2016 Saw Highest Proportion of Abandoned Acquisitions since Start of The Financial Crisis
- More than 7% of M&A deals failed to complete last year
- Long-term study by Intralinks and Cass Business School reveals significant predictors of deal failure
- Failure rate for public targets significantly higher than for private targets
London, UK – 2 November 2017: New research published today by Intralinks and Cass Business School has found that following an increase over each of the previous three years, the proportion of failed acquisitions reached an eight-year high in 2016.
7.2% of M&A deals announced last year failed to complete, the highest rate of worldwide deal failures since the start of the global financial crisis in 2008, itself the highest since 1995, and significantly higher than the overall long-term average deal failure rate of 5.7%.
These are some of the findings of “Abandoned Acquisitions”, a study carried out by the M&A Research Centre at City, University of London’s Cass Business School and Intralinks, the leading global provider of M&A deal management and secure content collaboration solutions.
Based on an analysis of 78,565 M&A transactions announced between 1992 and 2016, the study investigates 30 deal-specific, company-specific and macro-level financial and non-financial factors to determine which, if any, are statistically significant predictors of deal failure. The study then considers whether these predictors have changed over time.
- The failure rate for deals involving public company targets is significantly higher than for private targets. Since 1992, the long-term public target average failure rate was 11.1% compared to the long-term private target average failure rate of just 3.7%, and an overall average deal failure rate of 5.7%.
- 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 retained by the acquirer for the deal and the type of consideration offered by the acquirer 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 by the acquirer 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.
- External financial shock such as liquidity, financing and banking crises appear to temporarily significantly increase the rate of failed deal completions, whereas external political shocks appear to have no impact.
Public target M&A: five significant predictors of failed deals
- Target termination fees work: The absence of a target termination fee, also known as a break fee (i.e., a fee payable by the target to the acquirer if the deal does not complete), was the most significant factor influencing public target deal failure. The data shows that where a public target company agrees to pay a termination fee, the deal is less likely to fail. The presence of a target termination fee reduced the average probability of deal failure by almost 12%. In contrast, the study found that acquirer termination fees for public targets had no significant impact on deal failure.
- Size matters: The study data shows that the absolute size of the target, as measured by total target sales, was the second most significant factor influencing public target deal failure, with acquisitions of larger targets less likely to complete. As well as absolute target size, the relative size of the target compared to the acquirer, as measured by the ratio of target sales to acquirer sales, was the sixth most important factor, with deals involving larger targets relative to smaller acquirers also less likely to complete. Lastly, the absolute size of the acquirer was the seventh most significant factor, with deals involving smaller acquirers for public targets less likely to complete.
- Unwanted attentions: The third most significant factor influencing public target deal failure was whether the target’s initial reaction to the deal announcement was to consider it a hostile or unsolicited acquisition. Where an acquirer’s bid received a hostile or unsolicited initial reaction, the study found that there is a significantly higher chance of it failing to reach completion: an initial hostile or unsolicited reaction by the target increased the probability of the acquirer’s bid failing by 32% and 41%, respectively.
- Good advice: The number of legal and financial advisers retained by an acquirer for the deal were the fourth and fifth most significant factors, respectively, influencing the probability of deal failure. The higher the number of legal and financial advisory firms retained by the acquirer, the lower the likelihood of the deal failing to reach completion. Adding an extra acquirer financial adviser reduced the probability of deal failure by 11.5%, and adding an extra acquirer legal adviser reduced the probability of deal failure by 8.0%. In contrast, the study found no significant impact on the probability of deal failure related to the number of advisers retained by the target.
- Cash is king: The method of payment offered by an acquirer was the eighth most significant factor influencing the probability of deal failure. The study found that deals were less likely to fail when cash was the only form of consideration offered to the target’s shareholders.
Private target M&A: four significant predictors of failed deals
- Don’t bite off more than you can chew: The study found that, for private targets, the relative size of the target compared to the acquirer, as measured by the ratio of target sales to acquirer sales, was the most significant factor influencing deal failure: deals involving larger targets relative to smaller acquirers were less likely to complete.
- Stay liquid: The liquidity of the acquirer, as measured by the acquirer’s current assets to current liabilities ratio, was the second most significant factor influencing the probability of failed completions for deals involving private targets, with more liquid acquirers having a lower probability of deal failure.
