Parsing the Merger Material Adverse Effect Clause, Part 3



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 Allergan–Pfizer merger, the MAE clause lays out the circumstances that allow Pfizer (PFE) to back out of its merger with Allergan (AGN).

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Paraphrasing the MAE clause

Please note that the MAE clause has been paraphrased here. 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 Parent and the Parent Subsidiaries, taken as a whole, but shall not include effects to the extent arising from:”

Below is the standard material adverse effect language. The carve-outs follow, and my comments are in italics:

  • changes in any political conditions or developments in general, or resulting from any outbreak or escalation of hostilities, declared or undeclared acts of war or terrorism (Be careful with the disproportionate effect clause. Something that affects only Allergan could be considered a MAE.)
  • changes or proposed changes in Law (including rules and regulations), interpretations thereof, regulatory conditions or GAAP or other accounting standards (or interpretations thereof), including changes or proposed changes in Law or interpretation thereof (In other words, if FASB changed the rules regarding depreciation such that Allergan suddenly showed a loss, that isn’t a MAE.)
  • actions of Parent or any Parent Subsidiary which the Company has expressly requested in writing (This is self-explanatory.)
  • any decline in the stock price of the Parent Shares on the NYSE or change in the credit rating of Parent or any Parent Subsidiary or any failure to meet internal or published projections, forecasts or revenue or earning predictions for any period (provided that the underlying causes of such decline, change or failure may, to the extent not otherwise excluded, be considered in determining whether there is a Parent Material Adverse Effect) (Missing your quarter isn’t a MAE in of itself, however, the reason why you missed it is fair game.)

Other merger arbitrage resources

Other important merger spreads include the Cigna (CI) and Anthem (ANTM) deal, intended 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 could look at the S&P SPDR Healthcare ETF (XLV).


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