they don't even give a shit about paying the break-up fee or about looking bad. They just don't want to honor any of their unfunded deals. Likely because they are cash-strapped from owning Aegis and GMAC and losing billions on subprime to date.
WALL STREET JOURNAL Cerberus's Move Poses M&A Shift Nixed United Rental Deal May Lead to Tightening Of Terms Before Closing November 19, 2007
Cerberus Capital Management's decision last week to back out of its commitment to buy United Rentals has Wall Street tongues wagging. Sure, Cerberus isn't the only buyout firm that has turned tail since the credit-market swoon began, but this deal is different, they say.
That is because Cerberus walked away without "calling a MAC," or claiming that the power-tool renter's business had suffered a severe downturn since the deal was signed. The buyout firm also was aware of the credit turmoil because that began about a month before the deal was announced in July. And, one banker in the group that agreed to provide the financing for the deal says the banks -- Lehman Brothers, Bank of America, Credit Suisse Group and Morgan Stanley -- weren't pressuring the buyout firm to walk away, as banks have in other such cases recently.
While Cerberus's motivations are unclear, people in the deal-making community say its actions may contribute to a radical shift in buyouts. Private-equity firms are going to have to convince corporate directors "that they can be trusted not only to close, but not to trash the target when the going gets tough," according to Bob Profusek, an M&A lawyer at law firm Jones Day.
How might that happen? They may need to put up a deposit when deals are signed, he says, with the seller keeping the funds unless shareholders vote the deal down. Others suggest the reverse breakup fees buyout firms pay to walk away from deals may need to rise from the roughly 3% of a deal's value now. And the Material Adverse Change (the MAC) definition, which should preclude messy divorces between buyers and sellers but often doesn't, will be replaced with more specific performance benchmarks, Mr. Profusek predicts.