Why do some mergers and acqusitions fall through?

By Albert Phung AAA
A:

Most merger and acquisition (M&A) activities are carried out successfully, but from time to time, you will hear that a deal fell through as either the acquirer, target, or both parties withdrew from the deal. Three of the major reasons that mergers and acquisitions fall through are: regulatory problems, financing problems and problems relating to a company's fundamentals.

Regulatory issues typically involve a violation of government regulations. One important regulation that must be met involves antitrust and monopoly legislation. A merger or acquisition must not significantly affect the role of competition in the specific industry to ensure that the resulting company does not have a monopoly in its industry. For example, if a specific industry only has three companies providing services for the entire country, the U.S. Justice Department's antitrust division may strike down any attempted M&A activity between these three companies.

Financing problems tend to be factors with acquisitions, as opposed to mergers. An acquiring business needs to pay the target company's shareholders in order to buy the company. However, due to the size of the businesses involved, the acquirers often need to pay millions, if not billions, of dollars. In some cases, an acquirer may not be able to come up with enough cash to pay the promised price within an appropriate amount of time. In such an instance, the acquirer will need to withdraw from the deal.

Issues with the company's fundamentals can often occur when an acquiring company conducts more thorough number crunching to search for any red flags or skeletons in the target company's closet. For example, a private equity firm would probably be less interested in acquiring a company whose latest earnings have fallen substantially due to a decrease in demand for the company's products. Another example would be one party realizing that the other company may been participating in options backdating, which could lead to trouble with the Securities and Exchange Commission.

To learn more about mergers and acquisitions, please see The Wacky World of M&As and The Basics Of Mergers And Acquisitions.

RELATED FAQS

  1. What does a mutual fund's beta coefficient measure?

    Evaluate the risk associated with a particular mutual fund by determining its beta coefficient, which illustrates the fund's ...
  2. What are some examples of how cash flows can be manipulated or distorted?

    Read about some of the most common accounting techniques that can be used to manipulate the operating cash flow on a company's ...
  3. Where can I find the balance sheet of a country?

    Learn where to find balance sheets for different countries. Explore how different accounting standards may affect the quality ...
  4. What is the difference between cash flow and free cash flow?

    Learn about the main differences between cash flow and free cash flow. In addition to the differences, learn how to calculate ...
RELATED TERMS
  1. Premium to Surplus Ratio

    Net premiums written divided by policyholders’ surplus. The premium ...
  2. Combined Ratio

    A measure of profitability used by an insurance company to indicate ...
  3. Policyholder Dividend Ratio

    The policyholder dividend ratio is a measurement of the profitability ...
  4. Overall Liquidity Ratio

    A measurement of a company’s capacity to pay for its liabilities ...
  5. Reinsurance Recoverables to Policyholder Surplus

    The amount of incurred losses covered by reinsurers compared ...
  6. Losses Incurred

    Benefits paid to policyholders during the current year, plus ...
Related Articles
  1. Economics

    Indian Banking Regulations -- What You ...

  2. Investing

    The Little-Known 'Glitch' That Could ...

  3. Investing

    Technicals Make The Case For A 33% Rally ...

  4. Africa's economic growth and growing stability has gotten the attention of adventurous investors. What kind of ETF or mutual fund options are available?
    Mutual Funds & ETFs

    Destination Africa: These Funds Offer ...

  5. Credit card balance transfers can help pay off debts – but they can cost you. Here are some other approaches worth checking out.
    Credit & Loans

    4 Debt-Busting AlternativesTo Balance ...

Trading Center