But, of course, things are much different now. In fact, there is some doubt that mega deals -- such as for TXU Corp. (NYSE: TXU) and SLM Corp. (NYSE: SLM) -- may not get done because of the tough credit environment.
However, can buyers legally walk from a deal?
Not very easily, actually. After all, when a buyer signs a merger agreement, it's an enforceable contract. And, if it is breached, the consequences can be severe. In fact, in some cases, the buyer may be required to complete the deal. The New York Times looks at this issue in depth today. (registration required).
While we may see some bitter fights and litigation, this may actually be the exception. In light of the new environment, it seems reasonable that a seller will give up some ground on a deal. After all, this happened in Cerberus' buyout of Chrysler. Also, it looks like this will happen with The Home Depot's (NYSE: HD) deal to sell its distribution unit.
Keep in mind that if a seller want to re-market the deal, the price will inevitably be lower. But, there will be more time wasted as well as money spent on investment banking and legal fees.
Also, private equity firms have been savvy with so-called "reverse break-up fees." This means that a buyout firm will pay 3% to 5% if it walks -- for any reason. In some cases, the fees are rock-bottom. For example, Samuel Zell is on the hook for a measly $25 million if he walks from the Tribune Co. (NYSE: TRB) deal.
That can be a lot of leverage in a deal. So, as a result, I think we'll be seeing lots of amendments to existing merger agreements.
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
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Reader Comments (Page 1 of 1)
8-21-2007 @ 4:25PM
Jeff said...
enforceable contract, who knew?