On May 22, 2017, Huntsman Corporation announced a “merger of equals”1 with Clariant, meant to create a global company valued at about $20 billion. Just five months later in October, the two chemical companies mutually agreed to halt the merger, citing shareholder and activist investor concerns on the side of the “buying” company, Clariant. If the investors, M&A advisors, or chief officers had the gift of hindsight, they may have foreseen certain telltale signs that this deal was likely prone to cancellation. In fact, the Clariant/Huntsman merger also ranked amongst the highest as likely to be cancelled, according to recent analysis conducted by S&P Global Market Intelligence’s Quantamental Research team.
According to the group’s report, The Art of the (no) Deal: Identifying the Drivers of Canceled M&A Deals, proposed deals with large proportionality ratios (“mergers of equals”), can be difficult to manage. Key factors, such as who will lead the combined entity to board membership constitution, may lead to a higher cancelation risk for these types of transactions. The Clariant/Huntsman cancellation not only embodied a large proportionality ratio, but also fit the profile of other cancelled deal drivers including “large target based on revenue” and “cross boarder deal.”
Clariant/Huntsman was one of 16 deals announced and canceled in 2017 for companies observed in the Russell 3000 Index. Terminated deals impact capital market participants in various ways. Predicting deals that are likely to be canceled is of interest to chief officers, M&A advisers, and investors alike because of the potential opportunity of cost benefit savings. Findings from the report show that certain key drivers influence whether deals are likely to be canceled, which include the following:
- Size: The larger the size of the target (or acquirer), the more difficult (or easier) it is for the acquirer to finance the deal.
- Deal Proportionality (deal size to acquirer’s market cap): Deals with large proportionality ratios (“mergers of equals”), can be difficult to manage, leading to a higher cancelation risk for these type of transactions.
- Perceived Price Discount: Shareholders of targets with stock prices well off their 52-week highs often believe their positions are worth more than the offer price, and existing management usually encourage this point of view.
- CEO Age: Deals where the acquirer CEO is a young male, have a higher risk of being terminated than deals involving older CEOs, as younger male CEOs can be less diplomatic, more combative and less willing to concede in negotiations.
- Regulatory Risk: Deals where both the target and acquirer account for a large share of total industry assets have a higher risk of being terminated (antitrust concerns) than deals where this is not the case.
In addition, the research documented several other characteristics that increase the cancelation risk of M&A deals such as material changes in the company or industry fundamentals (e.g. 2008 financial crisis) and anti-trust and national security concerns, which was evident in the case of Clariant/Huntsman.