September 30, 2007
Avaya and 3Com: Why are these PE Deals Different From All Other PE Deals?
On Friday, 3Com Corporation announced that it had agreed to be acquired by affiliates of Bain Capital Partners, LLC, for approximately $2.2 billion in cash. This is the first big private equity deal announced post-August market crisis. As such, I'm excited for 3Com to file the merger agreement this week; it will give us a good window on how transaction participants and M&A attorneys have reacted to revise previously standard structures in light of market developments. My big bet -- expect there to be no reverse termination fee -- that is, a clause which gives the private equity buyer an absolute right to walk from the deal by paying a pre-set fee, typically 3-5% of the deal value (for more on these see my post here). Instead, expect the parties in 3Com to adopt the structure used in the Avaya transaction where Avaya agreed to be acquired by Silver Lake and TPG Capital for approximately $8.2 billion or $17.50 per common share.
The Avaya merger agreement was one of the only private equity transactions pre-market crisis to specifically provide for the opposite of a reverse termination fee -- specific performance. In Section 7.3(f) of the merger agreement the parties specifically cap monetary damages in case of breach but provide for specific performance. This effectively ends the optionality contained in the other private equity agreements with reverse termination fees. Here is the relevant language:
Notwithstanding the foregoing, it is explicitly agreed that the Company shall be entitled to seek specific performance of Parent’s obligation to cause the Equity Financing to be funded to fund the Merger in the event that (i) all conditions in Sections 6.1 and 6.2 have been satisfied (or, with respect to certificates to be delivered at the Closing, are capable of being satisfied upon the Closing) at the time when the Closing would have occurred but for the failure of the Equity Financing to be funded, (ii) the financing provided for by the Debt Commitment Letters (or, if alternative financing is being used in accordance with Section 5.5, pursuant to the commitments with respect thereto) has been funded or will be funded at the Closing if the Equity Financing is funded at the Closing, and (iii) the Company has irrevocably confirmed that if specific performance is granted and the Equity Financing and Debt Financing are funded, then the Closing pursuant to Article II will occur. For the avoidance of doubt, (1) under no circumstances will the Company be entitled to monetary damages in excess of the amount of the Parent Termination Fee and (2) while the Company may pursue both a grant of specific performance of the type provided by the preceding sentence and the payment of the Parent Termination Fee under Section 7.1(b), under no circumstances shall the Company be permitted or entitled to receive both a grant of specific performance of the type contemplated by the preceding sentence and any money damages, including all or any portion of the Parent Termination Fee.
Practitioners take note for future deals.
Additional Point: Given the difference between the Avaya deal and the other private equity deals, I was surprised to see the wild fluctuation in the Avaya stock price last week. This is a much more certain deal than the SLM Corp. and other private equity deals with reverse termination fees. Unless the buyers here can establish a MAC (which doesn't appear to be the case based on public information) this deal will close so long as the financing letters remain in place. I don't believe Avaya has disclosed these commitment letters, but presumably these are as tight as the merger agreement and can only be terminated for a similar MAC and other customarily significant reasons. Also, presumably if Avaya's lawyers negotiated a specific performance clause in the merger agreement they also demanded one in the commitment letters, so that they could ensure that the debt financing needed for the buyers to specifically perform under the clause above would be available. But perhaps the market is actually efficient here and is seeing something I do not.
Incidentally, Avaya stockholders approved the transaction on Friday -- the deal now goes into the debt marketing stage, and under the merger agreement is required to close by the end of the marketing period. The marketing period ends 20 business days from this past Friday provided Avaya has provided all the relevant information it is required to under the merger agreement to the buyers.
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