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Virus Crisis Makes Big Deal of M&A Small Print

Alex Webb

(Bloomberg Opinion) -- The virus-induced fall in global stocks has suddenly called one of Europe’s biggest tech deals of 2019 into question.

An 80% decline in AMS AG’s share price since February is undermining efforts to fund the final slice of its 4 billion-euro ($4.4 billion) takeover of German lighting group Osram Licht AG. It’s testing a seldom invoked deal-making provision buried in the small print.

AMS, which makes laser components for the iPhone’s facial recognition system, is midway through an effort to sell 1.7 billion euros of new shares in a rights offer to pay for Osram. It will be tough to fund the whole deal ultimately with debt. When the terms of the share sale were announced a week ago, the price of the new stock was set at 9.20 Swiss francs.

That was a 64% discount to the then share price, which had long been anticipating the fundraising. Coronavirus was no secret at the time and markets were already falling, and these wide terms seemed to acknowledge as much.

Since then, however, AMS shares have continued their downward trajectory, and were trading below 9 francs on Wednesday. Investors are now being asked to buy AMS shares above the market price to clinch a risky takeover in challenging times. It’s hard to see them being keen. No wonder Osram shareholders are getting worried AMS will not fulfill its bid – the German firm’s shares have also fallen sharply.

Normally, AMS would be able to count on the banks underwriting the share offer – HSBC Holdings Plc. and UBS Group AG – to buy any stock not taken by investors. The snag is that the underwriting agreement includes a so-called material adverse change clause, which allows the banks to walk away in the case of any “calamity or crisis or development involving a prospective change in national or international financial, political or economic conditions in any country”.

The markets see that as a get-out. The virus could detrimentally affect demand for the smartphones for which AMS supplies components, and the automotive industry – Munich-based Osram’s key end market.

It’s a highly uncertain situation. In a worst-case scenario the banks could be left holding roughly 70% of AMS, although they are likely to have passed on some of their commitment to hedge funds. Getting a controlling stake might even necessitate a mandatory takeover bid. The incentives for the banks to try wriggling off the hook are high.

AMS can still fund the deal in the short term because it has bridge financing. But it will have to repay those loans before long. It’s not clear if AMS shareholders wouldn’t mind letting the deal fall apart. What’s not in doubt is that Osram and its shareholders would be furious if that happened, and would almost certainly chase AMS in the courts – there doesn’t seem to be a material adverse change clause in the actual takeover offer. Still, the bidder might prefer a legal battle to turning to the debt markets to pay for the transaction at considerably more cost.

The takeover battle itself was a drawn-out, messy affair. Its closing risks becoming messier still.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.

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