The proportion of worldwide failed acquisitions reached an eight-year high in 2016, with Asia Pacific recording the highest average failure rate at 13.2%, according to a research recently published by M&A deal management solutions provider Intralinks and UK-based Cass Business School.
Over the past 25 years, China, Australia and Singapore are among the countries with the highest proportion of failed deals. Japan, India and South Korea are among the countries with the lowest rates of deal failure.
Worldwide, 7.2% of M&A deals announced last year failed to complete, the highest rate of worldwide deal failures since the start of the global financial crisis in 2008 and since 1995. It is also significantly higher than the overall long-term average deal failure rate of 5.7%. The materials, real estate and energy & power sectors have the highest rates of deal failure, whereas the consumer, industrials and healthcare sectors have the lowest.
Based on an analysis of 78,565 M&A transactions announced between 1992 and 2016, the study investigates 30 deal-specific, company-specific and macro-level financial and non-financial factors to determine which, if any, are statistically significant predictors of deal failure. The study then considers whether these predictors have changed over time.
• The failure rate for deals involving public company targets is significantly higher than for private targets. Since 1992, the long-term public target average failure rate was 11.1% compared to the long-term private target average failure rate of just 3.7%, and an overall average deal failure rate of 5.7%.
• The probability of failed deal completions for public targets is influenced by five significant predictors: target termination fees (break fees), target and acquirer size, the target’s initial reaction to the deal announcement, the number of financial and legal advisers retained by the acquirer for the deal and the type of consideration offered by the acquirer to the target company’s shareholders.
• The probability of failed deal completions for private targets is influenced by four significant predictors: the relative size of the target compared to the acquirer, the liquidity of the acquirer, the type of consideration offered by the acquirer to the target company and acquirer termination fees (reverse break fees).
• External financial shock such as liquidity, financing and banking crises appear to temporarily significantly increase the rate of failed deal completions, whereas external political shocks appear to have no impact.
The impact of catastrophic or unexpected events on deal failure
There are occasions when a deal may be derailed by matters completely beyond the control of the parties involved, with some events taking a greater toll than others, said Intralink.
These events included the September 2001 terrorist attacks in the US, the Lehman Brothers bankruptcy in September 2008 and the June 2016 UK Brexit referendum vote.
The study found that there was a sharp spike in the worldwide deal failure rate to 19% following the collapse of Lehman Brothers in September 2008. By contrast, the terrorist attacks in the US on September 11, 2001 and the June 23, 2016 UK Brexit referendum result saw no subsequent increase in deal failure rates, compared to their seasonally adjusted averages.