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Mark Shafir offered M&A lawyers little reason for optimism in remarks Thursday morning at the Tulane Corporate Law Institute in New Orleans. Shafir, the chairman and co-head of global M&A at Lehman Brothers Inc., provided an overview of the M&A market in the conference's opening session. Though he noted that M&A is currently running at 2005 volume levels, he admitted the difference a year had made in the market. He predicted a 79% drop in LBO volume in 2008 from last year as well as a decline of between 28% and 33% in strategic M&A volume. "We think it will deteriorate somewhat going forward," he said of the market.
Changes in the debt markets and the collapse of several large LBOs have affected board psychology, Shafir said. "Most of the boards I talk to are very worried about selling to sponsors at this point," he said in noting the slew of busted deals in recent months. Cross-border activity offered an exception to a generally down market. It comprised 47% of the M&A market in 2007, Shafir said, by far the highest percentage since at least 1997. Outbound activity from the U.S., Europe and Asia all spiked significantly in 2007, Shafir said. Later in the morning, Shafir, several M&A lawyers, Delaware Vice Chancellor Stephen Lamb and Brian Breheny, the head of the U.S. Securities and Exchange Commission's Office of Mergers and Acquisitions, considered the legal aspects of the issues Shafir outlined. Warren Levey, a partner at Skadden, Arps, Slate, Meagher & Flom LLP in Washington, led a discussion of CFIUS that moved to a consideration of the collapse of the buyout of 3Com Inc. by Bain Capital LLC and Huawei Technologies Co. Ltd. Levey said the parties mishandled the approval process. "They went in thinking that CFIUS was not an issue and not having a congressional strategy," he said, adding that the parties then offered a divestiture plan only late in the process. In light of the recent run of busted buyouts, the lawyers also mulled over material adverse effects clauses, the provisions in M&A agreements that allow a party to walk from a deal if a counterparty has suffered a so-called "MAE" as defined in the document. "The last nine or 10 months feel like one big MAE," said Faiza Saeed, a partner at Cravath, Swaine & Moore LLP in New York. Pointing to one case where the interpretation of an MAE clause was central to a dispute, she noted that the one in the Finish Line Inc.-Genesco Inc. agreement was fairly standard in carving out a number of potential occurrences from the definition of MAE. Those carve-outs themselves can be critical. Rob Spatt, a partner at Simpson, Thacher & Bartlett LLP in New York, noted the complex carve out in the merger agreement where J. Christopher Flowers agreed to acquire SLM Corp. That agreement stated that Flowers could walk from the deal if SLM suffered a decline worse than that of other companies in its industry, but the agreement was ambiguous on a critical issue. Spatt asked: Should a court consider only the incremental difference between SLM's troubles and those of the financial services industry, or look at SLM's difference in isolation? Flowers ended up walking away from the deal, but one panelist noted that Vice Chancellor Leo E. Strine Jr., the judge in the case, himself suggested at a hearing that the parties could have done a better job of drafting. "Definitions tend to be repeated from deal to deal without a lot of thought," said Saeed, who also noted that the complexity of MAE clauses often baffles clients as well as judges. "We've gone back and looked at these definitions and asked if anyone understands them," she said. - David Marcus See Dealscape's additional coverage of the Tulane Corporate Law Institute in New Orleans Categories Deal Video
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