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20-35_Roundup.qxd 4/6/09 5:39 PM Page 25Round Upand international interest.”To be sure, signs have already emerged that showsome people are starting to feel around for a bottom.In the first week of January, for instance, BorgWarnerrejected a mini-tender offer from Toronto-based TRCCapital Corp., dismissing it as too low. Meanwhile, inLear Corp.’s third quarter conference call, Merrill Lynchanalyst John Murphy noted that the company’s marketcap, at $190 million, roughly equaled its annualcapital expenditure budget. After making this point, heasked, “Have you thought about taking the companyprivate?”Lear chairman and CEO Robert Rossiter, accordingto a transcript of the call found on Thomson OneAnalytics, merely responded, “Thanks for pointingthat out.” He later clarified that Lear was “not interestedin any help.” Roughly a month later, Dana’s marketcap had fallen below $100 million and the NewYork Stock Exchange warned the parts maker that itcould be delisted.Still, it may be a while before the bigger namesin the auto parts space look to consolidate or seekout a rescue. In the meantime, many willpursue asset sales if possible. Modine International,for instance, is looking to to divestits Korean HVAC operations, with anyproceeds going to improve the company’sbalance sheet. ArvinMeritor, meanwhile, istrying to unload its light-vehicle systems division.In its fourth-quarter conference callheld in November, the company disclosedthat it was in negotiations to sell the business,but as of press time, on January 6, a dealhad yet to materialize.Part of the problem, like that facing the auto industryin general, is that buyers are in short supply. Privateequity, as has been well documented, has beenhampered by the credit crunch, while strategics —even the stronger companies in the sector like TRW— are remiss to even consider acquisitions if it meanssacrificing balance sheet flexibility.BBK’s Bill Diehl, the president and CEO of theDetroit advisory firm, issued a statement in mid-November in support of the federal automotivebailout. He also made a case that capital should goto the suppliers as well. “While support is neededby the Detroit Three, additional financing is criticalfor its supply base to encourage the efficiency andrationalization that is so badly needed after the lossof market share by [the OEMs]” he wrote. “Some ofthe funding provided for the industry should be earmarkedfor consolidating transactions in the supplybase.”Additional reporting by Ken MacFadyen“ Some of thefundingprovided forthe industryshould beearmarked forconsolidatingtransactions inthe supplybase.”chemicals company, bought Dow Chemical’sthermoplastic polyurethane business,a unit that generated $85 million in revenuesfor Dow in 2007. Terms of the dealwere not disclosed.The deal brings to Lubrizol Dow’s thermoplasticpolyurethane commercial, productionand research and developmentassets and 40 additional employees. Theacquisition will be factored into Lubrizol’sEstane engineered polymers business.The Dow brand names will be retainedand unified under the Estane engineeredpolymers business.February 2009 MERGERS & ACQUISITIONS 25
20-35_Roundup.qxd 4/6/09 5:39 PM Page 26Round UpStrategics Reverse CourseReverse breakup fees were once considered just an LBOphenomenon; now corporate bidders are on boardBy Avram Davis“ There aresomecompanies thatsay ‘as amatter ofpolicy, we donot agree tobreakup fees,and wenever will.”The propensity of reverse break-up fees in dealdocuments has climbed alongside the rise ofprivate equity, and when acquisitions startedblowing up last year, buyout shops leaned heavily onthe escape clause. Traditionally, reverse breakup feeshave been considered part of the LBO phenomenon,although increasingly, deal pros say, they are poppingup in more transactions involving corporate buyers.The growing prevalence in strategic deals is partiallythe result of the credit crunch. While financingwas rarely in question for strategics in the past, todaythere’s no guarantee that even corporate buyers canprocure the necessary debt for deals. Moreover, sellersmay also be worried about a buyer’s covenants. Whenchemicals maker Ashland acquired Hercules, last fall,the company negotiated a $77.5 million reverse breakupfee that safeguarded the seller against the possibilitythat Ashland would either fail to find financing orbreach its covenants, prospects that could potentiallytrip up the transaction.Another issue that has sellers concerned is the possibilitythat regulators, after a deal is cinched and paidfor, could step in to block a transaction. Over theyears, a few deals have taken precautions to guardagainst this possibility. In 2006, when Whirlpool sweetenedits offer for Maytag, the company included a$120 million reverse breakup fee, which would havebeen payable had regulators shot down the sale onantitrust concerns.Indeed, many anticipate uncertainty over antitrusttreatment will become more of an issue as a new administrationsweeps into Washington. The consensus amongdeal pros is that President Barack Obama will tightenthe screws somewhat, at least compared the GeorgeBush administration, which took a lax view towardantitrust. This reason, deal pros and lawyers cite, couldperhaps be the thrust behind the use of reverse breakupfees among strategic bidders.Jonathan Layne, partner at Gibson Dunn and cochairof the law firm’s mergers and acquisitions group,notes that if the coming administration is, in fact,“more robust in its antitrust involvement,” sellers willneed to make a deeper economic analysis of the corporaterisks. He adds that as it relates to antitrust, “therewill be a much greater risk to get a deal done,” andadds that both sides will be keen to discuss “how tomitigate” those liabilities.Initially, reverse breakup fees were considered a seller-friendlyaddition to a deal’s documents. However,as it played out at the onset of the credit implosion —with many PE buyers gladly paying the penalty for aclean break — it could be argued that the provisos wereleaving sellers in the lurch. Also, as demonstrated bythe litigation over many broken deals, the clauses werenot as black and white as initially thought. For instance,when Apollo Management walked away from its offerto buy Huntsman, the firm was hoping it would onlyhave to pay the negotiated, $325 million reverse-breakupfee. After lengthy litigation, though, Apollo, along withthe deal’s lenders, were forced to pay a total of $1 billionto the spurned target.Sellers, it is expected, will seek to clarify the detailsaround reverse breakup clauses. One such discussionwill likely be the timeframe of termination. A brokentransaction at the outset of negotiations typically hasfewer consequences than a deal that collapses after manymonths. Layne suggests that reverse breakup fees couldbe stepped to increase the penalty as time goes on, althoughsuch a scenario could unduly penalize buyers,especially in antitrust cases when a deal’s fate lies out ofa bidder’s control. The Whole Foods/Wild Oats merger,for example, is still facing Federal Trade Commissionscrutiny a full year after it was completed.Not everyone is on board with idea of breakup fees.According to Paolo Morante, a partner at DLA Piper’santitrust and trade regulation practice, “There are somecompanies that say ‘as a matter of policy, we do notagree to breakup fees, and we never will.’”From the buyer’s perspective, they may be remissto lock themselves into something that can ultimatelybe beyond their control. Sellers, meanwhile, mightprefer a market MAC, which can be tougher to provethan a mere breakup fee — especially after watching somany companies get burned in 2008.26 MERGERS & ACQUISITIONS February 2009
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