Let's Still Make a Deal

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"We are seeing major advantages for strategic buyers," says Marilyn Sonnie, a partner with law firm Jones Day who advised electronics maker Harmon International Industries (HAR) on its failed buyout by Kohlberg Kravis Roberts. "These are buyers who can come to the table and give a firm commitment."

Of course, companies have to be willing to spend their money. And so far many cash-rich players seem content to sit on the sidelines, especially in a weak economy. Still, there are a few who are willing to flex their newfound muscle. For example, Mars Inc. recently agreed to buy rival candymaker Wm. Wrigley Jr. Co. (WWY) for $23 billion in cash.

For companies that make deals in the coming months, the agreements are likely to leave no room for interpretation. Take the so-called MAC—or material adverse change— clauses, a key part of contracts that gives a buyer the right to walk away from a deal without having to pay a breakup fee if the financial position of its target deteriorates significantly. Now that the era of easy money has ended, buyers will likely want those clauses to be as broad as possible, giving them a way to wriggle out of deals. At the same time, sellers will try to push for a host of exceptions that narrow the escape hatch. "Sellers don't want to be left at the altar," says Dennis J. Block, an M&A attorney with Cadwalader, Wickersham & Taft.

TOUGHENED-UP TERMS

Such terms have been weighing heavily on pending deals since the credit crisis began. Back in September, Genesco (GCO), which runs a chain of shoe stores, sued prospective suitor Finish Line Inc. (FINL) to force the sports apparel retailer to go through with an acquisition. Finish Line wanted out, arguing that Genesco's earnings had headed south, thereby triggering the MAC clause. But a judge ruled the deal had to go forward, saying the entire industry, including Finish Line, had suffered a financial hit—an exclusion under the original contract. Genesco and Finish Line did not return calls for comment.

It looks like other terms will start to change as well. While breakup fees have historically run around 2% to 3% of the total value of the deal, they could go up to 7% to 8%. Debt is also pricier, with lenders likely demanding interest rates that run several percentage points higher than at the peak of the buyout boom in 2007.

Banks also want to make that debt easier to sell to investors, which has been a problem of late. To accomplish that, they may choose to issue the loans or bonds at 98 cents on the dollar right off the bat. Borrowers get less financing, but investors buy the debt at an automatic discount, making it more attractive. "The lenders want to know they have enough flexibility," says Scott J. Troeller, a partner at Veronis Suhler Stevenson, a private equity firm that specializes in media. Says M&A attorney Sonnie: "It's a reaction to the uncertainty of the times."

Silver-Greenberg is a reporter for BusinessWeek.com.