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Parsing the Starz-Lions Gate MAE Clause, Part 1

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The merger and the MAE clause

This is a follow-up series on the merger between Starz and Lions Gate Entertainment. You can read more about it in Another Big Media Merger: Lions Gate Is Buying Starz.

The MAE (material adverse effect) clause is one of the first things arbitrageurs look at in a merger agreement. In the merger deal between Lions Gate Entertainment (LGF) and Starz (STRZA), the MAE clause lays out the circumstances under which either party can back out of the transaction.

Note that some companies refer to a MAE clause as a material adverse change, or MAC, clause, but they’re more or less the same thing. In fact, arbitrageurs always call it the MAE clause, regardless of how it’s actually characterized in the merger agreement.

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The MAE clause

As a general rule, MAE clauses follow a uniform format. Pretty much anything that has a material adverse effect on a company will be considered a MAE, although there are exceptions to that rule.

Please note that we’ve included only an excerpt of the MAE clause below to limit the legalese. You should still read and understand the actual language in the merger agreement.

“‘Company Material Adverse Effect'” means any event, occurrence, fact, condition, change, development or effect that, individually or in the aggregate, (A) is materially adverse to the business, assets, properties, liabilities, results of operations or condition (financial or otherwise) of the Company and its Subsidiaries, taken as a whole; provided, however, that none of the following shall be deemed in and of themselves, either alone or in combination, to constitute, nor shall any of the following be taken into account (in either case, after giving effect to any event, occurrence, fact, condition, change, development or effect resulting therefrom) in determining whether there has been or will be, a Company Material Adverse Effect…”

This excerpt shows standard MAE language. The carve-outs follow in the next two parts of this series. In this case, there’s a disproportionate effect clause. Thus, if something affects either company in a disproportionate way, compared to other companies in Starz’s industry, then it’s still a MAE.

In the next part of this series, we’ll see how Lions Gate Entertainment could back out of the deal according to the provisions of the MAE clause.

Merger arbitrage resources

Other important merger spreads include the deals between Cigna (CI) and Anthem (ANTM) 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.

Investors who are interested in trading in the tech sector can look at the iShares Global Tech ETF (IXN).

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