Apollo Management’s Hexion Specialty Chemicals offered $6 billion to buy chemical company Huntsman (HUN) in July 2007, a bid which would have given stockholders $27.25 a share. Over the course of the next year, as fear about the deal not closing grew, Huntsman (HUN) shares fell below $11 last July. Apollo had begun to back out of the contact and the two banks that were planning to finance the buyout, Credit Suisse (CS) and Deutsche Bank (DB), walked away from the transaction. Their reluctance was understandable. The economy had fallen apart and earnings at chemical companies were demolished as demand for their products disappeared.

But, a deal is a deal, and Huntsman sued. The company’s lawyers had the cunning and skill to have the case initially heard in a local Texas court which immediately put the banks back on their heels. The financial firms should have settled then. Matters were only going to get worse, in part because the case stayed in Texas. That should not have mattered but loyalty is especially strong in The Longhorn State.

Many LBOs were broken between 2007 and 2008. Private equity firms lined up purchase companies that had enough cash flow to carry immense amounts of debt. They put in very little money of their own and turned to banks for financing. The banks were only too happy to collect the fees and onerous interest rates that came out of the transactions. Then the recession began to cut into LBO target balance sheets and the banking industry crumbled, destroying its ability to close many transactions, especially those that were overleveraged and risky.

The private equity houses and banks often turned to the “material adverse change” (MAC) clauses in the purchase agreements. A significant difference in a company’s prospects from when an offer was made until it was scheduled to close gave buyers some ability to cancel transactions, although the MACs were usually an excuse for financial firms to drop deals on which they could no longer make money. The exact definition of MAC was often left to break-up negotiations or sometimes the courts.

Huntsman recently gutted Credit Suisse and Deutsche Bank for behavior that was unethical and ended up being very costly. The banks agreed to pay $1.7 billion in cash and financing that will go to improve that company’s balance sheet to settle Huntsman’s charges of fraud and tortuous interference. Huntsman had asked the court for $4.65 billion, which the company knew it would never get. The $1.7 billion yield from settlement talks was impressive. Huntsman got $1 billion in cash and notes from Apollo and its affiliates to close out its disputes with them.

The Cliff Notes to the settlement would read “Texas Locals Thrash European Financiers.” That would be an accurate abbreviation of what happened, but the result of the negotiations meant a good deal more. Banks stiffed buyout targets and private equity firms throughout the disintegration of the LBO sector. They walked away from binding contracts in the name of protecting themselves from losses. It was a crass and ignoble way to do business, and, as it turned out, it was also illegal.

The private equity business is nearly dead now. It has a pulse because the markets have pushed the value of many companies down to unprecedented levels compared to the cash that they generate. Big banks, however, are rarely willing to take what they see as a flyer on even the most solid operations. The recession has left them feeling luckless and chastened.

Huntsman may be the last significant broken deal from the extraordinary years of private equity success that reached a major settlement. Leverage will return to the market. It always does. Opportunism never dies. Banks will want back in. But, the long multi-decade cycle of American bank industry missteps and failures is probably a sign that the “Huntsman mistake” will be made again.

Douglas A. McIntyre

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