The Progressive Waste-Waste Connections merger and the MAE clause
As we discussed in the last part of this series, the MAE (material adverse effect) clause is one of the first things that arbitrageurs check in a merger agreement. In the case of the Progressive Waste-Waste Connections merger, the MAE clause lays out the circumstances where Waste Connections (WCN) can back out of its merger with Progressive Waste (BIN).
Paraphrasing the MAE clause
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.
“‘Company Material Adverse Effect’ means any Effect that, (i) individually or in the aggregate, has a material adverse effect on the condition (financial or otherwise), business or results of operations of the Company and the Company Subsidiaries, taken as a whole; provided, however, that no Effects resulting or arising from the following shall be deemed to constitute a Company Material Adverse Effect or shall be taken into account when determining whether a Company Material Adverse Effect exists or has occurred or is reasonably likely to exist or occur.”
- any changes in general US or global economic conditions—a recession is not considered an MAE
- conditions, or changes therein, in any industry or industries in which the Company and the Company Subsidiaries operate—if the waste management industry becomes subject to costly environmental laws that affect everyone, then it isn’t an MAE
- general tax, economic, or political conditions—if the US institutes a tax that adds costs onto waste management companies, it isn’t an MAE
- any change in GAAP or interpretation thereof—if FASB changes the rules for depreciation which causes Progressive Waste to show a loss, that isn’t an MAE)
- any change in applicable Law—self-explanatory, provided it doesn’t disproportionately impact Progressive Waste
Merger arbitrage resources
Other important merger spreads include the deal between Baker Hughes (BHI) and Halliburton (HAL). 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 consumer services sector should look at the iShares US Consumer Services ETF (IYC).