Beyond Cyber Fine Print in M&A Negotiation


Heiko Ziehms

Like many merger and acquisition agreements involving US-based companies, the terms of Verizon Communications’ acquisition of Yahoo for $4.8 billion in July 2016 included language known as a material adverse change (MAC) clause. Unlike in most M&A deals, however, Yahoo disclosed after signing, that it had become aware of two cyber-attacks dating to 2013 and 2014, that compromised more than 1 billion of its customer accounts.

A MAC clause enables an acquiring company to abandon a deal without penalty if a materially adverse event happens between the agreement’s signing and completion. However, issues often arise over the definition of what constitutes a “material” event and assessing a financial impact, making such terms difficult to enforce, notes Antonio J. Macias, an assistant professor of finance at Baylor University’s Hankamer School of Business. 

Most MACs do not result in the parties abandoning a transaction, instead creating leverage for renegotiating a deal’s price. That is especially true “in case something big happens,” says Macias, who has published studies about the importance of MACs. 

Something big indeed happened at Yahoo. The disclosure of two major data breaches sent the parties back to talks—and led them to extract $350 million, or 7%, from the price Verizon originally agreed to pay. Reuters cited federal filings that Verizon’s CEO initially proposed a discount as high as $925 million. 

One peculiar aspect of cyber security is that breaches may be discovered after signing but related to incidents that precede an agreement. It creates a unique risk profile for both parties—and what reportedly happened in the Verizon/Yahoo acquisition.

In time, investors and business historians will evaluate the success of the Verizon–Yahoo deal. Yet it provides a valuable window into M&A mechanics. Spelling out terms of a MAC in detail makes sense in a volatile industry like technology—where timing is crucial. It offers lessons for C-suite executives evaluating risks and opportunities, in prospective high-tech deals:

Ensure the deal’s details are specific and unambiguous. Employ clear wording about how the final purchase price is determined, how earn-outs are calculated, and what constitutes a MAC event. Also, be thorough when the sale and purchase agreement references valuation concepts or accounting policies.

Employ diverse backgrounds on your M&A team. Large and dispersed teams, led by the CEO and CFO, often include accountants, lawyers, intellectual property experts, specialists on industry, technology, valuation and other expertise. A range of voices with varied qualifications and professional or cultural experiences can surface important issues. Ensure they are heard. Diverse teams are better at identifying opportunities and anticipating challenges, and are more creative at problem solving. 

Create opportunities to raise concerns—and to listen. Before top leadership signs off on a deal, they need to listen to the professionals they assemble and address concerns that are raised. This can be a challenge given the time pressures facing both teams to evaluate an acquisition or merger. However, it pays for the specialists to voice concerns freely and for leadership to address each risk and resist pressures to reach decision points too quickly. Overconfidence can present a hazard. 

Communicate constantly. All players on the M&A team should share findings with the team as they analyze how various factors can impact the conditions of a sale and purchase agreement. Many issues that lead to M&A disputes originate at the intersection of disciplines. For example, if the valuation team is not sufficiently aware of completion mechanism details, the same item may be captured twice in the purchase price, or not at all. The buyer may then pay double, or nothing, respectively, for value transferred by the seller. 

Recognize constraints involved in deal-making. There is never enough time or perfect data to address every risk. The objective is to form responsible, sufficiently robust judgments as to the risks involved, to protect against them contractually to the extent possible, or to reflect them in the price. Successful dealmakers understand what can realistically be obtained and make the best of available data.

Heiko Ziehms is a London-based managing director of Berkeley Research Group, specializing in commercial disputes, including financial and accounting matters related to M&A and joint ventures.