The ADT-Apollo merger and the MAE clause
The MAE (material adverse effect) clause is one of the first things that arbitrageurs check in a merger agreement. In the case of the ADT-Apollo merger, the MAE clause lays out the circumstances where Apollo (APO) can back out of its merger with ADT (ADT). MAE clauses are even more important when dealing with a private equity buyer like Apollo.
First, it’s important to note that some companies refer to the “MAE” clause as a “MAC” (material adverse change) clause. They’re 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 itself.
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. However, there are exceptions to that rule. Please note that the MAE clause has been paraphrased here to limit the legal jargon:
“‘Material Adverse Effect’ means any event, development, change, effect or occurrence that, individually or in the aggregate with all other events, developments, changes, effects or occurrences, has, or would reasonably be expected to have, a material adverse effect on or with respect to the business, results of operation or condition (financial or otherwise), assets or liabilities of the Company and its subsidiaries taken as a whole, provided that no events, developments, changes, effects or occurrences relating to, arising out of or in connection with or resulting from any of the following shall be deemed, either alone or in combination, to constitute or contribute to a Material Adverse Effect.”
In simpler words
In simpler words, the standard MAE clause specifies that anything bad that happens to ADT that delays or ruins the economics of the deal is an MAE, except for certain exceptions. The exceptions will be laid out in the following two parts of this series. Note that there’s also a disproportionate effect clause. One of the exceptions could still be an MAE if it impacts ADT disproportionately relative to other companies in the industry that it operates in.
Merger arbitrage resources
Other important merger spreads include the deal between Baker Hughes (BHI) and Halliburton (HAL) and KLA-Tencor (KLAC) and Lam Research (LRCX). For a primer on risk arbitrage investing, read Merger Arbitrage Must-Knows: A Key Guide for Investors.
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