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Parsing the Allergan–Pfizer Merger Material Adverse Effect Clause

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The Allergan–Pfizer 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 Allergan–Pfizer merger, the MAE clause lays out the circumstances where Pfizer (PFE) can back out of its merger with Allergan (AGN).

Note that some companies refer to a 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 characterized in the merger agreement.

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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 a 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.

“Parent Material Adverse Effect means any Effect that has a material adverse effect on the assets, business, results of operations, or financial condition of the Company and the Company Subsidiaries, taken as a whole, but shall not include effects to the extent arising from:”

This is the standard MAE language. The carve-outs will be covered in the next two parts of this series. We’ll include comments as well. Note that there is a disproportionate effect clause, meaning that any of these carve-outs cannot affect Allergan disproportionately. Note that usually the target is referred to as the Company, but in an inversion transaction it’s called the Parent because it’s officially considered the buyer.

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Reading further, you’ll see that there is no mention of tax laws in the MAE statement. Does that mean that Pfizer has to buy Allergan even if the tax laws change to make corporate inversions non-economic? It doesn’t. This issue is handled in the part regarding termination, and an “Adverse Tax Law Change” can terminate the merger. Any legislation that passes Congress and is eligible to be signed by the President is considered an “Adverse Tax Law Change.”

Other merger arbitrage resources

Other important merger spreads include the Cigna (CI) and Anthem (ANTM) deal, meant to close in 2H15. 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 S&P SPDR Healthcare ETF (XLV).

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