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 much of the profitability in the Internet sector is concentrated in the few major ...

    See how much profitability of the Internet sector is concentrated, and where the most value from Internet-based services ...
  2. What is the difference between consumer surplus and economic surplus?

    Learn the difference between consumer surplus and economic surplus, how the concepts are related and the important theoretical ...
  3. How important are seasonal trends in the automotive sector?

    Learn more about the automotive industry, including the strong seasonal sales trends for the industry and some of the major ...
  4. What techniques are most useful for hedging exposure to the banking sector?

    Learn how investors hedge exposure to the banking sector by investing in more aggressive sectors and also by investing in ...
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. Options & Futures

    Key Factors Of The Russell 2000 Index

  2. Stock Analysis

    There Are No Good And Bad Stocks, There's ...

  3. Charts & Patterns

    Why These May Be the Top 4 Growth Stocks ...

  4. Economics

    Gambling on Macau: Too Risky?

  5. Stock Analysis

    Why the House (and Las Vegas Sands) ...

Trading Center