, and the less than ideal evidence about the success of these ventures.
Turning to the advantages of private structuring, Dale points out that the reduced number of shareholders facilitates shareholder monitoring of managers, more closely aligns managerial and shareholder interests, and allows the new ownership to force rapid change in managerial strategies. The article identifies those strategies, particularly those that depart from the approaches of publicly traded companies. For example, buyout funds construct very different boards of directors. Rejecting the traditional placement of company managers on the board, or the current “good governance” approach of independent, outside directors, boards are largely populated with individuals from the buyout firm, people, in the parlance popularized by Warren Buffett, with “skin in the game.” Buyout firms also drive their acquisitions to use much more leverage than is considered acceptable in public companies, with the result that the need to pay down debt makes cash flow such firms’ top priority.
The article also describes the practice of buyout firms to have outside auditors report directly to the buyout fund, rather than to the (now private) company itself. This last difference results in auditors reporting to the actual owners of the company (rather than the managers hired by passive investors), thereby eliminating a critical conflict issue that plagues corporate governance in publicly traded companies. The article explores the effects of these differences, and discusses their implications for publicly traded companies, including adaptions that might be useful in the public company context.
Dale Oesterle, State and Local Government Subsidies for Businesses: A Siren’s Trap, 6 Ohio St. Entrepreneurial Bus. L.J. 491 (2011).
In this essay, Dale challenges the wisdom of state and local tax breaks and subsidies for local businesses designed to attract and retain the businesses within a particular state or county. Though such efforts have long been politically popular, Dale describes economists as a “new class of doubters” of their wisdom. The article situates the debate over the wisdom of these incentives for businesses in the broader debate over the economic value of government spending, specifically the extent to which a dollar of government spending stimulates economic growth: does it raise gross domestic product by fifty cents? A dollar? Two dollars? The article describes the traditional view as the “government should spend a dollar only if it can expect to increase gross domestic product . . . by more than one dollar.”
The true value of this so-called “Keynesian Multiplier” has long been debated by theoretical economists, but has been notoriously difficult to measure. Dale cites recent empirical work by Professor Robert J. Baro, however, suggesting that the multiplier is very small, in other words that one dollar in government spending usually results in much less than one dollar in economic growth. If Baro’s evidence holds up to scrutiny, the article suggests, “there should be a very heavy—almost conclusive----presumption against state and local government subsidies for businesses, large and small.” The need for such a presumption is particularly strong, Dale argues, because both politicians and business leaders benefit greatly from such subsidies described as “job creating,” even if they are in fact quite injurious to the local economy.
Dale Arthur Oesterle, The Collapse of Fannie Mae and Freddie Mac: Victims or Villains?, 5 ENTREPRENEURIAL BUS. L. J. 733 (2010).
This article traces the history of the Federal National Mortgage Association (Fannie Mae) and its little brother the Federal Home Loan Mortgage Corporation (Freddie Mac), with an eye toward assessing what went wrong, their role in the housing meltdown, what should be done now, and drawing lessons for other instances of government regulation. The article tells the story of an entity with modest beginnings that, through a series of regulatory shifts, endured mission creep and power expansion, as it cruised along a border between not technically being government guaranteed (and hence not subjected to tighter limitations) and being assumed by the market to have government backing (and hence receive significant market advantages in comparison to its private competitors)—not just too big to fail, but too full-faith and credited to fail. The article is critical of both the limited oversight along the way (the regulatory oversight agency was subject to capture by Fannie) and to the Treasury Department’s decisions about whom to save and whom to allow to suffer crippling losses in the course of the ultimate trillion dollar government takeover.
On the question whether Freddie and Fannie were the victim or a primary cause of the mortgage crisis that triggered the recession, the article concludes that “Fannie and Freddie were the villains.” Dale traces the manner in which Community Reinvestment Act loans with significantly higher risk to support affordable housing targets infected all underwriting standards, ultimately lowering standards for most home lending, not just community reinvestment act loans. The article points to the combination of political and economic forces that brought this about, ultimately describing those problems as endemic to government-sponsored entities, such as Fannie Mae. Therefore, Dale concludes, the best long term resolution is to take away any role for Fannie and Freddie in the secondary mortgage market and eliminate any hint of government guarantees of its obligations; in the article’s words “return to 1938, with a caveat.” Dale argues that experience in other countries demonstrates that United States home ownership rates can be achieved without government guarantees, and the true beneficiaries of such guarantees “are Wall Street financiers who benefit from the trading activity by under-priced asset insurance.” Dale suggests the pathway that could be followed for this transition and argues that in future efforts to subsidize distressed neighborhoods or low-income wage earners, transparency and caps are essential, so that the subsidy effects do not leak out and affect risk decisions in the larger market.
Dale A. Oesterle, THE LAW OF MERGERS AND ACQUISITIONS (4th ed.) (West 2012).
The first edition of Dale’s Mergers and Acquisitions casebook, published in 1991, was a path-breaking early entrant in an emerging field. This fourth edition, in a rapidly changing field, not surprisingly contains a great deal of new material. What it retains is Dale’s distinctive style and approach. Corporate acquisitions, Dale notes, “are some of the most heavily regulated events in all of American law,” and they bring to bear myriad disparate bodies of law: contracts, corporate, securities, tax, antitrust, labor, ERISA, accounting rules, and (sometimes) environmental, products liability, debtor-creditor, bankruptcy, and other regulatory subjects. So, rather than a distinct doctrinal area, Mergers and Acquisitions focuses on a “deal” and the relevant segments of multiple areas of doctrine. Unlike a majority of doctrinal courses, Mergers and Acquisitions also has a transactional focus rather than a litigation focus.
Dale brings his wide-ranging expertise, persistent focus on current issues, and sheer joy for the subject to these updated materials that have benefitted from his two decades of teaching Mergers and Acquisitions. In addition to the casebook, Dale wrote a teacher’s manual with an on-line version updated with new events in Mergers and Acquisitions and power point slides for the class, with diagrams on the cases in the casebook.