J&J - Guidant Back On

Also not surprisingly, J&J and Guidant negotiated a new price - a $4B discount off the original price. Nice work by J&J. It's unusual enough for a buyer to invoke the MAC clause, but this discount - nearly 20% off the original price - is huge, and is likely well in excess of the drop in Guidant's value caused by post-signing events.

Guidant's MAC

Nor surprisingly, Guidant sued Johnson & Johnson today over the latter's backing out of its $26B acquisition. While there is never a good time for a business to have the wheels fall off, there are few that compare in terms of sheer bad timing to the period between signing and closing the sale of your company. Since signing the deal, Guidant has faced product recalls, Spitzer-ization, and an SEC investigation. J&J decided to invoke the Material Adverse Change provision in the agreement and declare the deal off. Of course, they'd be happy to put it back on - at a lower price.

I can really feel for Guidant, having spent most of 2004 working to close the acquisition of my company. I know that Guidant's senior management must have been living and dying by that MAC clause, wondering if the next shoe to fall would put their buyer over the top. This is why negotiating the MAC clause is so important for a seller. It's hard enough for a buyer to walk on a vague MAC clause, but if you are able to negotiate in some specific concepts - either storm clouds you are aware of or just big risks unique to your industry or operations - you will sleep a lot better at night. When we sold AT&T Wireless, we had a couple of really ugly issues hit our business in the midst of running our auction. With telecom mergers taking 9 months or more to close, we tried to push as much of the risk of those problems continuing onto the buyers. We also wanted to make it clear that the issues had been disclosed, the buyers knew about them, and they went ahead with the purchase anyway. Our one-paragraph MAC clause was the most bitterly-fought provision in the whole merger agreement, but it was well worth it.

As a seller, you care about nothing so much as certainty of closing. Every deal has specific issues that can impact whether you get to closing - regulatory approvals, shareholder votes, etc. - but the MAC clause is a constant, and something that deserves a great deal of attention when negotiating every deal. Of course, as a buyer you need to be equally aware of attempts to push too much into the MAC clause. Although the bar to invoking a MAC is very high to begin with, there's no point in boxing yourself in if it can be avoided - or unless you get sufficient price concessions.

Selling the Deal

Seth Levine’s post on why entrepreneurs shouldn’t view their initial meeting with a VC as a one-shot deal rang particularly true for me yesterday when I met with a company I’ve been trying to do a deal with for 6 months. So much of corporate development is creating relationships with likely targets, whether they be large companies with businesses or assets that may need to be spun off, or small ventures that could be rolled up one day. And when you make a call to pitch a particular deal idea, it’s highly likely that you’ll get some manner of “no”. Like an entrepreneur, the kind of “no” you get – and what you do with it – depends entirely on the relationships you can establish. The guys I met with yesterday have told me no several times, as have I to their counter-proposals, but we’ve continued to talk – amicably – about what could be done to meet both of our needs. The outcome of all this dialogue is that we have finally reached a deal that works.

Circumstances change, and a deal structure that doesn’t make sense to a seller today may make a world of sense in three months. Sure, I sometimes feel like the persistant salesperson. But by leaving the door open, by being proactive and calling just to check in, I greatly increase the chance of being in front of the deal when it finally makes sense. And it's not just timing and luck - those calls and dialogue build the trust and information exchange that can create a deal where it otherwise would not ever happen.