Precision Castparts–Berkshire Hathaway Deal: Deeper Analysis
The Precision Castparts merger and the MAE clause
The MAE (material adverse effect) clause is one of the first things arbitrageurs look at in a merger agreement. In the case of the merger deal between Precision Castparts (PCP) and Berkshire Hathaway (BRK-B), the MAE clause lays out the circumstances under which Berkshire Hathaway can back out of the transaction.
Note that some companies refer to an MAE clause as a material adverse change, or MAC, clause, but they’re more or less the same thing. In fact, arbitrageurs always call it the MAE clause, regardless of how it’s actually characterized in the merger agreement.
The MAE clause, paraphrased
As a general rule, MAE clauses follow a uniform format. Pretty much anything that has a material adverse effect on the company will be considered an MAE, though there are exceptions to that rule.
Please note that I’ve paraphrased the MAE clause below to limit legalese. You should still read and understand the actual language in the merger agreement.
“Material Adverse Effect” means, with respect to the Company (Precision Castparts), a material adverse effect on (i) the ability of the Company to consummate the Merger, or (ii) the business, results of operations or financial condition of the Company and its Subsidiaries, taken as a whole, except to the extent such material adverse effect under this clause (ii) results from….
This excerpt shows standard MAE language. The carve-outs follow in the next part of this series. But in this case, there’s a disproportionate effect clause. So if these carve-outs affect either company in a disproportionate way, compared to other companies in PCP’s industry, then it’s still an MAE.
Other merger arbitrage resources
Other important merger spreads include the Freescale-NXP transaction. The merger of Freescale Semiconductor (FSL) and NXP Semiconductors (NXPI) is expected to close by the end of the year. For a primer on risk arbitrage investing, read Merger Arbitrage Must-Knows: A Key Guide for Investors.
Investors interested in trading in the industrials space should look at the S&P SPDR Industrials ETF (XLI).
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