A Deeper Look into the Humana-Aetna MAE Clause

Key Details of the Humana-Aetna Merger for Investors

(Continued from Prior Part)

The MAE clause, paraphrased

Continued from part three of this series, the material adverse effect clause (or MAE) lists the reasons why Aetna (AET) can back out of its deal with Humana (HUM).

The MAE clause, paraphrased

“Company [Humana] material adverse effect” means a material adverse effect on the financial condition, business or results of operations of the company and its subsidiaries, taken as a whole, provided that no event, change, effect, development or occurrence to the extent resulting from, arising out of, or relating to any of the following shall be deemed to constitute, or shall be taken into account in determining whether there has been, a company material adverse effect, or whether a company material adverse effect would reasonably be expected to occur.

This is standard MAE language. The carve-outs follow. Comments will follow the carve-outs in parentheses.

• any changes in general United States or global economic conditions (A recession or a financial crisis is not a MAE.)

• any changes in conditions generally affecting the healthcare, health insurance, or managed care industry, or any other industry in which the company or any of its subsidiaries operate, including Medicare Advantage (In other words, if the government cuts payments or changes the rules in the managed care industry such that it ruins the commercial logic of the deal, it isn’t a MAE.)

• any decline, in and of itself in the market price or trading volume of the company common stock, it being understood and agreed that the foregoing shall not preclude the parent from asserting that any facts or occurrences giving rise to or contributing to such decline are a company material adverse effect (The mere fact that Humana stock falls isn’t a MAE. However, the reason for the decline is fair game.)

• any changes in regulatory, legislative, or political conditions or in securities, credit, financial, debt, or other capital markets, in each case in the United States or any foreign jurisdiction (self-explanatory: if Bernie Sanders wins and says he plans to nationalize the healthcare industry, it isn’t a MAE.)

• any failure, in and of itself, by the company or any of its subsidiaries to meet any internal or published projections, forecasts or estimates, it being understood that the foregoing shall not preclude the parent from asserting that any facts or occurrences may be a company material adverse effect (Missing your quarter isn’t a MAE, but the reason why you missed may be.)

Other merger arbitrage resources

Other important merger spreads include the Hospira–Pfizer deal. The Hospira (HSP) and Pfizer (PFE) merger is also set to close in 2H15. For a primer on risk arbitrage investing, read Merger arbitrage must-knows: A key guide for investors.

Investors who are interested in trading in the healthcare sector should look at the S&P SPDR Healthcare ETF (XLV).

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - What Investors Should Know about Leading Healthcare Company Humana

• Part 2 - Aetna Is a Leading Healthcare Benefits Company

• Part 3 - What Does the Humana-Aetna Material Adverse Effect Clause Say?