Extended due diligence, prolonged negotiations, and regulatory approval processes have lengthened the time between agreeing on a deal and actually closing it – leaving more time for conditions at the target to change in the middle of the deal process and, thus, increasing the probability that a price adjustment will be needed or that the deal will sink. Troubles can come in many forms, including deteriorating financial performance, a recall or withdrawal of a top money-making product, a lawsuit, or a regulatory investigation, and their long-term ramifications may not be readily apparent. So what’s a buyer to do? A buyer basically has three choices: invoke a material adverse change (MAC) out and take its chances in court, renegotiate the purchase price, or walk away from the deal and pay any consequential break-up fee. In the current seller’s market, the decision may be even tougher for acquirers to make, given that prospective buyers are climbing all over themselves trying to buy eligible targets, and there’s a good possibility that a competitor is waiting in the wings to snag the deal. First, the acquirer must decide whether the change alters the basic fundamentals of the deal and whether the deal is still worth pursuing. Critical points to consider would be whether the problem at the target: * Appears to be a one-time blip, or indicative of deeper troubles; * Could have a ripple effect on other aspects of the business; and * Might affect the company’s profitability and/or market reputation Just as important for the buyer to figure out, notes Steve Blumreich, President of BKD Corporate Finance, are how badly it wants the company and what the competitive dynamics are – i.e., is the target desirable to other buyers? Impacts on the value of a target that takes a turn for the worse can be dramatic. Some buyers, however, may view the problems as an opportunity to negotiate more favorable terms, or a lower price, and decide to complete the deal on new terms. “Just the possibility of invoking a MAC out gives the buyer a negotiating hammer for re-pricing the deal without ever actually having to trigger the MAC,” notes Robert Ouellette, leader of the Corporate Practice Group at Schottenstein Zox & Dunn. “MACs are most often used this way. Buyers rarely trigger the provisions and walk away from the deal,” he adds. A MAC out gives the buyer the right to pull out of a deal or renegotiate terms if a major change occurs at the target before deal closing. But as Kevin Miller, a Partner in Alston & Bird’s Corporate Transactions and Securities Group, points out, doubt about which deal party would prevail in a MAC case “usually drives both parties back to the bargaining table.” If a buyer invokes a MAC out and takes its case to court, there’s the possibility that the case would not be decided in its favor, and it would have to pay the original purchase price. On the flip side, the target doesn’t want to risk the possibility of losing the case and end up looking like damaged goods. “Only if one side believes that the other’s demands are unacceptable would the deal parties be forced to litigate,” Miller adds. If the parties decide to pursue the transaction, price modification must be handled delicately so as not to become a deal-breaker. Offering too much may not make the deal economically viable for the buyer in the long run. Offering too little could further stall the deal process and invite competitive bids. All of these issues played out in Johnson & Johnson’s year-and-a-half pursuit of Guidant. As the deal awaited antitrust approval, product recalls and regulatory probes plagued the target. After briefly considering a pull-out from the deal – which prompted the target to threaten a lawsuit – J&J submitted a revised bid of $21.5 billion – nearly $4 billion less than its original offering price of $25.4 billion. After its difficult negotiations to lower the purchase price, Johnson & Johnson saw its work fall by the wayside as Boston Scientific swooped in with a $25 billion offer for Guidant, which represented a significant premium to J&J’s new offer. After initially accepting a sweetened bid of $24.2 billion from J&J, Guidant ultimately abandoned its pact with J&J in favor of a boosted bid – $27.2 billion – from Boston Scientific. After paying a $705 million breakup fee to jilted J&J, Guidant still realized a gain of nearly $1.1 billion over J&J’s initial offer. Despite the advantages the deal might have created for Johnson & Johnson, the fact remains that Guidant would have come with a lot of problems. But as Blumreich notes, in a seller’s market, more targets are in a position to “hold buyers’ feet to the fire to stay in the deal.” That certainly was the case in the Guidant acquisition. Miller adds that targets are winning concessions unheard of before. “Sellers are getting better deal terms across the board today, not just in the MAC area,” he says. They’re negotiating for no financing outs in agreements, decreases in caps and indemnities, indemnity deductibles, and deposits and equity guarantees, to name a few, he says. (c) 2007 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com

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