Parsing the Baxalta–Shire Material Adverse Effect Clause, Part 1
A Deeper Dive into the Baxalta–Shire Merger's MAE Clause
The Baxalta–Shire merger and the MAE clause
The MAE (material adverse effect) clause is one of the first things that arbitrageurs check in a merger agreement. In the case of the Baxalta–Shire merger, the MAE clause lays out the circumstances where Shire (SHPG) can back out of its merger with Baxalta (BXLT).
Note that some companies refer to the MAE clause as a MAC (material adverse change) clause, but it’s more or less the same thing. In fact, arbitrageurs always call it the MAC clause, regardless of how it’s characterized in the merger agreement.
Paraphrasing the MAE clause
As a general rule, MAE clauses follow a similar format. Just about anything that has a material adverse effect on the company is considered a MAE, but there are exceptions to that rule.
Please note that the MAE clause has been paraphrased here to limit the legal jargon. You should still read and understand the actual language in the merger agreement.
“‘Company Material Adverse Effect’ means any effect, event, occurrence, development or change that has a material adverse effect on the financial condition, assets, liabilities, business or results of operations of the Company; provided, however, that a Company Material Adverse Effect shall not be deemed to include effects, events, occurrences, developments or changes arising out of, relating to or resulting from:”
In simpler words, this is the standard MAE clause: “Anything bad that happens to Baxalta and delays or ruins the economics of the deal is a MAE, except for the following exceptions.” The exceptions will be laid out in the following two parts of this series. Note that there is a disproportionate effect clause, meaning that one of the exceptions could still be a MAE if it affects Baxalta disproportionately relative to other companies in the industry that Baxalta operates in.
Other merger arbitrage resources
Other important merger spreads include the Cigna (CI) and Anthem (ANTM) deal, slated to close in the second half of 2015. For a primer on risk arbitrage investing, check out Merger arbitrage must-knows: A key guide for investors.
Investors who are interested in trading in the healthcare sector could look at the S&P SPDR Healthcare ETF (XLV).
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