The Solera merger and the MAE clause
The MAE (material adverse effect) clause is one of the first things arbitrageurs look at in a merger agreement. In the case of the merger deal between Solera (SLH) and the private equity consortium, the MAE clause lays out the circumstances under which the consortium can back out of the deal with Solera.
Note that some companies refer to it as a material adverse change (or MAC) clause, but it’s more or less the same thing. In fact, arbitrageurs always call it the MAC clause, regardless of how it’s actually characterized in the merger agreement.
The MAE clause, paraphrased
As a general rule, MAE clauses follow a similar format. Just about anything that has a material adverse effect on the company is considered an MAE, but there are exceptions to that rule.
Please note that the MAE clause has been paraphrased here to limit the legalese. You should still read and understand the actual language in the merger agreement.
“Company Material Adverse Effect” means any change, event, effect or circumstance (each, an “Effect”) that, individually or taken together with all other Effects that have occurred prior to, and are continuing as of, the date of determination of the occurrence of the Company Material Adverse Effect, has a material adverse effect on the business, condition (financial or otherwise) or results of operations of the Company and its Subsidiaries, taken as a whole; provided, however, that none of the following, and no Effect arising out of or resulting from the following, shall constitute or be taken into account in determining whether a Company Material Adverse Effect has occurred.”
The exceptions follow. Most are lifted verbatim from the merger agreement, with my comments in italics.
- “any regulatory, legislative or political conditions or securities, credit, financial or other capital markets conditions” (self-explanatory; the buyers are bearing the risk if the capital markets seize up)
- “any failure, in and of itself, by the Company or any of its Subsidiaries to meet any internal or published plans, projections, forecasts, estimates or predictions in respect of revenues, earnings or other financial or operating metrics for any period (provided, that the exception in this clause (F) shall not prevent or otherwise affect a determination that any change, effect or development underlying such failure has resulted in or contributed to a Company Material Adverse Effect, and only then to the extent otherwise permitted by this definition of Company Material Adverse Effect)” (similar to the other clauses, missing your quarter isn’t an MAE, but the reason is fair game)
- “the execution and delivery of this Agreement or the public announcement or pendency of the Merger” (if for some reason a major customer decided to leave Solera because it was pressured to do business with the Koch brothers, it isn’t an MAE)
- “the availability or cost of equity, debt or other financing to Parent or Merger Sub” (the most important one: if the financial markets seize up and the private equity buyers can’t sell their debt, it isn’t Solera’s problem. Note: there’s a reverse termination fee, which may allow the buyers to get out by paying Solera $229 million)
Merger arbitrage resources
Other important merger spreads include the deal between Baker Hughes (BHI) and Halliburton (HAL) and the merger between Freescale Semiconductor (FSL) and NXP Semiconductors (NXPI). 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 tech (technology) sector should look at the Technology Select Sector SPDR ETF (XLK).