- Offer cash: The method of payment offered by an acquirer was the third most significant factor influencing the probability of private target deal failure. Deals where cash was the only form of consideration offered to the target’s shareholders were less likely to fail.
- Acquirer termination fees: The fourth most significant factor influencing private target deal failure was the absence of an acquirer termination fee, also known as a reverse break fee (i.e., a fee payable by the acquirer to the target if the deal does not complete). The study found that, for deals involving private targets, acquirer termination fees reduced the probability of deal failure by 2%. In contrast, the study found that target termination fees for private targets had no significant impact on deal failure.
The impact of catastrophic or unexpected events on deal failure
There are occasions when a deal may be derailed by matters completely beyond the control of the parties involved. However, some events take a greater toll than others.
The study 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. These events were: the September 2001 terrorist attacks in the US, the Lehman Brothers bankruptcy in September 2008 and the June 2016 UK Brexit referendum vote.
The study found that there was a sharp spike in the worldwide deal failure rate following the collapse of Lehman Brothers in September 2008. 19% of deals that had been announced in the three months prior to Lehman’s collapse, but were still pending, subsequently failed to complete, against a seasonally-adjusted deal failure rate of 9.6%.
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.
Deal failure rates by region, country and industry
The long-term average failure rate for announced acquisitions was 7.1% in the Asia Pacific region, compared to just 4.0% in Latin America. In North America, 6.4% of deals announced have not made it to completion, compared to a failure rate of only 4.2% in Europe, the Middle East & Africa. Some acquirer-target region pairs also have deal failure rates which are significantly higher than the average. For example, Latin American acquirers targeting Asia Pacific (18.6% failure rate) and North America (12.7% failure rate) seem to be particularly unlucky.
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. 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.
Commenting on the research
Philip Whitchelo, Vice President of Strategy and Product Marketing at Intralinks, comments on the findings of the research: “Failed deal completions impose significant deadweight and reputational costs on acquirers and targets. Our research, which identifies the most significant predictors of failed deals, will help both parties in a transaction to increase the chances of successful deal completion.”
Professor Scott Moeller, Director of the M&A Research Centre at Cass Business School, comments on the findings of the research: “This study is the most comprehensive ever conducted into this topic, and the only one to consider both public and private M&A on this scale. For the first time, we have a holistic account of the significant causes behind failed deal completions.”
Download the report
For more information on the research findings, download the full report here.
The sample for the study comprised M&A transactions worldwide announced during the period 1992-2016, which met the following criteria:
- The transaction involved a change of control of the target, where the acquirer owned less than 50% of the target prior to announcement and intended to acquire more than 50% of the target.
- The value of the transaction was at least US$50 million OR the sales of the acquirer in the last financial year prior to announcement were at least US$50 million OR the sales of the target in the last financial year prior to announcement were at least US$50 million.
- The transaction status, as determined by Thomson Reuters, is either completed or withdrawn (i.e., deals that were still pending were not considered).
Based on these criteria, the sample comprised 78,565 announced transactions involving 35,049 public and private acquirers and 73,268 public and private targets, making it the largest known study conducted into this topic and the only one to consider both private and public M&A on this scale.
The transaction and company data for this study were obtained from the Thomson One and Datastream databases, both from Thomson Reuters.
To determine which factors were significant predictors of deal failure, a regression model was built which included all the factors as independent variables. The dependent variable in the regression model is a dummy variable which is equal to one if the transaction fails to complete and zero otherwise.
Using the regression model, the study also identified the relative importance, or weighting, of the predictive factors in influencing the probability of deal failure, and these relative weightings are discussed in the report.
Following the completion of the research, interviews were conducted with 40 M&A professionals worldwide from public and private companies, private equity firms and legal advisory firms. In the report, these interviewees offer their insights and provide context to the research findings.
About Cass Business School
Cass Business School, which is part of City, University of London, is a leading global business school driven by world-class knowledge, innovative education and a vibrant community. Located in the heart of one of the world’s leading financial centers, Cass has strong links to both the City of London and the thriving entrepreneurial hub of Tech City. It is among the global elite of business schools that hold the gold standard of triple-crown accreditation from the Association to Advance Collegiate Schools of Business (AACSB), the Association of MBAs (AMBA) and the European Quality Improvement System (EQUIS). For further information, visit www.cass.city.ac.uk or on Twitter follow @cassbusiness.
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