Print

Email story

Comment

Letter to the editor

Broken deals are another reality of financial crisis

NEW YORK - When a buyout shop chooses to pay $100-million just to walk away from a committed deal, that tells you how deep today's financial crisis is running.

Private-equity firm Cerberus Capital Management wants out of its $4-billion offer for United Rentals Inc., which recently thought it was about to be bought for $34.50 a share.

Cerberus isn't even trying to fight paying the termination fee by blaming deteriorating credit conditions for its change of heart. Instead, Cerberus simply says it wasn't "prepared" to continue with the acquisition, and will pay the penalty to end the deal.

Not business-as-usual for dealmaking. Private-equity firms are famous for frugality - they don't like overpaying and are intently focused on capturing profits.

Cerberus apparently thinks that the $100-million spent now, while giving it nothing in return, could save it from losing at least as much later.

Times are desperate. Tightening lending conditions and a weak economy are proving to be a toxic cocktail for dealmakers, forcing them to go to extremes to exit certain acquisitions.

That means investors, who months ago were worried that takeover premiums for their shares would not be high enough, should now be fretting over whether they will get paid at all.

United Rental's investors didn't see this situation coming. The stock was trading just below the $34.50 offer price for the first two weeks of November, indicating that shareholders believed the Cerberus takeover was about to close. United Rental's business has been considered healthy, and its quarterly earnings beat analysts' expectations.

But on Nov. 14, the news hit that the takeover was in jeopardy. United Rental's shares plunged more than 30 percent to about $23 apiece on the news and now trade slightly below that.

This highlights one broken deal. Many more are also unraveling due to the credit market turmoil, including the acquisition of shoe retailer Genesco and the buyout of student-loan lender Sallie Mae. Cerberus last month cited the poor debt market environment when it withdrew a $6.2-billion offer for Affiliated Computer Services.

There are lessons to be learned for all corporate boards. When takeovers were booming, many companies gave potential buyers lots of wiggle room.

"Companies did not fully grasp that firms could and would walk away from some deals," said Steven Davidoff, assistant professor at Wayne State Law School.

Davidoff says better protections are needed. Companies being sold need to make sure breakup fees are set at sky-high levels.

Companies also can't forgive and forget which buyers are bolting on deals now, especially when the market turns around.

[Last modified November 27, 2007, 01:26:23]