Remember that just because a deal is announced, it doesn’t mean it will go through. A record number of M&A transactions announced in 2015 have been cancelled bringing the total deal value down from $4.374 trillion to $78 billion. Unfortunately cancelled deals mean a lot of time, resources and effort were wasted putting together these transactions.
Why Do Deal Fall Apart?
Typically when you first read about a deal in the news, especially with large publicly traded transactions, the transaction has not been completed and the two companies have only agreed to a letter of intent (LOI). After signing the LOI, the two companies can iron out all the details of the final agreement and wait for regulatory approval if necessary. During this period between LOI and close, the deal may break up for a number of reasons.
1. Regulatory Hurdles
Anti-trust issues and regulatory hurdles create delays for many large, publicly traded transactions. Regulatory scrutiny doesn’t necessarily mean a transaction will be called off, but it can be a contributing factor. Pfizer planned to acquire Allergan for $160 billion and relocate its headquarters to Ireland in order to lower its tax bill. However, due to new U.S. Treasury rules aimed at curbing these types of transactions, called tax inversions, Pfizer and Allergan called off the deal earlier this year.
2. Disagreement over Deal Terms
Other acquisitions fall apart because the two companies can’t agree on deal terms. The massive $35 billion “merger of equals” between Publicis Groupe and Omnicom Group faced a number of challenges: personality clashes, cultural differences, and disagreement on deal structure and senior positions. The deal was expected to close in six months when it was first announced, but nine months later the two companies mutually agreed to disagree and went their separate ways.
3. Cold Feet
In the world of privately-held not-for-sale acquisitions, it’s not uncommon for an owner to be anxious about selling their business. Typically by the time you’ve signed an LOI, you have overcome many of these fears by ensuring that the acquisition is the right strategic fit and gaining an understanding the owner’s perspective and motivations. However, the owner could still change their mind and decide not to sell.
On the other hand, circumstances could change that make you back out of the deal. Something uncovered during due diligence or a surprising turn of events may prevent you from going through with the deal. We once had to walk away from a deal because we didn’t share the same ethical values as the prospect company; the owner had two sets of books.
In my next post I’ll go over strategies for moving your deal forward after signing the LOI.