NOVEMBER 16, 2017
When Mergers Fail
By Hilary Collins, Assistant, Publications and Research, Financial Managers Society
A new study
from Cass Business School and Intralinks analyzed over 78,000 international M&A transactions over the past 25 years to try to find out why some mergers and acquisitions
fail while others succeed. While the average failure rate over the course of the study was 5.7%, it was up to 7.2% last year – the highest percentage since the crisis of 2008.
The M&A experts surveyed blamed the high failure rate of 2016 on the shaky environment politically and economically, but there also a number of more general ways to predict failure. Though there were dramatic differences in failure rates between countries, regions and industries, the study pointed out several significant predictors of failure across the board:
The absence of a punitive fee for a failed deal
Called a break fee or a target termination fee, the acquirer must pay the target if the merger fails – when this fee was present, the odds of failure dropped by about 12%.
The size of the parties
There are many ways in which the size of either party can impact a deal – in general, the bigger the target, the higher the likelihood of failure; the smaller the acquirer, the higher the likelihood of failure.
The target’s perception of the initial bid
If the target perceives the overture as unwelcome or downright antagonistic, most deals will not close.
The number of legal and financial advisors the acquirer retains
The higher the number of advisors, the less likely a deal is to fail – adding a financial advisor reduced the likelihood of failure by 11.5%, and adding a legal advisor reduced it by 8%.
Of course, this survey doesn’t tell the whole story – there are differences between private and public companies, industries, regions and more. Nevertheless, it does provide some worthwhile food for thought for any organization considering M&A as a strategic possibility.