What is a MAC Clause and Will it get BofA off the Hook?

Mystery of the MAC clause

What is this “MAC clause” business everyone is blogging about? Does it have to do with Apple computers? Macaroni and cheese? A department store cosmetics line?

Unfortunately, a MAC clause isn’t as much fun as any of those things. Unless, of course, your large financial institution stands to gain or lose from the acquisition of another large financial institution. In other words, if you are Bank of America or Merrill Lynch. Particularly if you are Bank of America, you might find a MAC clause a lot of “fun.”

MAC clause defined

The MAC in MAC clause stands for Material Adverse Change. According to a financial expert who made a very studious-looking PDF that I found online:

MAC clauses are a common means of allocating the risks presented by adverse business or economic developments occurring between the signing and the closing of an acquisition agreement.

So basically, Large Financial Institution No. 1 agrees to purchase Large Financial Institution No. 2, and they sign the papers. And we’re not talking about a quick, online cash advance here. We’re talking about a very lengthy process that involves lots of paperwork. So, after they sign paperwork and sometime before the parties declare, “OK, this deal is final,” something happens that changes the value of FI2 or the financial position of either company.

Bank of America and Merrill Lynch

So, of course, in the real, non-hypothetical world, Large Financial Institution No. 1 is Bank of America, Large Financial Institution No. 2 is Merrill Lynch, and adverse business developments are adverse business developments, and the economy is the economy.

Bank of America is saying that it was pressured into agreeing to buy Merrill Lynch, and financial analyst Mark Fightmaster reports:

CEO Ken Lewis threatened to use a MAC clause to kill the agreement to buy Merrill Lynch because he wanted to get a lower price, according to the Financial Times. New e-mails reveal how he was then pressured to proceed with the deal.

So, we have e-mails showing B of A was pressured to buy Merrill Lynch. However, do we have proof of a material adverse change?

One man’s opinion

Well, Federal Reserve Chairman Ben Bernanke, for one, apparently doesn’t believe that a material adverse change has occurred. Either that or he believes that even if it did occur, it has nothing to do with Lewis’ threat to use a MAC clause. The Financial times reports:

Bernanke called Lewis’s MAC-clause threat a “bargaining chip” and a “foolish move,” before he stated that “the regulators will not condone it.” An e-mail from top executives at B of A said they “want the transaction to go through but have to protect their shareholders.”

The end

So, now that you know what a MAC clause is, and who is threatening to use it against whom, all we can do is wait to see whether the clause is invoked and whether it works.

Until then,  you can go back to Googling “Tiger Woods Hawaii House,” “Chad Johnson face tattoo” and “prickly shark.” Oh yeah, I know what you’re up to.