Another Apollo (for the ladies)
M&A geeks have relished the drama that was the Hexion-Huntsman deal. Amy Kolz at The American Lawyer has an indepth piece analyzing what went wrong and who was to blame.
For those who haven’t followed the action, Hexion is an Apollo portfolio company that signed an agreement to purchase specialty-chemical maker Huntsman for $10.6 billion in July 2007. You probably recall that that was the height of the private-equity wave, and Huntsman’s lawyers at Shearman & Sterling and Vinson & Elkins took full advantage.
The merger agreement that Hexion, repped by Wachtell and O’Melveny & Myers, signed was head-scratchingly favorable to the target. There was no financing or solvency out, the MAC was extremely narrow, and the breakup fee was $325 million (within the range of reason).
Things promptly went south. After the jump, Wachtell gets benchslapped and the media piles on.
Within months, Huntsman started posting bad numbers: EBITDA was declining, debt was growing, and so on. It was quickly an overpriced, bad deal for Hexion/Apollo. In May, 2008, Hexion, Apollo, and a Wachtell team led by Marc Wolinsky (Swarthmore BA ‘77, Chicago JD ‘80) met to strategerize over their options. Of course, the first thing people considered was whether there was a MAC out. But as Kolz points out, Wolinsky had to know that a MAC (especially one as narrow as Huntsman negotiated) was a longshot – he was the lawyer on the seminal 2001 case IBP v. Tyson Foods, which set the bar impossibly high for buyers who want to walk.
Instead, Apollo and Wachtell began to consider the combined company’s potential insolvency as a possible way out of the merger. The strategy was certainly intriguing. If the merger would result in an insolvent company, the banks could refuse to finance it, leaving Hexion with no choice but to abandon the deal. And if it were the banks-not Hexion-scuttling the deal, Hexion would be liable for, at most, the breakup fee.
Important distinction there, because if Hexion willfully breached the agreement, the damages cap didn’t apply and the breakup fee wouldn’t be available.
Since we’re writing about this six months after Vice Chancellor Lamb’s September opinion, you know that plan didn’t work out so well. He found Hexion had knowingly and intentionally breached. Apollo and the banks ultimately paid $1 billion to get out of the deal. Lamb vilified not only the strategy to go for insolvency, but the tactic of engaging the same firm as both a litigation consultant and the financial advisor to write the insolvency opinion.
The case itself was fascinating, but Kolz’s analysis and conclusion are fascinating: Wachtell blew it.
Even after the trial concluded, as the two sides waited for Lamb’s ruling, Wachtell’s Martin Lipton personally guaranteed victory to Apollo cofounder Leon Black, according to individuals familiar with the matter. So when Vice-Chancellor Lamb issued his opinion on September 29, Apollo and Hexion were shocked. Not only had the judge ruled against Hexion on the material adverse effect clause and found Hexion liable for uncapped damages, he had declined to rule at all on Wachtell’s primary argument of insolvency, saying the issue was not ripe for judgment.
Wachtell did a little better for its next client, though. Another Wolinsky-led team was able to force Dow Chemical (which tried the same strategy as Hexion employed – claiming the combined company would be insolvent) to complete its acquisition of Rohm and Haas.
Also, make sure to check out Heidi Moore’s piece at the Wall Street Journal, where she recaps Wolinsky and Lamb’s awkward meeting at the Tulane M&A summit last week.
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Apollo et al got what was coming to them – crappy deal doc, aggressive and risky litigation…pride goeth before the fall.