What is a 'Sweetheart Deal'

A sweetheart deal is an agreement of any type, including mergers and acquisitions (M&A), in which one party presents another party with very attractive terms and conditions — usually so lucrative that it is difficult to refuse the offer.

Numerous types of business transactions may be termed sweetheart deals; they may occur for a variety of reasons; and are subject to different interpretations. For example, the term could describe all manner of insider trading; or it could mean a slap-on-the-hand or look-the-other-way from an authority when an entity has done something dishonorable, instead of the authority meeting out due punishment.

In any case, when one uses the term “sweetheart” to describe a deal, it often carries the implication that something unethical or fishy is afoot.

Breaking down 'Sweetheart Deal'

Sweetheart deal can also infer an arrangement in which you get something that is to your advantage, but only by agreeing to give up something else. In yet another interpretation, it could mean an agreement between two organizations that offers advantages to both, but which is unfair to competitors or another third party.

In an M&A deal, or an attempt to lure a new executive with bonuses and perks, for example, the deal might be “sweet” for the key players because they can get very healthy buyout packages; at the other end of the spectrum. However, a restructuring might result in layoffs for many lower-level employees.

Shareholders Beware

A sweetheart deal often, but not always, can be bad for shareholders. These deals can be very costly to execute, with steep legal fees, and the like. If a company does not put its shareholders’ interests first, using its money instead to fund the deal, then shareholders could take a financial hit. But, because an issuer has a fiduciary duty to its shareholders, if a sweetheart deal is obviously unethical and not in shareholders' interests, then legal action may be taken. Shareholders also could suffer a loss if the market reacts badly to the deal, and the stock price falls.

A Real-Life Sweetheart Deal

Early in 2017, the press learned that then-President Donald Trump’s nominee for secretary of the United States Department of Health and Human Services (HHS), which regulates pharmaceuticals, got a discounted deal on stock from an Australian biotechnology firm seeking U.S. Food and Drug Administration (FDA) approval for its new drug.

Innate Immunotherapeutics (Innate Immuno) needed to raise money. But, instead of issuing stock in the open market, it offered a sweetheart deal to a couple of “sophisticated” U.S. investors — selling nearly $1 million in discounted shares to two American congressmen who had the potential to advance Innate Immuno’s interests. One of these congressmen was the HHS nominee cited above; the second — who also happened to own about 20 percent of Innate Immuno — sat on a key health subcommittee. These congressmen investors paid 18 cents per share for stake in a company whose value at the time had risen rapidly to more than 90 cents and was climbing higher. Ultimately, on paper, these buyers realized a greater-than 400 percent profit!

The “sweetheart” portion of this deal is obvious: It 1) skirted normal procedures; 2) contained grave conflicts of interest; 3) solicited industry insiders, who also were well-placed politicians; and 4) benefited (greatly) only a handful of people at the top.

This stock deal famously resurrected concern about powerful public officials being privy to investment opportunities that are not available to the public, including from companies whose profits might be influenced by political decisions.

RELATED TERMS
  1. Mergers and Acquisitions - M&A

    Mergers and acquisitions (M&A) is a general term that refers ...
  2. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies ...
  3. Lucrative

    An investment or venture is considered to be lucrative if it ...
  4. Deal Flow

    Deal flow describes the rate business proposals and investment ...
  5. Merger Of Equals

    A merger of equals is when two firms of about the same size come ...
  6. Term Sheet

    A term sheet is a non-binding agreement setting forth the basic ...
Related Articles
  1. Investing

    Facebook to Abandon U.K. Tax-Reduction Scheme (FB, FCAU)

    Facebook Inc. (FB) will no longer book sales to its largest UK advertising clients in Ireland, the BBC reported Friday. The tax-reduction scheme has caused a significant backlash in the UK, which ...
  2. Tech

    Will Market Volatility Impact M&A in 2016?

    With global economic uncertainty and stock market volatility marking the start of 2015, analysts forecast that M&A is likely to experience a slowdown.
  3. Investing

    Why Investors Should Look at the Proxy Statement

    Many investors tend to look at the 10-K or 10-Q first, but smart investors do not overlook the proxy statement as a valuable source of company information.
  4. Small Business

    How to Master the Art of Negotiation

    Learn the tactics that good negotiators use and a number of tips to help you get what you want in any negotiation.
  5. Investing

    Do Mergers Save Or Cost Consumers Money?

    A merger or acquisition can actually be beneficial to the customer - find out how, in this article.
  6. Investing

    5 Big M&A deals in 2015 (PFE, AGN)

    Learn how these mergers and acquisitions helped make 2015 a boom year for M&A deals, with the total value of the companies involved surpassing the U.S. budget.
  7. Trading

    3 Single Digit Darlings Flying High (LEDS, HMNY)

    Single digit momentum plays can yield fabulous profits, but aggressive risk management is needed to avoid financial games common with these plays.
  8. Insights

    M&A Boom in 2017 Seen Spawning Record-Size Deals

    Booming M&A may spawn the first $100 billion all-cash deal, JPMorgan says
RELATED FAQS
  1. What is the difference between a merger and an acquisition?

    Learn about the legal differences between a corporate merger and corporate acquisition – terms used when companies are either ... Read Answer >>
  2. Why Isn't My Stock Trading at the Buyout Price?

    An acquisition or merger does not necessarily mean the deal will be resolved as originally stated. Read Answer >>
  3. What is the difference between an accretive and a dilutive merger?

    Learn how to distinguish between a merger and acquisition (M&A) deal that is accretive and one that is dilutive, and why ... Read Answer >>
  4. Why do companies merge with or acquire other companies?

    The reasons for company mergers and acquisitions include synergy, diversification, growth, improving competition, and supply ... Read Answer >>
Hot Definitions
  1. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  3. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  4. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  5. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  6. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
Trading Center