TBO.com - TBO is Tampa Bay Online

Credit Crisis Turning Takeovers Into Takebacks

ADVERTISEMENT

By RACHEL BECK, The Associated Press

Published: November 24, 2007

NEW YORK - When a buyout shop chooses to pay $100 million just to walk away from a committed deal, that tells you how deep today's financial crisis is running.

Private-equity firm Cerberus Capital Management wants out of its $4 billion offer for United Rentals, which just days ago thought it was about to be bought for $34.50 a share.

Cerberus isn't even trying to fight paying the termination fee by blaming deteriorating credit conditions for its change of heart. Instead, Cerberus simply says it wasn't "prepared" to continue with the acquisition, and will pay the penalty to end the deal.

Not business-as-usual for deal-making. Private-equity firms are famous for frugality - they don't like overpaying for their targets and are intently focused on capturing as much profits as they can.

Cerberus apparently thinks the $100 million spent now, while giving it nothing in return, could save it from losing at least as much later should that investment not go as expected.

What's particularly shocking is that Cerberus seems willing to risk its reputation to do this after working hard to build itself into a top-tier dealmaker with bold acquisitions that included the takeover of troubled automaker Chrysler.

Times are desperate. Tightening lending conditions and a weak economy are proving to be a toxic cocktail for dealmakers, forcing them to go to extremes to exit certain acquisitions.

That means investors, who months ago were worried that takeover premiums for their shares would not being high enough, should now be fretting over whether they will get paid at all because plenty of deals likely won't get done.

United Rental's investors didn't see this situation coming. The stock was trading just below the $34.50 offer price for the first two weeks of November, indicating shareholders thought the Cerberus takeover was about to close. United Rental's business has been considered healthy, and its quarterly earnings beat analysts' expectations.

But on Nov. 14, the news hit that the takeover was in jeopardy. Cerberus sent a letter to the Greenwich, Conn.-based equipment rental company that offered two options: Renegotiate the terms of the deal or the private-equity firm would opt out and pay the $100 million fee to United Rentals.

Cerberus chose not to cite a "material adverse change," or MAC, for its change of mind. That's the ploy some buyout shops have used to try to walk away from deals without paying a breakup fee.

United Rental's shares plunged more than 30 percent to about $23 each on the news and now trade slightly below that.

In recent days, the mudslinging has intensified between the sides. United Rental filed a lawsuit Monday, claiming Cerberus is directly violating the deal agreement and acting in bad faith by trying to lower the price. Cerberus responded that it was within its right to withdraw from the buyout and pay the liability capped at $100 million.

This highlights one broken deal. Many more are also unraveling because of the credit market turmoil, including the acquisition of shoe retailer Genesco and the buyout of student-loan lender Sallie Mae. Cerberus last month cited the poor debt-market environment when it withdrew a $6.2 billion offer for Affiliated Computer Services.

There are lessons to be learned for all corporate boards and the shareholders they represent. When takeovers were booming, many companies gave their potential buyers lots of wiggle room in deal agreements. That's coming back to haunt the companies that thought they were going to be sold.

"Companies did not fully grasp that firms could and would walk away from some deals," said Steven Davidoff, an assistant professor at Wayne State University Law School in Detroit. "That is very clear right now."

Going forward, Davidoff says better protections are needed. Companies being sold need to make sure breakup fees are set at sky-high levels, so exiting is outrageously expensive and therefore deterred.

Companies also can't forgive and forget which buyers are bolting on deals now, especially when the market turns around and the takeover business resurrects.

That's the only way to punish those dealmakers for breaking corporate America's trust.

Share this:

Loading Comments...

Email Print

ADVERTISEMENT