BofA, Merrill Drama Revives Talk Of MAC Clauses
11 Juni 2009 - 10:37PM
Dow Jones News
Testimony by Bank of America Corp. (BAC) Chief Executive Ken
Lewis about threats to scuttle the Merrill Lynch deal has again
focused attention on "material adverse change" clauses in merger
agreements.
The use of these legal loopholes, known as MAC clauses, can
allow would-be acquirers to get out of a transaction if they want
out. In fact, they've played a part in most of the failed deals of
the past two years, as the financial crisis punished many companies
to the point they were no longer the attractive targets their
buyers had thought. Some of the buyers, though, had to pay a steep
price to unwind the deals.
For instance, Finish Line Inc. (FINL) got out of its acquisition
of rival shoe seller Genesco Inc. (GCO) by paying $175 million and
12% of its stock.
Penn National Gaming Inc.'s (PENN) private-equity suitors wound
up settling, backing out of the deal but paying even more than the
pact's breakup fee would otherwise have entitled Penn. Conversely,
SLM Corp.'s (SLM) failed leveraged buyout saw the student-loan
company receive no cash, but resulted in SLM securing a large and
much-needed line of credit.
"We've seen an obvious uptick since the economic crisis in
people invoking the MAC clause," said Jim Smith, a partner with
Dewey & LeBoeuf who co-chairs the firm's securities litigation
group. "This is an escape hatch, theoretically."
He pointed out that MAC clauses have picked up since the big
M&A boom that peaked in 2007. Those that bought at the tail end
of that boom use MACs to get out of paying high breakup fees,
though they still pay a steep price to unwind the deals.
"When things were go-go with a lot of private-equity deals,
there was a lot less need for MACs," he said. "Then everything hit
the wall, and suddenly people with extreme buyers' remorse were
relying on them more frequently than they otherwise would."
Lewis, echoing earlier statements, said during congressional
testimony that BofA considered invoking the MAC clause because of
staggering, unforeseen losses at Merrill. BofA ultimately
capitulated to government pressure, and with some new
government-backed financial guarantees, went ahead with the
merger.
As in many matters, efforts to terminate mergers all come down
to the details. And there are many unusual aspects to Bank of
America's acquisition of Merrill Lynch. For one thing, the deal
finalized under government pressure; moreover, unlike most
acquisitions, this one had no breakup fee written into the
deal.
In the case of the Merrill purchase, the MAC clause was open to
loose interpretation because it stipulated that factors like
general economic downturns, in and of themselves, don't constitute
a MAC. Therefore, BofA would have had to argue that Merrill did
something specifically to itself that caused its results to be
worse than the credit crisis alone would have made them.
Presumably, Merrill and the government would have taken the
opposite stance.
Few, if any, of the recent MAC-related merger bailouts actually
were decided by the courts, and many even settled before the legal
wars were fought.
Lewis suggested in his testimony that, while a legal victory
would have been a win, a loss may have seen a court foist upon BofA
a ruined Merrill that collapsed into bankruptcy after BofA backed
away from the deal.
-By Joe Bel Bruno, Dow Jones Newswires; 201-938-4047;
joe.belbruno@dowjones.com