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Monday, September 12, 2011

LUBRIZOL acqusition agreement-some interesting features

Warren Buffet is undoubtedly one of the most savvy investors and acquisition experts out there. Hence, any M&A agreement entered into by him does bear some interest. I read through 50+ pages of the acquisition agreement signed to acquire Lubrizol(DEF14A filing in 8-K) and below are some observations.
  • Material Adverse Change definition:- While this boilerplate clause does exist, Lubrizol has a lengthy list of exceptions(generally geopolitical, macroeconomic,capital market related) which apply only to the extent such conditions have a disproportionate effect on the Company and its Subsidiaries, taken as a whole, relative to others in the industries in which the Company and any of its Subsidiaries operate. That clause makes it harder for the acquirer(Berkshire) to wriggle out, merely if the industry declines,
  • Representation as to published earnings guidance:- Even though companies routinely disclaim liability for their earnings guidance, Lubrizol assured that its the earnings guidance included in the Company’s February 2, 2011 press release continued to be reasonable, based on and subject to the assumptions stated in such release, and (ii) no event, circumstance, change, occurrence, state of facts or effect has occurred which would cause the Company to change such earnings guidance.This is a very interesting clause, because that means the acquirer can explicitly rely on that guidance. 
  • $200MM break fee:- This is payable only by Lubrizol to Berkshire(not vice versa) which goes to show the signalling effect of the latter. Even if any other acquirer buys Lubrizol within a year, the break fee is still payable, probably to reflect the due diligence value that Berkshire brings to the table
The deal is now nearly closed, but these 3 points are of interest to wannabe bankers and anybody involved in deal documentation. That is why this post. 

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