2016 saw most abandoned acquisitions since global financial crisis

The proportion of failed acquisitions worldwide reached an eight-year high in 2016, according to research from financial services firm Intralinks and City, University of London’s Cass Business School.

An estimated 7.2 percent of mergers and acquisitions announced last year failed to complete, the highest rate since the start of the 2008 global financial crisis, the study revealed.

The Asia-Pacific region saw the highest average deal failure rate at 13.2 percent. The research also revealed that Australia had one the highest proportions of failed deals in the last 25 years, along with China and Singapore.

Japan, India and South Korea, however, are among the countries with the lowest rates of deal failure.

"Failed deal completions impose significant deadweight and reputational costs on acquirers and targets, Intralinks vice president of strategy and product marketing Philip Whitchelo said.

“Our research, which identifies the most significant predictors of failed deals, will help both parties in a transaction to increase the likelihood of successful deal completion."

The research noted that the failure rate of deals involving public company targets since 1992 was at 11.1 percent, compared to a failure rate of 3.7 percent for private targets.

The probability of failed deal completions for public targets is influenced by 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.

Meanwhile, for private targets, the probability is influenced by 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).

The study also found that external financial shock such as liquidity, financing and banking crises would temporarily increase the rate of failed deal completions significantly, while external political shocks appear to have no impact.

The researchers also looked at “catastrophic and/or unexpected” events to see if there was an impact on deal failure rates for deals that had been announced, but not yet completed, in the three-month period leading up to each event.

The events in question were the September 2001 terrorist attacks in the United States, the Lehman Brothers bankruptcy in September 2008 and the June 2016 UK Brexit referendum vote.

They found that the worldwide deal failure rate rose to 19 percent following the collapse of Lehman Brothers, while the two other events did not result in increases in deal failure rates, compared to their seasonally adjusted averages.

The research is based on analysis of 78,565 mergers and acquisition transactions announced between 1992 and 2016, investigating 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.

“This study is the most comprehensive ever conducted into this topic, and the only one to consider both public and private M&A on this scale,” Scott Moeller, director of the M&A Research Centre at Cass Business School, said.

“For the first time, we have a holistic account of the significant causes behind failed deal completions.”