The final phase of any business acquisition is risky. Many acquisitions are called off at the end. Why is this? In this article we list the 6 most common reasons. And, more importantly, we tell you how to make the final phase of the acquisition process successful.
Due diligence and final negotiations.
This phase of the acquisition process begins when the parties have come to an agreement on key transaction terms. Often these terms are set out in a letter of intent, summary document or term sheet.
This agreement is often the start of further research into the most important details of the company. Because now it comes down to this: does the company actually meet what was stated in the preliminary phase? Does the company meet the acquisition criteria as formulated at the start of the process?
This due diligence does not only focus on financial research. The contracts, the organization and the commercial aspects also come under a magnifying glass. Withholding information is no longer possible.
Are the results of the investigation negative? Then this can have consequences for the progress of the transaction or the condition under which the transaction takes place. Further negotiations are necessary regardless. And sometimes the acquisition is called off….
Calling off an acquisition
In practice, it happens regularly: acquisitions that do not go through at the last minute. Some of this is reported in the media. Recent examples are:
- The cancellation of Pfizer’s acquisition of pharmaceuticals Allergan
- The cancellation of the sale of Hans Anders
- The failed merger between Orange and Bouygues.
Probably a much larger number of intended corporate acquisitions than actually realized. Most cancelled acquisitions remain hidden from public view. If the acquisition strategy and criteria were well thought out beforehand, this cannot be the reason for the transaction not going through.
What then are the reasons for blowing off the acquisition? Usually they are quite trivial. We list 6, which we ourselves have often encountered:
The price is the subject of much debate during negotiations. Negotiations can break down at the last minute. Parties may misunderstand each other when it comes to the details of the price conditions and definitions.
But also the outcome of the due diligence investigation often has consequences for the final pricing or the considerations on which it is based. This can get in the way of a compromise.
Lately, we are seeing more often that a transaction does not go through because simply the high price cannot be justified given the outcome of the due diligence. Examples can be found particularly in the private equity world. Here they often, as it is called, “test the market” by putting a company on the market at a high price. There is then little leeway, because the high price can only be justified if nothing then comes out of the due diligence.
2. Corpse in the closet
During the due diligence, sometimes unexpected “bodies” come out of the closet. Serious deviations from what the selling party initially presented. These are the so-called ‘dealbreakers’, causing transactions to be called off. This does occur less often, simply by preparing transactions well and sharing all information at an early stage. However, things can still go wrong.
- Financially weak parts that further disappoint in the course of the process
- Lawsuits where the risks are high
- Tax issues
The selling party itself isn’t always aware of these ‘wrongs’. Due to the large size of some companies, not all information and data are transparent. Therefore, these often only come to light during an extensive investigation. It may also be the case that the buyer simply assesses the risks higher than the seller and the deal falls through.
The structure in a transaction really should not be leading. Yet sometimes a transaction can fall through if the structure cannot be achieved. As in the case of one of the largest mergers in the pharma market: Allargan and Pfizer. Structure and taxation played an important role. The transaction provided for a certain structure that could provide tax advantages. But the U.S. government put a stop to this. This made the transaction less lucrative, and the deal did not go through.
4. Chair Dance
The famous “chair dance” is one of the reasons why mergers and acquisitions fail at the last minute. Many acquisitions of larger companies are based on job sharing. This is a sensitive and complicated process that is the subject of much debate. This game of musical chairs is more of a power struggle over who is the leading party within the merger.
5. Competition authority
The Dutch regulator ACM can also draw a line under a merger or acquisition. However, this is increasingly rare.
The ACM enforces the Competition Act. It sees to it that mergers, acquisitions and joint ventures take place properly. Fortunately, it is increasingly possible to test in advance whether the concentration will lead to an obstruction of competition in the Dutch market. As a result, the ACM does not have to intervene as often.
This is somewhat more complicated with mergers within the European market. Under certain conditions, these are subject to approval by the European Commission. However, this is more difficult to test in advance.
6. Cold feet
Non-rational aspects also come into play. Especially in our own market: family businesses and Dutch companies. Some companies feel last-minute fear of commitment. Or they fear that they cannot adequately solve certain identified problems with the takeover candidate.
Cold feet are not unusual, and also occur on the sales side. That’s when the owner suddenly doesn’t want to sell, causing the deal to fall through.
Increase your chances of a successful transaction
All these aspects in the acquisition process are known to us and we can assess them well in advance. Both the rational and the emotional aspects. This is what makes transaction guidance so interesting. With our support as process supervisor and expert on all aspects of the transaction, you increase the chances of a successful completion and a successful acquisition.
Would you like to talk to us without obligation about an acquisition strategy or business acquisition guidance?
Then call Clifton Finance: Maarten Vijverberg +31 6 55853074 or Gonneke van der Lee +31 6 52466518.
By: Maarten Vijverberg