One of the ways corporations look to grow and expand is through mergers and acquisitions (M&A). These deals help companies to gain advantages like gaining a larger customer base, a global footprint, access to distribution channels or suppliers, and technical knowhow, among other things. If the deals turn out as planned, they give the business a competitive edge and enhance shareholder value. However, sometimes it just doesn't go through. And if that happens, there are many costs involved, direct and indirect. We talk about one of the direct costs here which are termed as the breakup or termination fee (and a reverse breakup or reverse termination fee). (See: Biggest Merger and Acquisition Disasters)
In case the deal doesn’t get through, a termination fee is paid by the target entity to the acquirer (buyer), whereas a reverse termination fee is paid by the acquirer to the target entity. The purpose of this stipulated amount is to make all parties take the deal seriously and to compensate for the time, effort and expenses incurred by a party in case the deal isn’t completed.
According to a report by Paxton Law Group, between January 1, 2010 and June 30, 2014, “The average size of termination fees as a percentage of transaction value was 2.91% in public merger agreements, 3.00% in private merger agreements, 4.49% in stock purchase agreements and 3.76% in asset purchase agreements while the average size of reverse termination fees as a percentage of transaction value was 4.49% in public merger agreements, 4.28% in private merger agreements, 5.22% in stock purchase agreements, and 5.20% in asset purchase agreements.”
Here are some of the examples where mergers didn’t work out and involved compensation in the form of a termination or reverse termination fee, as per the case.
- In 2011, under the broad opposition by the U.S. Department of Justice (DoJ) and the U.S. telecommunications regulator (FCC), AT&T Inc. and Deutsche Telekom terminated the agreement on the sale of T-Mobile USA to AT&T (T). As a result, Deutsche Telekom was paid a break-up fee by AT&T as agreed in the contract. It included a $3 billion cash payment to Deutsche Telekom by AT&T as well as a large package of mobile communications spectrum and a long-term agreement on UMTS roaming within the U.S. for T-Mobile USA.
- Staples, Inc. (SPLS) and Office Depot, Inc. have recently announced their plan to terminate the $6.3 billion merger agreement following U.S. District Court for the District of Columbia’s recent ruling granting the Federal Trade Commission’s request for a preliminary injunction to block the acquisition as per the press release. The failure of the merger will require Staples to pay office Depot a $250 million break-up fee.
- The proposed deal between Halliburton Company (HAL) and Baker Hughes Incorporated (BHI) was terminated effective April 30, 2016. The two companies had entered into a merger agreement of $34.5 billion in November 2014. In connection with the termination of the merger agreement, Halliburton will pay Baker Hughes the termination fee of $3.5 billion as per the company’s statement.
The break-up or reverse break-up fees are not always a part of a merger agreement. Apparently one of the deals which did not have a break-up fee was that of Comcast Corporation (CMCSA) and Time Warner Cable, Inc. (TWC).