MAC Attack

Ever since 9/11, there has been a growing list of transactions that have been scuppered or at least radically reconfigured following the use of the MAC, ranging from Apax Partners' withdrawal from the Mannesmann Plastics Machinery transaction a year ago (the business was finally acquired by KKR along with Demag Cranes this summer) to Diageo's sale of Burger King to a consortium led by Texas Pacific Group. In this latter case the acquisition is now inching forward on revised terms: what had been a $2.26bn bid is now looking like a $1.6bn deal, with Diageo reportedly being given an equity sweetener to counter the small matter of cutting the price by $600m.

The new willingness to invoke the clause in order to make a last minute withdrawal from a transaction has much to do with continued economic uncertainty. In other words, the clause has been used in the way it was meant to ? to call a halt to an acquisition process when the view of the target business initially formed by the potential buyer turned out to be significantly wide of the mark, for whatever reason.

Tough calls
MACs feature prominently in acquisition agreements, where they typically appear first as a representation and warranty ensuring that the business is as it was when the buyer last saw it, and then again as a general catch-all condition as part of the completion arrangements. MAC clauses are also built into associated debt documents, and they can appear in the bankers' initial offer letter as well, describing the circumstances in which the bank is prepared to underwrite and syndicate the facilities to be provided.

The wording itself often appears straightforward: the clause usually stipulates that a transaction agreement is void in the event of a ?materially adverse change in the target's business, operation, prospects, assets or condition (financial or otherwise), or any event or circumstance that may result in such a change.?

There are in fact many subtle variations on this construction, mainly designed to limit its scope, but the fact remains that the language itself is deliberately simple in order to encompass a wide range of situations. As a result the language can be keenly negotiated between the vendor's and buyer's lawyers. Even then, whether an adverse change is actually adverse enough to warrant withdrawal from a deal on the basis of a MAC is a tough call, not only because interpreting the wording unambiguously is no mean feat, but also because of the politics that typically prevail in the transaction process.

The latter factor is often crucial: because the MAC clause can have the effect of a nuclear weapon on a deal, most practitioners are reluctant to resort to it for fear that they might be seen as going back on their word. For instance, only in extreme circumstances will bankers unilaterally pull a deal citing an adverse change because they worry about what this will do to their relationship with the equity provider.

However, in the same way that bankers worry about their relationships with financial sponsors, the sponsors are eager not to upset the vendor of the target company and its management team either. So if an issue arises during the final stages of the due diligence process that makes a sponsor change his mind, for instance where recent trading turns out to have taken a significant turn for the worse, he will often put pressure on the financiers to declare their unhappiness with this development. He will then go to the vendor and state that the bankers are backing off, claiming a material adverse change. The bankers don't usually have the same relationship with either the vendor or the managers, but want to keep working with the sponsor and see an opportunity of doing them a favour. The sponsor can simply blame the banks and withdraw or renegotiate, with its reputation intact.

Although things can get ugly when MACs are involved, there has been little precedence in Europe yet of buyers and sellers fighting over them in court rooms, even in reportedly highlycharged falling-outs. One such case was last year's spat between WH Smith and ABN Amro Private Equity, when the private equity firm declared, after entering into exclusive negotiations over buying a business off the stationer, that the asking price was in fact too high. The deal never happened and the vendor didn't hesitate to state how bitter a taste was left in its mouth.

Even if it's debatable whether disputes originating from MAC clauses will become more public, it's safe to assume that more deals are going to change shape from opening to close as long as completion continues to be a protracted process and business uncertainty endures. And the MAC will be stuck in the middle of many of these.