Why many large M&A transactions don't get closed?

Large M&A Transactions don’t get closed

Large M&A transactions don’t get closed. In this blog, we will discuss about the reasons why many large M&A deals don’t get approvals for closing after the deal is announced, reasons why this happens and how acquirers can address this problem in future.

Large M&A transactions don’t get closed – consequences for this

1. When the acquirer and target company agree with each other on the M&A deal and sign the definitive agreement, then the deal is announced by both the parties.
2. In cases of large M&A deals, announced deals needs to secure regulatory approvals and antitrust committee clearance for the deal to get closed.
3. In addition, the conditions to closing needs to be satisfied which would include conditions like securing financing for the deal, get approvals from customers for change of control provisions and settling any legal disputes which are currently pending.
4. When a M&A transaction does not get closed post announcement, then the reputation of the parties involved get affected and the stock prices of the parties crash.Both the parties would have spent money on transaction including engaging lawyers, bankers and consultants.In addition, termination fees needs to be paid by the parties which break the deal.
5. The senior managers who would have worked on the deal would be blamed for spending time, efforts and money on resources which did not yield any results.
6. Hence when deals fail to get closed, it has repercussions on both the parties.

Common reasons why deals do not get closed

1. Some of the reasons why deals do not get closed is:

Failure to get shareholders approval –

• The shareholders of the acquirer or target would not be happy with the final purchase price and do not approve the deal as they are looking at higher price.
• There shall be issues on how both the parties perceive on the valuation of the deal.Issues for conflict would be synergies estimated and on the long term prospects of the target company.
• During the period between signing and closing, the target company might receive a higher bid from another buyer.Hence the target company can terminate the transaction with the existing buyer and bear the termination fees.

Rise of Activist Investors –

• Activist investors in the acquirer board would oppose the deal.The reason for their opposition would be that the deal does not serve the shareholder interest and does not generate high shareholder returns.

Failure to get regulatory approval –

• The deal might not get antitrust clearance or CFIUS approvals.This is because the deals has the potential to reduce the overall competition which would affect the end customer.
• Deals involving industries operating in highly regulated industries might attract resistance from regulators as it can affect the internal security.

Deals blocked by Governments –

• Governments also block deals especially when deals result in high job losses, evasion of taxes or can affect the investment climate of the regions.
• For instance Broadcom hostile bid for Qualcomm was blocked by US government because the deal had the potential to compromise on the internal security.

Large M&A transactions don’t get closed – Characterstics

1. Studies indicate that deals with value more than $10B face a higher risk of not getting closed compared to deals with value from $1-5B.
2. Deals with complex structures do not get approvals from their shareholders.For instance when shareholders are paid consideration which includes cash and stock, then the investors do not get clarity on the premium amount and on the taxes that they need to pay for their Considerations. In comparison, deal structures involving only cash or stock are far simpler and do not face any such problems. Hence companies should always have a simple deal structure so that it can be easily approved.
3. Some sectors like communications are more prone to failed deals than other industries. This is because communication sectors are highly regulated and most of these deals are more than $20B value.

How companies can address this problem

As per McKinsey report, 73% of the deals that fail to get closed is due to:

• Issues in valuation
• Failure to secure regulatory approvals
• Governments blocking the deal.

Companies can address these problems by identifying these issues at the start so that they don’t spend time and cost on the deals which can be blocked after announcement.
Companies can do the following.
Be Transparent

• Issues of valuation between the buyer and the target starts to happen before or during due diligence. Hence it is important that both the parties communicate with each other and are honest in their approach for arriving at final price.
• For instance, after due diligence the acquirer values the company at a premium and including the synergies the acquirer bids the target 50% more than the current price.
• A premium valuation may get an approval from the target management and shareholders. The acquirer shareholders would not be happy with such a high premium and may also oppose the deal.
• In such a case, the acquirer should proactively explain the strategic rationale behind this deal and how this deal can bring in higher revenues and increase cost savings and productivity.
• Post announcement, the acquirer should also update the shareholders on the current progress and pending approvals from regulators.When the acquirer proactively shares the latest updates on the deal, it builds a trust among the shareholders and they feel that this deal is good for their long term interest.Hence there is an higher chance of securing approvals from shareholders.

Proactively be ready to negotiate with regulators

• Large M&A deals involving companies that have high market shares generally are scrutinized by the regulators.
• In the current era, any acquisitions involving big technology giants like Apple, Amazon, Facebook and Google would attract regulatory oversight as these companies have a track record of destroying competition.
• The regulators generally ask the parties to divest some of their assets in order to get approvals. Larger companies generally have lobbying power and proactively engage with regulators to negotiate on the assets to be divested.These negotiations generally take a lot of time which would delay the integration. Delaying the integration would mean that more time would be taken to achieve the deal synergies.
• Hence companies which want to close the deal fast and start the integration would proactively want to divest some of their assets to secure faster approval.In such deals, speed is more important than time.

Monitor the political climate

• Large companies like General motors or Amazon that contribute significant employment in the region or are the leaders in technology expertise are vulnerable to have their deals blocked by the government.
• For instance when Renault and Chrysler wanted to consolidate in Merger of Equals, the deal was blocked by the French Government because the government felt that this deal would cause more job losses.
• Hence acquirers needs to proactively engage their M&A team with external communications teams to assure the ggovernment that no such actions will happen.
• For instance when a chinese company wants to acquire German company for technology, the chinese company should proactively communicate to the German government and their employees that there will be no job losses and the target headquarters would continue to be operational.Such assurances will mitigate any adverse reactions from the government.

Conclusion

1. Large M&A transactions don’t get closed especially transactions with deal value more than $10B specifically operating in regulated industries like Communications, Defence and Healthcare face higher risk in closing their deals post announcement.
2. Close to 73% of the deals don’t get closed due to issues in valuation, failure to get approvals from regulators and Governments blocking the deal due to internal security or job losses.
3. Failure to close the deal would lead to loss of reputation of the parties involved and high time/cost and efforts spent which did not yield any results.
4. Delay in closing the deal would delay the integration which would lead to more time taken to achieve the deal synergies.