Dead Deals

Refers to the costs incurred by a buyer or seller due to a deal failing to come through.

Author: Aimaan Shergill
Aimaan Shergill
Aimaan Shergill
A student at the University of Toronto, where I major in Finance, Economics, and Data Science. I have held internships at Deloitte, Ontario Health, IBM, and PwC, contributing to projects in financial advisory, strategic funding, and consulting.
Reviewed By: Manu Lakshmanan
Manu Lakshmanan
Manu Lakshmanan
Management Consulting | Strategy & Operations

Prior to accepting a position as the Director of Operations Strategy at DJO Global, Manu was a management consultant with McKinsey & Company in Houston. He served clients, including presenting directly to C-level executives, in digital, strategy, M&A, and operations projects.

Manu holds a PHD in Biomedical Engineering from Duke University and a BA in Physics from Cornell University.

Last Updated:November 22, 2023

What are Dead Deals?

Dead deals are merger and acquisition transactions that do not get completed. The costs incurred by a buyer or seller due to a deal failing to come through are known as dead deal costs.

Dead deal costs can start adding up after a letter of intent is signed, as the acquiring company's due diligence occurs during this time.

Costs charged by the third party concerning work undertaken for acquisition/disposition projects that do not ultimately close.

Therefore, the significant internal and external time and costs dedicated to those facilitating the transaction would be incurred by the buyer and seller.

The buyer or acquiring firm tends to incur most of these costs because of the financial and operational due diligence they conduct.

The purpose of buyer due diligence is to understand if the seller’s financial statements and operational capabilities reflect the actual state of the target company.

Even if the buyer offers a tiny discount compared to another offer, sellers are often better off choosing one with a good track record of finishing agreements despite the fees involved.

Though in cases without implementing due diligence from the buyer, the bulk of dead-deal expenses are borne by sellers.

Costs from dead deals

Deal costs are unavoidable, even if the deal does not close. While such costs can be viewed as a “cost of doing business” for acquirers, most acquirers attempt to complete the transaction by guaranteeing a high likelihood of completion to the seller.

Sellers may incur due diligence costs to understand the buyers' history of closing sales and completing transactions. The seller needs to negotiate with a reliable buyer who has the means to incur the total cost of the acquisition.

Some dead deal costs that both the buyer and the seller incur include:

  • Legal: While dealing with legal issues, buyers and sellers use lawyers to draft legal agreements during a transaction, such as non-competes, letters of intent, employee contracts, etc.
  • Valuation: If the seller wants to let go of property or other assets, they will bring a valuation expert to give the most recent appraisal on the assets and help determine their price.
  • Environmental due diligence: Legislation requires buyers and sellers to evaluate the potential environmental impacts of assets, such as factories.
  • Financial due diligence: The buyer wants to know if the seller's financial records accurately reflect the actual financial situation of the target company. The buyer will also be interested in learning about any obligations associated with hidden assets that might influence the sale.
  • Taxation advisory: During a transaction, experts evaluate the most tax-effective way for the buyer and seller to limit duty risk. The buyer would look for an arrangement where they would get the most cash yet follow the law.

Why M&A deals collapse

McKinsey and Company looked into 265 deals announced and canceled between 2013 and 2018, valued at more than €1 billion.

The reasons for these deals failing to go through include shareholders failing to commit to the deal agreements, activist investors, lack of synergies, regulatory concerns, and political concerns.

There are several reasons merger and acquisition transactions may collapse during negotiations, which include:

1. Cultural Clash

One of the leading reasons for transactions to fall out is the cultural clashes between the buyer and the seller. Even if the buyer has asked about acquiring the target company, it may not be aware of its culture before the negotiations.

If the buyer finds the target company to have a different corporate culture, it may pull out of the deal to avoid conflicts post-acquisition.

When firms choose to diversify, their existing customers will aim to see the value created by the expanded product range and whether they want to change their existing purchasing behaviors to accommodate the expanded product range.

2. Buyer bankruptcy

The buyer could also potentially become bankrupt due to financial problems during the acquisition process, making them incapable of undergoing a high-value transaction.

The buyer may not be able to cover all the costs, or some financial institutions may be reluctant to lend credit to the buyer to help finance the transaction.

Why do deals fail after a transaction?

Studies show that between 70% and 90% of acquisitions fail post-integration. There are many reasons transactions fail during negotiations between buyers and sellers.

Boston Consulting Group’s 2015 M&A report states that transactions can create growth and value when deals are well-designed and post-merger integrations are effectively executed.

In a survey within the report, four of the most cited reasons for deal failure were poor integration, high complexity, difficult cultural fit, and low synergies.

Buyers, on average, screen 20 candidates for each deal, of which 60% are immediately rejected, and 14% are dismissed after due diligence is conducted.

Furthermore, mixed-offer deals, comprising cash and stock payments, are more likely to get canceled than pure cash or pure stock transactions. 

The deal structures for pure cash or pure stock transactions mitigate shareholder uncertainties on potential premiums they receive or taxes they would have to pay.

Essential Elements of a Deal

Executives must ensure a deal goes through, including:

  1. Being transparent: Transparent and frequent cross-company dialogue is an effective way where all parties align and their motivations are accounted for. Simpler transaction structures are easier to communicate than complex ones.
  2. Anticipate regulatory concerns: Transactions involving companies with substantial market shares that own important licenses, permits, processes, and technologies will attract close attention from regulatory agencies. Therefore, companies need to expect any regulatory risk that they may incur.
  3. Monitor political landscape: Blue-chip companies work closely with local and national economies, such as Amazon, which employs close to 1 million individuals in the US.
    Governments can use their powers to block transactions to protect certain stakeholders, such as Amazon taking advantage of their employees in a region with less strict labor laws.

Conclusion

To conclude, dead deal costs are incurred by a buyer or seller due to a deal failing to come through. Such transactions may collapse due to buyer bankruptcy, cultural clashes, etc.

To ensure these costs are not incurred, it is important for executives to be transparent, anticipate regulatory concerns, and monitor political landscapes.

Researched and authored by Aimaan Shergill | LinkedIn

Reviewed and edited by Parul GuptaLinkedIn

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