Since the dog days of August, a chill has spread through the hallowed halls of private equity. $350 billion worth of leveraged buyout loans are sitting on the books of banks, looking for a home with investors. While one deal that was on the rocks, First Data's acquisition by KKR, managed to close, there are others, like J.C. Flowers' proposed $60 a share takeover of SLM Corp. (NYSE: SLM) which have fallen through.
As more and more deals go the way of Sallie Mae, you'll be hearing a lot more of the expression Material Adverse Change (MAC). MAC is a standard contract clause in a merger agreement which gives the acquirer the right to back out of a deal if there is a material adverse change -- an unexpected and permanent impairment in the value of the company. If an acquirer can successfully "call a MAC," it can get out of a deal without paying the breakup fee.
In the case of the SLM deal, J.C. Flowers announced it was backing out due to legislation signed by the president which makes the student lending business less attractive by cutting subsidies to student-loan providers, thus reducing Sallie Mae's profit prospects. In the case of KKR and The Goldman Sachs Group's (NYSE: GS) effort to welch on its proposed deal to acquire Harman International (NYSE: HAR), the MAC is an earnings report that came in lower than expected -- 93 cents instead of $1.22.
If the acquirers in these deals can't succeed in their efforts to call a MAC, they'll pay breakup fees of $225 million (for Harman) and $900 million (for SLM). Why are these deals cratering? Banks that finance the deals can't convince investors to buy their loans. And if the banks demand richer terms of the buyout firms to persuade investors to buy the debt, then the deals will no longer generate high enough returns to appeal to the buyout firms.
Meanwhile, by pulling out of deals that the sellers thought were closed, the buyout firms are soiling their reputations as reliable acquirers. Fortunately for them, they have so much money that they can afford to get by quite nicely as they withdraw from the industry for the next 10 years.
Peter Cohan is president of Peter S. Cohan & Associates,. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
For more coverage of private equity purchases, visit BloggingBuyouts.
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Reader Comments (Page 1 of 1)
9-27-2007 @ 5:27PM
seth said...
The buyers in the Sallie Mae deal are not planning to walk out of the deal, that was never there intention. They merely were trying to scare Sallie Mae into renegotiating the deal at a lower price. This has been the buyers' plan all along. They were always more interested in renegotiating the deal than in walking away from it. According to NewsVisual http://www.newsvisual.com/newsvisual/2007/09/jp-morgan-and-s.html , Sallie Mae has exetremely strong corporate connections to both JPMorgan and BofA. Most likely they used these ties to pressue Sallie Mae on several fronts.