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In March, software giant Intel Inc. decided against using a mobile communications standard favored by wireless networking company Proxim Inc. The move not only dented Proxim’s business prospects, but also jeopardized its $223 million merger with broadband technology provider Netopia Inc. Agreement on the merger, which the companies announced in January, had come after intense negotiations over one aspect of the deal: the “material adverse change,” or MAC, clause. The standard merger provision stipulates the conditions under which a party can cancel a proposed transaction. In today’s topsy-turvy market, buyers and sellers are wrangling over material adverse change provisions — the former to preserve a back door if a deal sours, the latter to ensure it goes through. “The negotiation of the MAC clause has really come front and center,” said Stephen Ferruolo, a partner at the San Diego office of law firm Heller Ehrman White & McAuliffe LLP. Still, companies typically avoid invoking a MAC clause in walking away from a merger. That’s because it can stigmatize the spurned company while provoking a costly lawsuit against the buyer. To that end, when Proxim and Netopia officials called off the merger in March, they blamed market conditions rather than material adverse changes. Since there is no concrete definition of what constitutes a material adverse change, merger negotiations over MAC provisions are often contentious. Moreover, a finalized MAC clause is often replete with “carve-outs,” meaning stipulations of what doesn’t qualify as a material adverse change. For example, Proxim and Netopia both saw their stock prices fall in the months after the merger announcement, with the deal ultimately losing $150 million in value. But the drop failed to qualify as a MAC-stipulated reason to end the deal because it had been carved out of the original agreement. Part of the problem is that the needs of the buyer and seller often conflict. Buyers want broad MAC clauses that grant them wide latitude to walk away, said Charles Nathan, a partner in the mergers and acquisitions group at Los Angeles law firm Latham & Watkins. In essence, such companies want the right “to walk if the seller’s CEO sneezes twice in the middle of the night,” he said. In contrast, sellers want to limit the buyer’s ability to annul a deal by studding an agreement with a maximal number of carve-outs. The MAC clause is generally one of the last details of a merger agreement, but when things go bad, it becomes the most crucial. “The amount of negotiation devoted to the MAC-out has definitely increased,” said Diane Frankle, co-head of the M&A team at Silicon Valley law firm Gray Cary Ware & Freidenrich LLP. In large part, that reflects the risky current merger climate. Despite a slowdown in overall deal flow, 69 deals have been withdrawn to date this year, according to CommScan/Computasoft Research Ltd. in New York. That compares with 49 canceled deals over the same period last year. Still, once companies have signed a definitive agreement, only the most drastic of adverse conditions are deal-killers. Not only does a merger imply a hole in the buyer’s business that needs filling, but in technology and biotechnology deals in particular, the acquirer is often buying the seller’s confidential technology and personnel. And once a deal proceeds, those once-private business secrets and information are exposed. “One of the real concerns is that once you open up the kimono, you can’t close it again,” Ferruolo said. “If we announce this deal, and it doesn’t happen, you’re really damaged goods, and your prospects for getting funded or bought at anywhere near that valuation is going to be pretty tough.” Consider Verizon Communications’ decision to jettison its proposed $800 million purchase of NorthPoint Communications Group Inc. Verizon cited a material adverse change. Soon after it fell through, Northpoint filed for bankruptcy and then slapped Verizon with a $1 billion lawsuit. Former NorthPoint CEO Elizabeth Fetter said Verizon has never given any specific reason beyond the MAC assertion, and she was confident in her company’s case that market factors such as the company’s sinking stock price fell outside the MAC clause the companies agreed upon. Nevertheless, Verizon’s assertion of a material adverse change is the exception. “It’s a last resort after all the other attempts to renegotiate the terms of a deal, and people really have to ask themselves if it is worth the risk of asserting it,” Frankle said. Typically, regardless of the grounds for breaking a deal, both parties have a vested interest in making the termination appear mutual. Still, the MAC clause can serve as a potent bargaining chip. “What often happens,” Ferruolo said, “is that a MAC does crop up, but the parties work together to try to get the deal done.” Copyright (c)2001 TDD, LLC. All rights reserved.

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