How the ETE-Williams tie-up came undone

Although many blockbuster mergers eventually end up in tatters, there are a few fleeting weeks or even months of shared, unreserved joy at the beginning for both buyer and seller.

The target company is thrilled to be paid a premium valuation. The buyer is pumped up about new markets and synergies. Achieving those aspirations will be hard work but there should be a sense of accomplishment and optimism over coming to an agreement.

Alas, little of this joint exhilaration could be found when Energy Transfer Equity and Williams Companies, the US energy pipeline titans, came together in a $33bn deal last September. It is perhaps karmic that the death of the deal — one of the most spectacular M&A implosions — was over a tax technicality decided in a Delaware court at the end of June. The extraordinary complexity of the merger proved its downfall. Its untidy origins should have given pause to the companies and their technical experts. But it seems they were so obsessed with the craft of building a Frankenstein that they did not stop to consider whether the monster was a sensible idea.

The transaction shows how a public company can be sold over the objections of its chief executive. When the board of Williams approved its sale to ETE, not only was the vote contested (it passed just 8-5) but Alan Armstrong, the head of Williams, was a “nay”. In fact, when the board initially voted, a majority sided with Mr Armstrong against the deal. They appear to have changed their mind over a dinner — that chicken must have been spicy.

Williams had two activists on its board who were itching to dump Mr Armstrong, whom they believed had mismanaged the company. Other board members acknowledged they may have been dumped had a deal not been reached. The ETE deal also came with $6bn of cash and a stock swap that proved too tempting for a majority to dismiss.

Despite the rancour on the Williams side that day, the ETE side was jubilant. Kelcy Warren, its founder, had built a multibillion-dollar empire from a string of acquisitions and Williams was to be the final piece of the puzzle. ETE shares jumped by a third in the days after the news broke. But ETE’s anguish was coming.

Pipeline operators such as ETE and Williams think of themselves as toll collectors and had, at the time of the deal, mostly weathered the collapse in commodity prices. But, eventually, their fortunes sagged and a massive, debt-laden acquisition did not look so smart. By this point, tension had flared on the ETE side. Its since-deposed finance chief had privately lobbied Williams shareholders to vote down the deal. In the ensuing litigation, Williams accused ETE and its lawyers of slow-walking necessary regulatory filings to avoid closing before a mandated drop-dead date. The companies also disclosed that an initial $2bn annual synergy estimate had fallen to $150m.

Buyers with second thoughts have always tried to wiggle out of deals but M&A lawyers have, for the large part, made that difficult. Fortuitously for ETE, the Williams agreement also required tax lawyers.

Pipeline companies are strange brew of traditional corporations and partnerships that are not easily slapped together. For this reason — given the varied structures in the Williams-ETE deal and the cash, stock, dividends and assets changing hands — a third company was set up to facilitate exchanges between the two groups.

When the deal was announced, all the law firms said the sausage-making would be tax-free and the deal made that a closing condition. By April, ETE’s lawyer had a change of heart, giving Mr Warren an escape hatch.

Williams filed suit in Delaware, alleging that the changed tax opinion was a sham implemented at the behest of Mr Warren. The judge avoided the merits of the tax point and found that the decision of ETE’s lawyer was arrived at in good faith. Lacking the tax opinion, the deal was terminated at the end of June.

The ruling is being appealed and there is still logic to the deal. As one person close to the talks said: “Pipeline deals are all about maps. And the maps here still make sense”. Six Williams directors have just quit the board and both companies are reeling from the oil and gas bust. Yet they could, one day, join forces. At that point, one hopes the companies and their advisers, clever deal-structuring aside, will have a little more substantive enthusiasm.

sujeet.indap@ft.com