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Parsing the Salix–Valeant merger MAC clause: Part 1

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Nov. 20 2020, Updated 2:32 p.m. ET

The Salix–Valeant merger and the MAC clause

The MAC (material adverse change) clause is one of the first things that arbitrageurs look at. In the case of the deal between Salix Pharmaceuticals (SLXP) and Valeant (VRX), the MAC clause lays out the circumstances under which Valeant can back out of its deal with Salix. Let’s take a look at the specific conditions that could stop this deal.

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The MAC clause, paraphrased

As a general rule, MAC clauses follow a similar format. Pretty much anything that has a material adverse effect on the company will be considered a MAC, but there will be exceptions to that rule.

Please note that the MAC clause has been paraphrased here to limit the legalese, with added comments in italics. You should still read and understand the actual language in the merger agreement.

A Company Material Adverse Effect means a material adverse effect on the business, properties, assets, liabilities, financial condition, or results of operations of the Company and the Company Subsidiaries, taken as a whole; provided, however, that none of the following shall be deemed, either alone or in combination, to constitute, and that none of the following shall be taken into account in determining whether there has been or will be, a Company Material Adverse Effect:  (Note: this is the standard MAC language. The carve-outs follow.)

Note that there is a disproportionate effect clause: If these carve-outs affect Salix in a disproportionate way compared to other pharma companies, then it is still a MAC)

  • Any change generally affecting the economy, financial markets or political, economic or regulatory conditions in the United States or any other geographic region in which the Company and the Company Subsidiaries conduct business (In other words, if Congress changes the laws and allows Medicare to negotiate drug prices, that isn’t a MAC).
  • General financial, credit, or capital market conditions, including interest rates or exchange rates, or any changes therein. (The financial crisis would not be considered a MAC. That said, tread carefully—this deal is 100% debt financed. If we get another financial crisis (say, when the Fed starts hiking rates), private equity and debt financed spreads will blow out. Arbs will take a lot of pain.)
  • Any change attributable to the negotiation, execution, announcement, pendency, or pursuit of the transactions contemplated hereby, including the Offer and the Merger, including any litigation, loss of or change in relationship with any customer, supplier, vendor, or other business partner, or departure of any employee or officer, of the Company or any of the Company Subsidiaries to the extent attributable to any of the foregoing. (If one of Salix’s big wholesalers ends their contract because they don’t want to do business with Valeant, it isn’t a MAC.)

Other merger arbitrage resources

Other important merger spreads include the deal between Hospira (HSP) and Pfizer (PFE). For a primer on risk arbitrage investing, read Merger arbitrage must-knows: A key guide for investors.

Investors who are interested in trading in the healthcare sector should look at the Health Care Select Sector SPDR Fund (XLV).

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