The KLA-Tencor–Lam Research 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 KLA-Tencor–Lam Research merger, the MAE clause lays out the circumstances under which Lam Research can back out of its merger with KLA-Tencor.
Note that some companies refer to an MAE clause as a MAC (material adverse change) 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 Effect or Effects that, individually or in the aggregate, are, or would reasonably be expected to be, materially adverse to (a) the business, assets, properties, condition (financial or otherwise) or results of operations of the Company and the Company Subsidiaries, taken as a whole; provided, that none of the following will be deemed, either alone or in combination, to be or constitute a ‘Company Material Adverse Effect’ or be taken into account when determining whether a ‘Company Material Adverse Effect’ has occurred or may, would or could occur…”
This is standard MAE language. The carve-outs follow in the next part of this series.
Note that there’s a disproportionate effect clause, which means the carve-outs may, in fact, be a MAE if they disproportionately affect KLA-Tencor relative to other companies of comparable size and geography in same the industry in which KLAC operates.
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 sector can look at the S&P SPDR Tech ETF (XLK).