Are We Turning a Corner? Investors Are Betting on It

The first is the tried and true claim of a material adverse change, or MAC. To stand up to challenge, the MAC must be unexpected and have a significant long-term impact. If the MAC affects an industry as a whole, the buyer is generally out of luck. A fair number of MAC clauses also exclude pandemics. That makes it a good tool to renegotiate deals, but not to terminate them: The Delaware courts, where these cases are typically brought, have only once found in favor of the acquirer in a MAC claim.

The second is the requirement that the target company operated according to the ordinary course of business before being acquired. Nothing is ordinary now, of course — but this clause requires only that the target make its reasonable best efforts. Is abruptly and aggressively tapping credit lines the ordinary course of business? LVMH, which said it would run Tiffany “for centuries to come” was OK with it, but BorgWarner says that Delphi maxing out its credit line is a breach of the acquisition agreement. Courts have yet to judge these types of claims, but it hardly seems unreasonable for a company to raise cash to avoid bankruptcy.

The third way is through regulatory issues, but for this to work a buyer needs a regulator to play along. A deal to watch is Google’s acquisition of Fitbit. Google spends money like I use dental floss, but Fitbit’s shares are trading well below the agreed purchase price. If a regulator challenges the deal on antitrust or privacy grounds, that could give Google an out. There are also transactions subject to antitrust approval by China, like Mellanox-Nvidia and Cypress-Infineon. With geopolitical battles brewing over medical exports, national security and other issues, will Beijing block these transactions?

The easiest way out of a deal, it should be noted, is if both sides agree to scrap it, as with Woodward and Hexcel this week. Ultimately, though, acquirers with pending deals will mostly wait to see how bad things get before taking action. Then, deals with clear strategic significance will still get done. Deals that no longer make true economic sense are likely to collapse or be renegotiated, regardless of what the acquisition agreement says.

Article source: https://www.nytimes.com/2020/04/07/business/dealbook/coronavirus-peak-economy.html