Deals of the year: postmortem

Introduction   The SunGard legacy   Dunkin' Donuts' securitization   A decade of Pfizer deals

This fall, for example, Del Monte Foods Co.'s $5.3 billion agreement to sell to Kohlberg Kravis Roberts & Co., Vestar Capital Partners and Centerview Partners LLC has a reverse break fee, as does J.Crew Group Inc.'s $3 billion agreement to sell to TPG Capital and Leonard Green & Partners LP. Strategic buyers who are taking on significant debt have also employed the structure, as Phillips-Van Heusen Corp. did last year on its $3.2 billion purchase of Tommy Hilfiger Corp.

The SunGard deal became a market standard in part because seven major buyout firms teamed up on it, a group led by Silver Lake Partners that included Bain Capital LLC, Blackstone Group LP, Goldman Sachs Capital Partners, KKR, Providence Equity Partners Inc. and Texas Pacific Group. "At the time, we all thought we were just doing a deal, but in hindsight, it was an inflection point," says Alfred Rose, a partner at Ropes & Gray LLP in Boston who represented Silver Lake. "Because so many deals after SunGard followed it, and because so many PE shops were involved, it's not surprising that it became a touchstone."

The most important part of the template SunGard created was the reverse termination fee. The structure provided that the buyers would pay SunGard $300 million -- 2.65% of the deal's total value -- if the debt financing for the deal wasn't available. But if that event occurred, or if the buyers breached the merger agreement, SunGard would have been entitled only to the $300 million and would not have been able to sue the buyers to complete the transaction.

The reverse breakup fee allowed the buyout shops in the SunGard consortium to limit their exposure if one or more of them breached the terms of their equity commitment, says Sean Rodgers, a partner at Simpson Thacher & Bartlett LLP. Buyout funds also liked the structure because it in essence served as a financing out at a time when that concept had effectively disappeared from the papers on most leveraged buyouts because the conditions in the financing papers and the merger agreement had become identical.

"SunGard provided a model for parties to allocate risk and move forward without some of the queasiness buyers were feeling at the time," says Rodgers, who did not work on the SunGard deal, though his firm has advised Blackstone and KKR.

Lawyers began to tweak the reverse termination fee almost immediately after SunGard was signed. A few months later, TPG and Warburg Pincus accepted a "two-tier" reverse breakup fee in their $5.1 billion agreement to buy Neiman Marcus Group Inc. under which the buyout shops promised to pay the luxury retailer $140 million if debt financing fell through and up to $500 million if financing was available and the buyers walked. The two-tier structure became increasingly common after buyout shops exited several deals in 2007, which made sellers demand a larger reverse break fee for assuming financing risk. Both the Del Monte and J.Crew deals have a two-tier structure in which buyers would pay about 7% of the equity value were they to walk.

With the reverse termination fee in SunGard came the concept of a debt-marketing period before the close of a transaction in which the buyers try to sell the debt required to fund the deal. "In deals where there was a real penalty for buyers if the financing wasn't there, the buyers wanted the company's responsibilities spelled out in much more detail in the merger agreement," says Rodgers.

Says Mark Gordon, a partner at Wachtell, Lipton, Rosen & Katz who advised Goldman Sachs on the SunGard deal, "The size was headline-grabbing, virtually all of the top PE firms were involved, and it created an easy-to-follow template that allowed the PE firms to go to other companies and say, 'This worked in SunGard.' "