The Art Of The (No) Deal: Identifying The Drivers Of Canceled M&A Deals

Globally, almost 54,000 merger and acquisition (“M&A”) deals with a total value of $4.1 trillion were announced in 2017. While investors generally expect announced deals to close, not all do. Terminated deals impact capital market participants in various ways. Predicting deals that are likely to be canceled is of interest to both M&A advisers and equity investors. Certain drivers influence whether a deal is likely to be canceled:

• Size: The larger the size of the target (acquirer), the more difficult (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 (who leads the combined entity, board membership constitution, etc.), 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.
• A model comprised of four drivers forecasts the rate of M&A cancelations at twice the level (26%) of the M&A universe (13%).