No Exit

MAC clauses are supposed to protect buyers, but in a seller's market the burden may fall to the buyer's CFO.

The buyer’s CFO should also insist that MAC clauses protect against specific events that, while not appearing “material” to a judge considering the totality of the target company, would be significant enough to make the deal uneconomical. And that requires the buying CFO to play soothsayer to a certain extent.

In a 2003 deal involving the sale of Pittsburgh-based utility DQE Inc.’s AquaSource subsidiary to Bryn Mawr, Pennsylvania-based Aqua America Inc., Aqua America insisted on language in the MAC that would guarantee compliance with key performance metrics during the period between signing and closing. “The purpose of the MAC clause is to protect, during the holding period, that shareholder value you expect the acquisition to generate,” says CFO Dave Smeltzer.

Despite initial resistance, DQE agreed to the terms of the MAC, and the deal went forward. That gave Aqua America executives some measure of protection while waiting for regulatory clearance, a process that, in the merger of public utilities, can take up to a year. The lesson, says Smeltzer, is that buyers need to be ready to draw a line around certain potential events and occurrences that could turn a good deal into a bad one. “If they really want to sell, and they understand that this is a dealbreaker for us, the deal will get done,” he says.

Making It Work

DQE’s resistance, however, is somewhat understandable: it was one of the few companies to actually use a MAC to bust a deal. When the company agreed to merge with Maryland-based Allegheny Energy Inc. in 1997, part of the contract included a provision stating that if regulatory action had an effect on one company that “exceeded the effect” of the action on the other, the MAC clause could be triggered.

Later that year, a restructuring of public utilities in Pennsylvania resulted in Allegheny having to take a $450 million accounting write-off, while DQE wrote down only $142 million. DQE invoked the MAC and, despite opposition from Allegheny, convinced a judge in federal district court that the MAC had indeed been triggered.

Such an outcome is unlikely today, since sellers have the leverage to guarantee exceptions to most potentially threatening MACs. In fact, according to Nixon Peabody’s study, one of the most frequently found exceptions in major deals is one ruling out regulatory changes — such as the one that sank the DQE/Allegheny deal — as a MAC-clause trigger. For example, the outcome of the much-publicized deal in which a consortium led by New York–based private-equity firm J.C. Flowers & Co. agreed to purchase SLM Corp. (Sallie Mae) for $26 billion was thrown into doubt in July when J.C. Flowers announced that proposed legislation to cut student-loan subsidies might trigger the MAC clause, busting the deal.

That case notwithstanding, MACs need not always be bad news for buyers, says Michael S. Roberts, a partner with Connelly Roberts & McGivney, a boutique M&A practice in Chicago. “If the change falls into a gray area, the buyer probably won’t want to walk away,” he says. Besides, he adds, “the change will also be a problem for any other potential buyers, [so] it offers some leverage to renegotiate the terms.”

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