Call a MAC, ok, lets call their bluff

KKR and Goldman Sachs have threatened to back out of their $8 billion buyout of upscale audio equipment maker Harman International Industries Inc., adding that they are under no obligation to complete the merger because "a material adverse change" in its business had occurred. In deal parlance, it is "Call a MAC".

I was not surprised by the news, since that the prevalent credit crunch has forced many buyout firms to rethink their M&A deals which were negotiated when cheap credit was easily available.

The "material adverse change" is actually a clause in the merger agreement, but it is hardly invoked in the past. However, under the current circumstances, the clause, acting like an opt-out clause, started to work like a last straw for those buyout firms who have regretted on their deals.

The material adverse change, however, is hard to be invoked given the very strict criteria to be met. Therefore, the withdrawal of KKR and Goldman Sachs could result in a legal fight with Harmann.

I doubt that the two private equity firms are really serious about their withdrawal, given the uncertainty in "calling the MAC" . It could be a negotiating tactic to force Harmann to lower the price of the deal.

So lets call their bluff and look at how the drama plays out.