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Failed deals have merger specialists shifting tactics

The Baltimore Sun

Happy New Year? Not for Wall Street deal makers.

PHH Corp. announced 18 minutes into 2008 that its sale to the Blackstone Group and a unit of General Electric Co. had collapsed. Now buyout specialists and lawyers are wondering which deals might go belly up next.

Among the biggest pending buyouts is the $19 billion planned acquisition of Clear Channel Communications by Thomas H. Lee Partners and Bain Capital. Smaller deals outstanding include a $1.1 billion offer for Reddy Ice Holdings and a $794 million planned takeover of Myers Industries.

Blackstone, the private equity powerhouse run by Stephen A. Schwarzman, could not come up with the funding for its $1.7 billion takeover, according to PHH. The company, based in Mount Laurel, N.J., says the Schwarzman firm now owes it a $50 million breakup fee.

Several other buyout firms, including Cerberus Capital Partners and J.C. Flowers, have likewise bowed out of deals they made before the credit markets seized up. A recent ruling in the influential Delaware Chancery Court may make it easier for others to follow suit.

During the height of the buyout boom, corporate executives focused on getting the best price for their companies.

Now companies and their lawyers are likely to change tack and focus on strengthening the language in contracts to help ensure that transactions are completed.

"Certainty is going to take on a different meaning," said Morton A. Pierce, chairman of the mergers and acquisitions group for the law firm of Dewey & LeBoeuf.

"People are going to look at the standard provisions and see if they can tighten them up to get more certainty other than a breakup fee," Pierce said.

Sellers are bound to seek stronger financing guarantees and fatter breakup fees, Pierce said. "These are all things that have been negotiated in favor of the buyer, until now," he said.

The issue of when buyers can walk away - and how much they have to pay to do so - gained new urgency with the Delaware ruling last month. Chancellor William B. Chandler III, chief judge of the Delaware Chancery Court, ruled that Cerberus, the private equity firm that bought Chrysler last year, did not have to close on its $4.1 billion planned buyout of United Rentals, the rental equipment operator. Cerberus could terminate the deal by paying United Rentals a $100 million fee, he said.

Chandler wrote that the contract for the deal was "hopelessly conflicted" on the question of whether United Rentals could force Cerberus to complete the transaction, what is known in legal parlance as "specific performance." His decision limited the company's legal remedy to collecting the $100 million termination fee as stated in the contract.

Clear Channel's agreement calls for Thomas Lee and Bain to pay a $600 million breakup fee. SLM Corp., the student loan giant informally known as Sallie Mae, has sued J.C. Flowers in Delaware to collect a $900 million fee after its deal with the buyout firm went sour.

Lawyers said the United Rentals case could have gone either way. The judge not only had to consider testimony about how the two sides struck the deal but also about the negotiations that preceded the contract.

Chandler, in his 68-page opinion, wrote, "The law of contracts ... does not require parties to choose optimally clear language; in fact, parties often riddle their agreements with a certain amount of ambiguity in order to reach a compromise."

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