Parsing the Plum Creek Timber–Weyerhaeuser Merger: Part 2



The Plum Creek Timber–Weyerhaeuser 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 Plum Creek Timber–Weyerhaeuser merger, the MAE clause lays out the circumstances under which Weyerhaeuser (WY) can back out of its merger with Plum Creek Timber (PCL).

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The MAE clause, paraphrased

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.

““Material Adverse Effect” with respect to any Person means any fact, circumstance, effect, change, event or development that materially adversely affects the business, properties, financial condition or results of operations of such Person and its Subsidiaries, taken as a whole, excluding any fact, circumstance, effect, change, event or development to the extent that it results from or arises out of…”

Below is the standard material adverse effect language. My comments are in italics:

  • “changes or conditions generally affecting the industries in which such Person and any of its Subsidiaries operate” (There’s a disproportionate effect clause, so if something affects the timber or building products industry as a whole, it isn’t a MAE. However if it affects PCL specifically, it is.)
  • “general economic or political conditions or securities, credit, financial or other capital markets conditions, in each case in the United States or any foreign jurisdiction” (Again, Weyerhaeuser attaches a disproportionate effect clause [which is generally boilerplate in merger agreements]. The financial crisis or a recession would not be considered a MAE.)
  • any failure, in and of itself, by such Person to meet any internal or published projections, forecasts, estimates or predictions in respect of revenues, earnings or other financial or operating metrics for any period (it being understood that the facts or occurrences giving rise to or contributing to such failure may be deemed to constitute, or be taken into account in determining whether there has been or will be, a Material Adverse Effect)

Other merger arbitrage resources

Other important merger spreads include the merger between Cigna Corporation (CI) and Anthem (ANTM), which is set to close at the end of 2016. 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 REIT sector can look at the Vanguard REIT ETF (VNQ).


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