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Dead Deals

Proposed M&A deals that go through due diligence but fail to close

What are Dead Deals?

Dead deals refer to merger and acquisition deals that go through due diligence but do not close due to various reasons from either the seller or buyer. When deals fail to close, various costs are incurred, both direct and indirect, and are referred to as dead deal costs. The costs are incurred by the seller and buyer to facilitate the transaction.

 

Dead Deals Diagram

 

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Costs from dead deals

When both the seller and the buyer work together to make a transaction go through to the end, they incur various costs to facilitate the transaction. Majority of the costs from dead deals are incurred during due diligence when the parties spend a lot of time in verifying the other party’s proposed transaction.

 

Buyer side

On the buy-side, the buyer is interested in knowing if the financial reports presented by the seller represent the actual state of affairs at the target business. The buyer will attempt to find out the performance of the company over recent financial periods and seek any explanations for revenue increases and decreases.

The buyer will also be interested in knowing any liabilities attached to undisclosed assets, and any other information that may affect the transaction. The costs incurred in conducting due diligence will be considered dead deal costs if the transaction fails to close.

 

Seller side

On the other side, the seller will conduct due diligence on the buyer to know their history of closing deals. The seller wants to transact with a buyer with a positive history of closing deals in previous transactions. For example, if several buyers expressed interest in acquiring the seller ’s business, the seller would perform due diligence to weed out buyers with a questionable past. The costs that the seller incurs in conducting background checks will be counted as dead deal costs if the seller fails to close a deal with one of the buyers.

 

Examples of dead deal costs

The following are some of the third-party deal costs that sellers and buyers incur during merger and acquisition transactions that fail to close. They include:

 

1. Legal costs

During an M&A transaction, both the seller and the buyer pay attorneys to draft legal documents for them, as well as handle any legal matters that the parties are required to meet before proceeding with the transactions. Some of the legal documents that may be prepared by an attorney include non-compete agreements, purchase and sale agreements, letter of intent, employment contract, etc.

 

2. Valuation costs

When the seller is disposing of property or equipment, it will invite a valuation specialist to provide the latest valuation of the property or equipment. The assessment helps in determining the price that the seller is willing to accept as a payment for the purchase of an asset.

 

3. Environmental assessment costs

When selling certain types of assets such as factories and manufacturing facilities, the law requires the parties to conduct an environmental assessment of the plan to determine the consequences that it will have on the environment. An environmental assessment is conducted before the actual implementation of the plan.

 

4. Tax advice costs

When undertaking a capital-intensive acquisition or merger, the buyer will invite tax practitioners to provide them with the most-efficient plan that will result in lesser taxes. The buyer will want to go with the most efficient tax plan that saves them money while still complying with the tax laws.

 

Why M&A deals collapse

There are several reasons why M&A deals collapse midway during negotiations between the seller and the buyer. They include:

 

1. Culture clash

One of the leading causes of M&A deals is the culture clash between the seller’s and buyer’s businesses. While the buyer might have expressed interest in acquiring the target company, it might not be privy to the company’s culture before the purchase negotiations. If the buyer discovers that the target company has different cultures during negotiations, it may pull out of the deal to avoid future conflicts post-acquisition.

 

2. Limited involvement of owners

Another reason for deal failure is limited or no involvement of the actual owners of the business. The buyer’s side may hire M&A advisors to oversee the transaction on their behalf. However, the M&A advisors can only do what is within their powers, and can not take over the functions of the seller. It means that, when the actual buyer is absent from the negotiations, it will derail the transaction and end up failing in the process.

 

3. Buyer bankruptcy

The buyer may also become bankrupt during the acquisition process, especially when it involves a high-value transaction. The buyer will be unable to meet all the acquisition costs, and financial institutions will be reluctant to advance credit to a bankrupt client. Due to the capital limitations, the buyer will pull out of the transaction on bankruptcy grounds and result in the M&A deal failure.

 

More resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Letter of Intent
  • Negotiated Sale
  • Sale and Purchase Agreement
  • Success Fee

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