Yahoo Finance Parsing the Humana-Aetna MAE Clause
Key Details of the Humana-Aetna Merger for Investors
The MAE clause, paraphrased
Continued from part four of this series, the material adverse effect clause gives you 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.
the execution and delivery of this agreement, the public announcement or the pendency of this agreement or the mergers, the taking of any action required or expressly contemplated by this agreement or the identity of, or any facts or circumstances relating to the parent or its subsidiaries, including the impact of any of the foregoing on the relationships, contractual or otherwise, of the company or any of its subsidiaries with governmental authorities, customers, providers, suppliers, partners, officers or employees (If a major customer leaves because they don’t want to deal with the combined entity, it isn’t a MAE.)
any adoption, implementation, promulgation, repeal, modification, amendment, authoritative interpretation, change or proposal of any Applicable Law of or by any governmental authority (If the government changes the rules of the managed care industry, and it ruins the financial rationale for the deal, it isn’t a MAE, so Aetna would still have to buy Humana.)
any changes in GAAP, SAP, or ASOPs (Changes in accounting rules are not a MAE.)
any changes in geopolitical conditions, the outbreak or escalation of hostilities, any acts of war, sabotage or terrorism, or any escalation or worsening of any such acts of war, sabotage or terrorism threatened or underway as of the date of this agreement (Note the disproportionate effect clause: if a terrorist cyber attack hits Humana that is expensive to fix, it may be a MAE because it hit only Humana.)
any taking of any action at the written request of or with the consent of the parent
any changes to reimbursement rates or in methods or procedures for determining such rates, any changes to eligibility requirements or any other programmatic changes by any governmental authority (If reimbursement rates fall, it isn’t a MAE.)
the matters set forth in Section 1.01 of the company disclosure schedule (Arbs will never know what is in the company disclosure schedule, as it is confidential. These are a list of all the ongoing issues at the company that were disclosed during due diligence.)
any claims, actions, suits or proceedings arising from allegations of a breach of fiduciary duty or violation of applicable law relating to this agreement or the mergers (If a dissident Humana shareholder files to enjoin the merger, it isn’t a MAE.)
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).
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