Deal or no deal?
What’s a merger agreement worth these days? Anywhere from zero to the agreed-upon amount. The epic battle between Huntsman and Hexion Specialty Chemicals on their busted deal has just begun.
Hexion, owned by private equity firm Apollo Management, is backing out of its agreement to acquire Huntsman for $28/share on the grounds that the combined company with its heavy debt load would be insolvent.
CEO Peter Huntsman vows to fight tooth and nail to hold Hexion to the terms of the original merger agreement. The company is suing Apollo and its founders Leon Black and Joshua Harris for $3.1bn in damages.
This scenario is nothing new, as a number of private equity deals have fallen through in the wake of the global credit crisis. However, it is the first in the chemical industry.
Winning a settlement for a busted deal is not without precedent. Last March, US shoe retailer Genesco successfully sued to force a $175m settlement with suitor Finish Line, which wanted out, and its bank UBS.
Huntsman’s stock plunged 38% from $20.86 to $12.86 the day after Hexion’s announcement on June 18, and continued to fall further last week to just above $11.
The damage? $2.3bn in market capitalization wiped out for Huntsman. From the original acquisition price of $28/share, the difference comes out to $3.9bn.
Whichever way you cut it, this represents a huge loss for the Huntsman family and the company’s investors. Huntsman founder Jon Huntsman built his empire on the principle that “your word is your greatest asset; honesty is your best virtue.”
Huntsman followed through on many deals on that basis, even when the terms turned less favorable.
In his book “Winners Never Cheat,” Jon Huntsman recalled a deal with Great Lakes CEO Emerson Kampen where they had a handshake deal for Great Lakes to buy 40% of a Huntsman division for $54m.
Great Lakes dragged its feet for 6 months, but in the meantime, business recovered and profits in the Huntsman business soared. Emerson Kampen assessed the value of a 40% stake at $250m by the time he was ready to do the deal, and offered to split the difference between the original agreed-upon $54m and the $250m value – that would have been an extra $100m to Huntsman.
Huntsman flat out refused, and would not take the extra $100m. A deal was a deal when they shook on it for $54m, and that’s all Great Lakes had to pay. When you shake hands, the negotiating is over.
It is most unfortunate that now a reneged-upon deal has wiped out so much of the value of the Huntsman empire – at least for now.