Could the Fed’s bailout lead to a renegotiation (or termination) of the Merrill (MER) – Bank of America (BAC) deal? Certainly seems possible.
If the Fed had introduced its bailout a week ago, Lehman Brothers (LEH) would probably still be with us. Merrill Lynch (MER), moreover, probably wouldn’t have agreed to sell to Bank of America (BAC) for $29 a share. (And here we were blasting BOFA CEO Ken Lewis for overpaying earlier this week..)
Lehman can’t un-declare bankruptcy, of course. But can Merrill renegotiate the Bank of America deal? Not unilaterally. But its shareholders could block it. And if its shareholders seem as though they are prepared to block it, it’s reasonable to assume that Bank of America (BAC) might be forced to renegotiate.
(This, after all, is what happened with Bear Stearns: The companies agreed to a deal at $2, and then shareholder outcry persuaded JP Morgan to raise the price to $10).
We’ve scanned the BAC-MER Merger Agreement, and we have not seen any reference to a break-up fee. If, in fact, there isn’t one, this is unusual, especially for a merger of this size. In our opinion, it makes it more likely that Merrill shareholders could actually block or hold up the deal.
Merrill can’t recommend that its shareholders vote against the deal, but it can’t stop them from telling each other not to. If the government’s bailout gets Morgan Stanley and Goldman Sachs stocks on firm footing again, it’s hard to imagine that some shareholders won’t start agitating for, at the very least, a price renegotiation.
Here’s the key passage from the Merger Agreement, which spells out what happens if the deal doesn’t go through:
8.2 Effect of Termination. In the event of termination of this Agreement by either Company or Parent as provided in Section 8.1, this Agreement shall forthwith become void and have no effect, and none of Company, Parent, any of their respective Subsidiaries or any of the officers or directors of any of them shall have any liability of any nature whatsoever under this Agreement, or in connection with the transactions contemplated by this Agreement, except that (i) Sections 6.2(b), 8.2, 8.3, 9.3, 9.4, 9.5, 9.6, 9.7, 9.8 and 9.10 shall survive any termination of this Agreement, and (ii) neither Company nor Parent shall be relieved or released from any liabilities or damages arising out of its knowing breach of any provision of this Agreement. Notwithstanding the foregoing, in the event of any termination of this Agreement, the Stock Option Agreement shall remain in full force and affect in accordance with its terms.And here are the conditions under which the merger might not happen:
The consummation of the Merger is subject to customary closing conditions, including
- (i) requisite approvals of Merrill Lynch stockholders and Bank of America stockholders [this is the only one that matters],
- (ii) expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and certain other regulatory approvals,
- (iii) delivery of customary opinions from counsel to Merrill Lynch and Bank of America that the Merger will qualify as a tax-free reorganization for U.S. federal income tax purposes,
- (iv) the absence of certain legal impediments to the consummation of the Merger and
- (v) subject to certain exceptions, the accuracy of the representations and warranties and compliance with the covenants of each party.
This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of the matters presented in connection with the Merger by the stockholders of Company:
(a) by mutual consent of Company and Parent in a written instrument authorised by the Boards of Directors of Company and Parent; (b) by either Company or Parent, if any Governmental Entity that must grant a Parent Requisite Regulatory Approval or a Company Requisite Regulatory Approval has denied approval of the Merger and such denial has become final and nonappealable or any Governmental Entity of competent jurisdiction shall have issued a final and nonappealable order, injunction or decree permanently enjoining or otherwise prohibiting or making illegal the consummation of the transactions contemplated by this Agreement; (c) by either Company or Parent, if the Merger shall not have been consummated on or before the first anniversary of the date of this Agreement unless the failure of the Closing to occur by such date shall be due to the failure of the party seeking to terminate this Agreement to perform or observe the covenants and agreements of such party set forth in this Agreement; (d) by either Company or Parent (provided that the terminating party is not then in material breach of any representation, warranty, covenant or other agreement contained herein), if there shall have been a breach of any of the covenants or agreements or any of the representations or warranties set forth in this Agreement on the part of Company, in the case of a termination by Parent, or Parent or Merger Sub, in the case of a termination by Company, which breach, either individually or in the aggregate, would result in, if occurring or continuing on the Closing Date, the failure of the conditions set forth in Section 7.2 or 7.3, as the case may be, and which is not cured within 30 days following written notice to the party committing such breach or by its nature or timing cannot be cured within such time period; (e) by Parent, if (i) the Board of Directors of Company shall have (A) failed to recommend in the Joint Proxy Statement the approval and adoption of this Agreement, (B) made any Change of Recommendation, (C) approved or recommended, or publicly proposed to approve or recommend, any Alternative Proposal, whether or not permitted by the terms hereof or (D) failed to recommend to Company’s stockholders that they reject any tender offer or exchange offer that constitutes an Alternative Transaction within the 10 business day period specified in Rule 14e-2(a) of the Exchange Act, or (ii) Company shall have breached its obligations under Section 6.3 in any material respect; (f) by Company, if Parent shall have breached its obligations under Section 6.3 in any material respect; (g) by either Company or Parent, if the approval of Company stockholders required by Section 7.1(a) shall not have been obtained at a meeting of Company stockholders convened for purposes of approving and adopting this Agreement; or
(h) by either Company or Parent, if the approval of Parent stockholders required by Section 7.1(a) shall not have been obtained at a meeting of Parent stockholders convened for purposes of approving the issuance of Parent Common Stock in the Merger. Disclosure: Henry Blodget has a long-term position in MER.
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