Hedge fund managers may want to take a close look at Salt Lake City–based chemicals conglomerate Huntsman Corp.’s legal victory over Leon Black’s Apollo Group in late September for clues about how hard it might be to get out of merger agreements that suddenly look less attractive.
The Huntsman decision suggests it might be pretty difficult.
In response to a suit brought by Apollo, a Delaware Court ruled after a six-day trial that Apollo’s Hexion Specialty Chemicals unit must complete the $10.6 billion deal struck last year to acquire Huntsman for $28 a share even though current economic conditions present many obstacles to closing. Apollo faces a breakup fee that could exceed $325 million.
“If [the court] had tried to draft a more favorable ruling for Huntsman, it could not have,” says Steven Davidoff, an associate professor of corporate law at the University of Connecticut and a former lawyer with New York–based global firm Shearman & Sterling.
The decision was a blow to Apollo, which is planning a New York Stock Exchange listing this year. It was welcome news to Huntsman shareholders, which include hedge fund firms D.E. Shaw Group, Citadel Investment Group and Pentwater Capital Management. After Apollo tried to scotch the deal in June — citing difficult market circumstances — those funds were among the investors offering a $500 million lifeline to be paid back only if the merged company attained a certain profit threshold.
When the merger agreement was struck in July 2007, it looked like a win-win deal. Apollo, a powerful private equity group, was offering a lucrative exit to the Huntsman family and the hedge funds that had backed the company’s expansion. But the one-two punch of high oil prices and the credit crunch threw Apollo’s calculations awry.
The ruling offers a cautionary tale, perhaps, for any investment firm that strikes a deal and then pulls out all the stops to get away from it. It might also be a lesson for family-owned companies that become the object of affection for corporate suitors. Huntsman, which has about 14,000 employees and operations in two dozen countries, had rejected a $25.25-per-share offer from Basell Holdings, a Dutch industrial company that presented itself as a similar and like-minded partner.
“A strategic-acquisition partner is a lot safer for a company like Huntsman or any family-owned company,” says Roger Shamel, president of Lexington, Massachusetts–based Consulting Resources Corp., an advisory firm that specializes in the chemical industry. “It’s more durable and has a chance of working out.”
