Merger must-know: Covidien’s material adverse effect clause
Key overview: Merger arbitrage and the Covidien-Medtronic deal (Part 6 of 10)
The Covidien MAC (paraphrased somewhat)
The MAC clause is one of the first thing arbs look at. This details what will allow Medtronic (MDT) to break the deal with Covidien (COV).
The “Covidien Material Adverse Effect” is an event, development, occurrence, state of facts, or change that has either a material adverse effect on the ability of the Covidien Group to consummate the transaction or a material adverse effect on the business, operations, or financial condition of Covidien and its subsidiaries, as a whole, except for the following changes.
Changes generally affecting the medical device or medical supplies industries or its segments in which Covidien and its subsidiaries operate in the United States or elsewhere
Changes generally affecting the economy or the financial, debt, credit, or securities markets in the United States or elsewhere
Changes in any political conditions or developments in general
Changes or proposed changes in law (including rules and regulations), interpretations of the law, regulatory conditions, or U.S. GAAP or other accounting standards
Actions of Covidien or any of its subsidiaries that Medtronic has expressly requested in writing
Any decline in the stock price of Covidien’s shares on the NYSE or any failure to meet internal or published projections, forecasts, or revenue or earning predictions for any period (provided that the underlying causes of such a decline or failure may, to the extent not otherwise excluded, be considered in determining whether there is a Covidien Material Adverse Effect)
Any events, developments, occurrences, states of facts, or changes resulting from the announcement or the existence of the agreement
So what sorts of things could be considered a MAC? Well, first of all, any sort of issues with the FDA or the SEC, or any accounting problems, would be considered a MAC. What if the tax laws change retroactively, which ends the tax benefits of the transaction? Presumably, Medtronic wouldn’t get the required shareholder vote and would pay $850 million and walk away from the transaction.
Other merger arbitrage information
You can find Market Realist’s primer on merger arbitrage analysis here.
Other important merger spreads include Time Warner (TWC) and Comcast (CMCSA) as well as DIRECTV (DTV) and AT&T (T).
Browse this series on Market Realist:
