“How Deals Die”: Inside The 24-Year Study on How 1 in 10 M&As Fall Apart
Over the span of 24 years, from 1996 to 2020, an exhaustive study titled “How Deals Die” by law professors Da Lin and Morgan Ricks has illuminated the fragile nature of mergers and acquisitions in the U.S. corporate sector. This extensive research, analyzing a sample of 5,036 M&A deals involving U.S. public companies, provides insights into how often deals break, the reasons behind their failure, and the broader implications for the involved parties.
M&A transactions, often celebrated as strategic moves that redefine industries, are inherently risky endeavors. Despite meticulous negotiations and the extensive contractual safeguards designed to ensure deal completion, a significant percentage of these deals do not go as planned. According to the study, 89.7% of the deals were completed on original terms, while the remaining 10.3% failed to meet these terms.
The reasons for these failures are varied, ranging from regulatory blocks to mutual withdrawals, with each outcome having different implications for the parties involved. The study’s comprehensive typology categorizes deal outcomes into eight distinct types, revealing the complex nature of deal breakage.
Among the approximately 10.3% of deals that encountered significant issues, they were broken further by the types of outcomes:
- Completed with Altered Economic Terms
- Bump in Consideration (B Outcome): Approximately 2.6% of deals saw an increase in the per-share consideration paid to the target company’s shareholders. This outcome typically occurs when a bidding war ensues, leading to a higher payout for the target’s shareholders. For example, the study cites the case of Graphic Industries Inc. in 1997, where a third party offered a higher bid, prompting the original acquirer, Wallace Computer, to increase its offer from $18.50 to $21.75 per share.
- Decrease in Consideration (D Outcome): Conversely, 1.1% of deals resulted in a decrease in the agreed consideration. This often happens due to adverse developments affecting the target company, prompting the acquirer to renegotiate the terms. A notable example is the 2005 deal between Capital One and Hibernia Corp., where the devastation of Hurricane Katrina led to a reduction in the purchase price.
- Failed to Complete Between Original Parties
- Alternate Deal (A Outcome): About 1.8% of deals were terminated by the target company in favor of a higher bid from another party. This is often seen as a positive outcome for the target, as it usually results in a better financial deal.
- Withdrawal by Target (T Outcome): 0.89% of the deals saw the target company withdraw from the agreement, often due to improved financial conditions or market situations making the original deal less attractive.
- Withdrawal by Acquirer (K Outcome): 2.5% of the deals were canceled by the acquirer, typically because of deteriorating business conditions or legal issues affecting the target.
- Mutual Withdrawal (M Outcome): 0.95% of the deals were mutually withdrawn by both parties, where both decided that terminating the deal was preferable.
- Regulatory Block (R Outcome): 0.95% of the deals were blocked by regulatory bodies such as the U.S. Department of Justice or the Federal Trade Commission due to antitrust concerns or other regulatory issues.
The authors emphasize that “deals break in different ways,” and understanding these various outcomes is crucial for accurate M&A research. They argue that “previous M&A research has been hampered by its failure to take outcome heterogeneity into account,” which has led to flawed conclusions in many studies.
The study also provides an in-depth analysis of how broader economic conditions and regulatory scrutiny affect M&A deal outcomes. For instance, during the 2007-2009 financial crisis, there was a significant spike in acquiror-favorable outcomes (K Outcome), where acquirers backed out of deals or renegotiated terms to their advantage. This period saw private equity firms, in particular, withdrawing from numerous transactions as credit conditions tightened and economic uncertainty grew.
The study notes, “As scholars have documented, during the financial crisis of 2007 to 2009, a number of private equity buyers backed out of M&A deals they had signed before the crisis erupted.”
Regulatory scrutiny also plays a crucial role in determining the success or failure of M&A deals. These regulatory blocks are more common in industries with high market concentration, where the proposed merger would significantly reduce competition. For example, the study highlights the 2001 deal between Hughes Electronics Corp. and EchoStar Communications, which was blocked due to opposition from both the Department of Justice and the Federal Communications Commission.
In discussing regulatory blocks, the authors note, “Outcome R is ex post indeterminately favorable to the merging parties… it is possible that one or both parties prefer the regulatory block to completion.” This insight underscores the complexity of M&A deals, where not all blocks or failures are necessarily negative for the involved parties.
For M&A practitioners, the findings of this study emphasize the importance of deal certainty and the need for robust contractual provisions to mitigate the risks of deal breakage. Clauses such as break-up fees, reverse termination fees, and material adverse effect clauses are essential tools for managing these risks. However, as the study highlights, even with these protections, a significant percentage of deals fail to close as originally planned.
In their paper, Lin and Ricks argue that many M&A studies have been flawed due to a lack of attention to the various ways in which deals can fail. They state, “Many empirical M&A studies relating to deal outcomes suffer from insufficient attention to the varieties of deal breakage, in some cases calling into question their findings.”
Da Lin is an Assistant Professor of Law at Richmond Law School, known for her research on corporate governance, financial regulation, and M&A transactions. Ricks is a Professor of Law at Vanderbilt Law School, with a distinguished background in financial regulation and corporate finance.
Information for this briefing was found via the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
