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. How did the stock market operate prior to the Securities and Exchange Commission?

    Read about the early stock exchanges in the United States, how corporations issued their shares through brokers and why railroads ...
  2. Where did the concept of reconciliation in accounting come from?

    Learn about the history of account reconciliation, double-entry bookkeeping and the rise of modern accounting practices in ...
  3. How are Tweezer patterns interpreted by analysts and traders?

    Understand the basics of the tweezer candlestick pattern and how analysts and traders interpret this common but unreliable ...
  4. How much impact does government regulation have on the automotive sector?

    Learn about how government regulation affects the automotive industry in terms of design, safety features, fuel-economy and ...
RELATED TERMS
  1. Paid Syndication

    Web syndication is the promotion or inclusion of content on a ...
  2. Controlled Insurance Program (CIP)

    An insurance policy which consolidates coverage for contractors ...
  3. Chain Ladder Method (CLM)

    A method for calculating the claims reserve requirement in an ...
  4. Expected Loss Ratio (ELR) Method

    A technique used to determine the projected amount of claims ...
  5. Frequency-Severity Method

    An actuarial method for determining the expected number of claims ...
  6. Injury-In-Fact Trigger

    A coverage trigger theory that states that policy coverage activates ...

You May Also Like

Related Articles
  1. Stock Analysis

    Are Consumers Being Deceived About Organic ...

  2. Stock Analysis

    National Storage IPO: This Week's Big ...

  3. Trading Strategies

    Understanding Bottoms & Bottoming Patterns

  4. Stock Analysis

    1 Natural Gas Company Gaining on Chesapeake ...

  5. Stock Analysis

    Ignore These Risks to Gilead at Your ...

Trading Center