Finance 101

3 October 2007 By Lauren Silva

Break fees are supposed to protect a target’s shareholders against a buyout firm getting cold feet. But they seem to be doing the opposite. Instead of encouraging the consummation of deals, they give buyers a way out. In fact, they make some buyout deals look like cheap options.

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Silver Lake Partners and ValueAct Capital Partners broke off their $2.25bn purchase of datamanagement company Acxiom. The private equity firms and their bankers, Morgan Stanley and UBS, will pay $65 million to terminate the acquisition, less than the $110 million termination fee set originally.

KKR and Goldman have walked away from their $8bn deal to buy stereo maker Harman International. They claim that a material adverse change or Mac at the company gives them a contractual excuse not to buy the company for $120 a share. Harman International disagrees. Even without a Mac, the buyers could still walk if they pay a $225m break fee.

The consortium buying Sallie Mae has cut its original $60 a share offer, worth roughly $25bn. The new cash offer of $50 a share includes warrants that could later pay out more if things go well. The buyers, J.C. Flowers & Co, JPMorgan and Bank of America, believe recently passed legislation that cuts Sallie Mae's government subsidies triggers the deal's Mac clause, allowing them to walk away if they want. Even if the consortium can't rely on the Mac, its negotiating hand is strengthened because, if it has to, it can walk away anyway if it pays a $900m break fee, equivalent to about $2 a share.

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