Bof A’s MAC clause was as porous as swiss cheese


Over the past few days, I have written two posts regarding the increasingly acrimonious sparring surrounding Bank of America’s acquisition of Merrill Lynch.

The latest news is stunning: Bank of America’s MAC clause could probably never have been invoked because it had a specific exclusion for the deteriorating prices of legacy assets on Merrill’s books.

Here’s what it says. All you need to do is read the highlighted parts:

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3.8 Absence of Certain Changes or Events. (a) Since June 27, 2008, no event or events have occurred that have had or would reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect on Company. As used in this Agreement, the term “Material Adverse Effect” means, with respect to Parent or Company, as the case may be, a material adverse effect on (i) the financial condition, results of operations or business of such party and its Subsidiaries taken as a whole (provided, however, that, with respect to clause (i), a “Material Adverse Effect” shall not be deemed to include effects to the extent resulting from (A) changes, after the date hereof, in GAAP or regulatory accounting requirements applicable generally to companies in the industries in which such party and its Subsidiaries operate, (B) changes, after the date hereof, in laws, rules, regulations or the interpretation of laws, rules or regulations by Governmental Authorities of general applicability to companies in the industries in which such party and its Subsidiaries operate, (C) actions or omissions taken with the prior written consent of the other party or expressly required by this Agreement, (D) changes in global, national or regional political conditions (including acts of terrorism or war) or general business, economic or market conditions, including changes generally in prevailing interest rates, currency exchange rates, credit markets and price levels or trading volumes in the United States or foreign securities markets, in each case generally affecting the industries in which such party or its Subsidiaries operate and including changes to any previously correctly applied asset marks resulting there from, (E) the execution of this Agreement or the public disclosure of this Agreement or the transactions contemplated hereby, including acts of competitors or losses of employees to the extent resulting therefrom, (F) failure, in and of itself, to meet earnings projections, but not including any underlying causes thereof or (G) changes in the trading price of a party’s common stock, in and of itself, but not including any underlying causes, except, with respect to clauses (A), (B) and (D), to the extent that the effects of such change are disproportionately adverse to the financial condition, results of operations or business of such party and its Subsidiaries, taken as a whole, as compared to other companies in the industry in which such party and its Subsidiaries operate) or (ii) the ability of such party to timely consummate the transactions contemplated by this Agreement.

(b) Since June 27, 2008 through and including the date of this Agreement, Company and its Subsidiaries have carried on their respective businesses in all material respects in the ordinary course of business consistent with their past practice.

(c) Since June 27, 2008 through and including the date of this Agreement, neither Company nor any of its Subsidiaries has (i) except for (A) normal increases for or payments to employees (other than officers subject to the reporting requirements of Section 16(a) of the Exchange Act (the “Executive Officers”)) made in the ordinary course of business consistent with past practice or (B) as required by applicable law or contractual obligations existing as of the date hereof, increased the wages, salaries, compensation, pension, or other fringe benefits or perquisites payable to any Executive Officer or other employee or director from the amount thereof in effect as of June 27, 2008, granted any severance or termination pay, entered into any contract to make or grant any severance or termination pay (in each case, except as required under the terms of agreements or severance plans listed on Section 3.11 of the Company Disclosure Schedule, as in effect as of the date hereof ), or paid any cash bonus in excess of $1,000,000 other than the customary year-end bonuses in amounts consistent with past practice and other than the monthly incentive payments made to financial advisors under current Company programs, (ii) granted any options to purchase shares of Company Common Stock, any restricted shares of Company Common Stock or any right to acquire any shares of its capital stock, or any right to payment based on the value of Company’s capital stock, to any Executive Officer or other employee or director other than grants to employees (other than Executive Officers) made in the ordinary course of business consistent with past practice under the Company Stock Plans or grants relating to shares of Company Common Stock with an aggregate value for all such grants of less than $1 million for any individual, (iii) changed any financial accounting methods, principles or practices of Company or its Subsidiaries affecting its assets, liabilities or businesses, including any reserving, renewal or residual method, practice or policy, (iv) suffered any strike, work stoppage, slow-down, or other labor disturbance, or (v) except for publicly disclosed ordinary dividends on the Company Common Stock or Company Preferred Stock and except for distributions by wholly-owned Subsidiaries of Company to Company or another wholly-owned Subsidiary of Company, made or declared any distribution in cash or kind to its stockholder or repurchased any shares of its capital stock or other equity interests.

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Translation: If the market tanks and assets already on the books when this deal is consummated are marked down, then this is NOT grounds for Bank of America to renegotiate or pull out.

Look, here’s the story:

  • Ken Lewis rushed into a terrible deal for Merrill Lynch at a grossly inflated price because he desperately wanted Bank of America to be a top notch franchise across the full spectrum of products.  Merrill has a very good franchise and had a good brand until recently.
  • The deal terms specifically excluded poor market conditions as a MAC clause.  I should add that this is standard operating procedure in many mergers as I have been witness to countless MAC clauses with this very exclusion in mergers when I worked in Leveraged Finance and Corporate Development.
  • John Thain was doing his duty in getting the best deal for his shareholders and protecting the 60,000 jobs of Merrill Lynch from a Lehman cataclysm. Ken Lewis was arguably not worried enough that he was overpaying and wasting shareholder money.

So, if Ken Lewis says that he told Hank Paulson and Ben Bernanke on December 21st that he was invoking the MAC clause, then this was a hollow statement because the MAC clause could not be invoked.  Whether Lewis knew/knows that is unclear.

As for John Thain, the man has been pilloried publicly, in particular because of the bonus scandal and the office re-design.  But, let me ask you this: was BofA going to underpay its vaunted Merrill money-makers in a one-off bonus round and risk their exiting the company?  No.  If you went to a Fortune 500 company with a new CEO, what would you guess the average amount spent for office renovations would be?

All of the Thain theatrics were bread and circuses, distracting us from the real issues: is our financial system safe yet and, if not, how can we most prudently ensure it is.

Definitive Proxy Statement (Schedule 14A), Merrill Lynch – BofA Merger – SEC Website

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