AT&T Corporation Acquires Tele-Communications Incorporated

When AT&T Corp. acquired Tele-Communications Inc. last year, the $54 billion deal came with a little insurance: a breakup fee of $1.75 billion. Even friendly acquisitions can be risky business, prompting more companies to demand breakup or termination fees before they cut a deal.

J.P. Morgan and Co.’s annual analysis of termination fees usually shows only minor changes from year to year, write the authors of that analysis, Rick Escherich and Thomas Lambe, but that wasn’t the case last year. The pair note that 41 percent of the public deals announced during the first nine months of 1998 included breakup fees, compared with 28 percent of the deals for all of 1997. But the number rises to a record 52 percent when lockups–usually large blocks of shares for the acquiring company–are factored.

The primary reason for the rise in breakup fees is the size of the deals being cut, according to Stephen Blum, a partner in corporate finance at KPMG Peat Marwick, in New York. “In the large deals, you’re more likely to see breakup fees,” he explains, “because the target is publicly traded and doesn’t want to put itself in play if the deal fails.”

Blum adds that many megadeals involve sizable stock swaps, which take longer to complete than straight cash transactions. That’s an incentive for the seller’s board to seek some assurance, in the form of a breakup fee, that the deal will happen. Yet breakup fees can go to either party, says Blum, depending on how the deals are structured.

Escherich and Lambe believe that breakup fees are becoming standard operating procedure in many merger-and-acquisition deals. They write that “sellers are increasingly seeing these fees as a ‘normal’ part of an agreement.”