Abandoned Acquisitions: Why do some deals fail to complete?
2 November 2017
The M&A deal failure rate is at an eight-year high. Here’s how to stop your next deal from becoming one of them.
Failed deal completions impose significant deadweight and reputational costs on acquirers and targets. Why are some deals more likely than others to fail? What factors are significant predictors of deal failure? What can acquirers and targets do to increase the likelihood of successful deal completion?
Intralinks’ latest report, Abandoned Acquisitions: Why do some deals fail to complete?, has the answers. Together with the M&A Research Centre at Cass Business School, London, we investigated more than 78,500 M&A deals announced over the past 25 years to identify the deal makers and deal breakers. We also interviewed 40 global M&A professionals and incorporated their insights into our findings. In this blog post, the first of several on the report, I’ll give you the highlights.
M&A cycles and regional variations
The percentage of worldwide M&A deals that fail to complete has increased every year since 2013. Last year’s worldwide deal failure rate of 7.2% was the highest since the start of the global financial crisis in 2008 and before that since 1995. There are significant regional variations in deal failure rates, with the Asia Pacific region having the highest long-term average rate of abandoned acquisitions and Latin America having the lowest. Some acquirer-target region pairs also have deal failure rates that are significantly higher than the average. For example, Latin American acquirers targeting Asia Pacific and North America for deals seem to be particularly unlucky.
Public vs. private M&A targets
Deals involving public targets have a significantly higher deal failure rate (11.1%) than those involving private targets (3.7%).
The probability of failed deal completions for public targets is influenced by five significant predictors: target termination fees (break fees), target and acquirer size, the target’s initial reaction to the deal announcement, the number of financial and legal advisers representing the acquirer, and the type of consideration offered to the target company’s shareholders. The probability of deal failure for public targets is reduced by: target termination fees, deals involving smaller targets and larger acquirers, agreed or solicited deals, multiple acquirer financial and legal advisers, and all-cash consideration.
The probability of failed deal completions for private targets is influenced by four significant predictors: the relative size of the target compared to the acquirer, the liquidity of the acquirer, the type of consideration offered to the target company, and acquirer termination fees (reverse break fees). The probability of deal failure for private targets is reduced for deals involving: smaller targets and larger acquirers, liquid acquirers, all-cash consideration, and acquirer termination fees.
The impact of catastrophic or unexpected outside events
There are occasions when a deal may be derailed by matters that are completely beyond the control of the parties involved – an unexpected external event can jeopardise a transaction that was previously proceeding perfectly smoothly.
We looked at three global/regional events, which can be described as catastrophic and/or unexpected, to see the impact on deal failure rates for deals that had been announced, but not yet completed, in the three-month period leading up to each event.
We found that there was a sharp spike in the worldwide deal failure rate that reached 19% following the Lehman Brothers bankruptcy in September 2008. By contrast, the terrorist attacks in the US on September 11, 2001 and the June 23, 2016 UK Brexit referendum result saw no subsequent increase in deal failure rates, compared to their seasonally adjusted averages.
Both the September 2001 attacks and the Brexit referendum result can be described as political shocks, with effects which only become apparent over the long-term. The Lehman Brothers bankruptcy resulted in an immediate collapse of market confidence in the liquidity, funding and solvency of banks and financial institutions. This proved fatal to some deals, as acquirers found that they were unable to finance their transactions.
Deal failure rates by country and industry
China, Australia and Singapore are among the countries with the highest proportion of failed deals, whereas Russia, Japan and France are among the countries with the lowest rates of deal failure.
Worldwide, the materials, real estate and energy & power sectors have the highest rates of deal failure, whereas the consumer, industrials and healthcare sectors have the lowest. However, in EMEA the highest rate of abandoned acquisitions over the past 25 years has been in the financials sector.