Blame the lawyers. At least, that is what some did in explaining why JPMorgan had to raise its offer for Bear Stearns five-fold, citing supposedly lax wording in the merger agreement. Never mind that JPMorgan's guarantee of Bear's trades seemed clear enough when it was announced and had to be relatively unencumbered anyway in order to achieve a key objective – ie, keeping counterparties trading with Bear.
Even if the theory does not stand up, this is not the only mooted deal of recent vintage where quarrels have arisen over the wording of contracts. In December, a court upheld Cerberus Capital Management's right to walk away from a $6.6bn buy-out of United Rentals in return for paying a $100m reverse break-up fee. The argument there centred on the interpretation of two provisions in the merger agreement. In January, Sallie Mae settled rather than try to force prospective buyers to proceed with a deal after the latter invoked a material adverse change clause.
It is too simplistic to blame sloppy drafting for disputes. Still, there may be room for improvement in terms of updating the often-archaic language used in merger agreements, as firms such as Jones Day and contract specialist Kenneth Adams have called for. This would help in ensuring deal contracts make clearer the position of each party to a deal.
It is more likely that rapidly changing circumstances have fuelled disputes. The rapid-fire deal environment of recent years may have created an impression that there was only a low risk of merger provisions being tested to destruction. Why kick up a fuss over some ambiguous wording when the deal seems certain to happen anyway? Few negotiators could have guessed that credit markets would deteriorate so sharply that buyers would choose to risk reputations by walking away. On this front, a cooling merger market should do its bit in prompting greater clarity.
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