The proportion of announced mergers and acquisitions globally that failed to close was up for a third consecutive year in 2016, reaching an eight-year high. It was the highest level since 2008, the year the financial crisis hit.

At 7.2%, it was the fourth-highest level of failed deal activity in a 25-year period examined in a new study by City University of London’s Cass Business School, trailing only 1992, 2008, and 1993. Cass conducted the study on behalf of IntraLinks, a provider of software that enables collaboration among parties to M&A deals.

It was a massive study, covering 78,565 transactions from 1992 through 2016 that involved a change of control of the target company. For each transaction, either its value was at least $50 million, or the revenue of the acquirer or target was at least that amount, in the last fiscal year prior to the deal announcement.

The 2016 deal failure rate was well above the long-term average of 5.7%. Among the factors blamed, in interviews with 40 M&A professionals following completion of the research, were uncertain political and economic environments, including the election of Donald Trump as U.S. president. Given these uncertainties, transaction prices may simply have been too high.

But, given the cyclical nature of business trends, perhaps as interesting as what caused the high failure rate in 2016 were insights the research produced about why deals have gone awry over time and what kinds of deals have been most subject to failure.

17Nov_DealsChart“This is the most comprehensive study ever conducted on this topic and the only one to consider both public and private M&A on this scale,” says Prof. Scott Moeller, director of the M&A Research Centre at Cass Business School. “For the first time, we have a holistic account of the significant causes behind failed deal completions.”

First, there are regional differences, with a highest failure rate of 7.1% during the 25-year study period for announced acquisitions in the Asia-Pacific region, compared with a low of 4.0% in Latin America. The North America rate is 6.4%. By country, China and Australia have the greatest proportion of failures (12.9% and 11.9%), while Russia and Japan (1.4% and 2.2%) have the lowest.

Second, there are industry-by-industry differences, with failures highest in the materials and real estate sectors (7.7% and 6.8%) and lowest in the consumer/retail and health-care sectors (4.8% and 5.1%).

By far the starkest differential, though, shows up in the 11.1% failure rate for deals involving public-company targets, triple the 3.7% rate when private companies are targets. Among 30 deal-specific, company-specific, and macro-level financial and nonfinancial factors studied, the five most significant ones for predicting failure are:

  1. The absence of a target termination fee, also known as a break fee — a fee payable by the target to the acquirer if the deal does not close. The presence of such a fee reduces the average probability of deal failure by almost 12%. It’s not surprising that targets are more careful about entering into M&A transactions when they might be on the hook for such a fee. However, for deals where the acquirer pays a fee upon walking away, there is no significant influence on the probability of deal failure.
  1. The size of parties to the transaction. The greater the target’s revenue, the less likely the deal will be completed. (Also, the relative size of the target compared to the acquirer is the sixth-most-significant factor, and the absolute size of the acquirer is the seventh-most-significant, with deals involving smaller acquirers less likely to complete.)
  1. Whether a target initially regards an acquirer’s bid as hostile or unsolicited. These things happen relatively rarely, but when they happen, a majority of such proposed deals — 57.2% and 63.1%, respectively — fail to close. On the other hand, there have been many examples of deals that remained hostile until the end and were still completed.
  1. The number of legal advisers retained by acquirers.
  1. The number of financial advisers retained by acquirers.

In the cases of both 4 and 5, the higher the number of advisers, the less the likelihood of deal failure. (No significant impact was found relating to the number of advisers retained by targets.)

In fact, adding one extra financial adviser reduces the probability of failure by a startling 11.5%. One more legal adviser had an 8.0% effect. “This might seem counterintuitive, given the [possibility] for a large cast … to get in each other’s way,” the research report says. However, it adds, many executives argue that such confusion is less likely when advisers are hired for their specific expertise, managed effectively, and incentivized to deliver a deal completion.

An all-cash offer ias only the eighth-most-important factor in closing acquisitions of public companies. “There [are] deals where the buyer feels it is more appropriate to build an element of equity into the transaction structure — or has no choice but to do so,” says the research report.

When it comes to acquisitions of private companies, targets being larger relative to smaller acquirers is the most significant factor in non-completed deals. Next came the liquidity of the acquirer, as measured by the acquirer’s ratio of current assets to current liabilities; more-liquid acquirers had a lower probability of deal failure.

Meanwhile, the research report notes that there are occasions when a deal may be derailed by matters completely beyond the control of the parties involved.

The study looks at three events that could be described as catastrophic or unexpected in order to see the impact on deal-failure rates. These events are the September 2001 terrorist attacks in the United States, the Lehman Brothers bankruptcy in September 2008, and the June 2016 Brexit referendum vote in the U.K.

The study found that there was a sharp spike in the worldwide deal failure rate following the collapse of Lehman Brothers. Nineteen percent of deals that had been announced in the prior three months and were still pending failed to complete, against a seasonally adjusted deal failure rate of 9.6%.

However, the 2001 terrorist attacks and the 2016 Brexit referendum result were not associated with a subsequent increase in deal-failure rates.

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