NEW YORK (Reuters Breakingviews) - The merger escape hatch may be about to open. President-elect Donald Trump’s unnerving tweets and fickle policy ideas add to the angst already undermining transactions like Abbott Laboratories’ $5.8 billion acquisition of medical-test maker Alere. Buyers seek solace in material adverse change, or MAC, clauses that offer the potential to wriggle out of a deal between signing and closing, but the provisions are almost never enforced in court. That may be about to change.
Surprises are inevitable, especially as the merger cycle turns downward. Abbott is crying MAC after Alere unexpectedly delayed filing financial statements, revealed billing-practice and bribery probes and revised its financial results. A massive hack of email users at Yahoo is shaking Verizon’s desire to complete its $4.8 billion takeover of the internet firm’s core business.
The current dealmaking climate is especially fraught, however. Looming but unspecified changes in financial regulation, the Supreme Court and trade, immigration, tax and foreign policies make the future performance of takeover targets even harder to predict. Tweeting kisses to Russian President Vladimir Putin or shaming companies into keeping factories in the United States could exacerbate the unease.
That suggests conditions are ripe for beefier MAC clauses. Buyers may get the gumption to balk at heretofore typical carve-outs, including certain changes in regulation, from the definition of a material adverse change, hoping to cover any Trump-era bombshells. They also could press harder to enforce the clauses. Judges are sounding more in the mood to oblige.
Delaware Supreme Court Justice Leo Strine ruled as a lower court judge in 2001 that poultry producer Tyson Foods couldn’t jilt IBP just because the meatpacker reported two bad quarters and a subsidiary was shaky. In a landmark opinion, he defined MACs as “unknown events that substantially threaten the overall earnings potential of the target in a durationally significant manner,” a standard so high it has never been met.
Often forgotten, though, is that Strine said he was “confessedly torn about the correct outcome.” He ruled against Tyson largely because it had signed the deal knowing of IBP’s cyclical business and troubled division, and was merely suffering from “buyer’s regret.” In other words, squashing a merger because of a MAC may not be as tough as it looks.
For example, two bad quarters might be far less “durationally significant” to a corporate buyer like Tyson than to, say, a private-equity firm that expects to recoup its investment within a few years. That’s especially true if the poor financial results were serious enough to jeopardize financing for the acquisition.
Courts also seem more willing to read MAC clauses broadly. In 2013, India’s Apollo Tyres argued it could walk away from its $2.5 billion deal to buy Cooper Tire and Rubber because labor troubles at a Chinese division prevented the target from delivering required financial information.
Cooper argued that a MAC carve-out shifted the risk of any labor unrest to Apollo. While conceding that was true, a Delaware judge said the escape clause still covered anything, presumably including a labor dispute, that could “reasonably be expected” to prevent Cooper from performing under the merger agreement. Besides, Cooper had breached its promise to sustain normal operations at the Chinese subsidiary. On that basis alone, the judge allowed Apollo to bail.
The judiciary aside, MAC clauses are most useful as leverage in renegotiating terms. Buyout firm Cerberus and a partner, Chatham Lodging Trusts, were able to shave nearly 10 percent off the $1.1 billion price for Innkeepers in 2011 by invoking a material adverse change. A similar tactic may play out in Verizon’s courtship of Yahoo.
The deal to watch, though, is Abbott and Alere. The $60 billion healthcare titan sued last month to kill the acquisition. Given Alere’s serious troubles, the buyer’s case comes off strong. That would bode well for chief executives and boards of directors nervous about what the new White House resident has in store. If nothing else, Trump could be remembered for helping make MACs great again.
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.