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What Happens if the Ares-American Capital Deal Fails?

By Jordan Wathen - May 25, 2016 at 1:08PM

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If an agreement falls through, an activist will have substantially more power to force a second sale attempt.

On Monday, Ares Capital (NASDAQ: ARCC) announced that it would acquire American Capital (NASDAQ: ACAS) in a transaction valued at $3.4 billion. Elliott Management, activist investor and 14.4% owner of American Capital, was one of the driving forces behind the deal.

Making its case publicly, Elliott Management once opined that American Capital could be worth as much as $23 per share. Ultimately, the deal came out at a valuation of $17.40 per American Capital share, paid in cash and Ares Capital stock. But even that's good enough for a 20% annualized return for Elliott Management, according to an analysis by Bloomberg.

Being a major shareholder has its perks throughout an activism campaign. Elliott Management's ownership allowed the activist to push for change at American Capital and be taken seriously. Its shares will come in handy when the time comes to approve the merger, as each share represents one vote in favor of the transaction.

But having a big stake is even more crucial in the worst-case scenario. If the deal falls through, Elliott will be in the privileged position of being able to force an immediate second attempt at a sale. Elliott and American Capital have agreed that the following events would have to take place should this transaction fall apart: 

  • American Capital will appoint four new members to its board of directors, which should number no more than 10 people.
  • One new member will be selected by Elliott.
  • Three new members will be selected by mutual agreement of Elliott and American Capital.
  • A new chairman of the board will be selected to replace the incumbent (currently American Capital CEO Malon Wilkus).

This was all pre-negotiated between Elliott and American Capital. The specifics are to be hammered out by June 6, according to the SEC filing. Even with only the basic terms laid out, however, you can see how much clout Elliott would have if it were to push for another sale in the case that the Ares-American Capital merger fell apart. At least four of American Capital's 10 board members, and potentially its chairman, would be sympathetic to Elliott's desire to sell the company.

If you remember, two of Elliot's five steps toward increasing American Capital's value involved modifying the board and having those new directors engage in a complete strategic review. Though there is always the risk  a merger will crumble before it's consummated, in this case, the next step is obvious: American Capital would go right back on the auction block. There's no turning back now.

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