Asia-pacific saw highest deal failure rate in 2016: report
The Asia-pacific region recorded the highest average merger and acquisition (M&A) deal failure rate in 2016 at 13.2%. The global average failure was 7.2%.
According to a research report by Intralinks and Cass Business School, this marks the highest rate of worldwide deal failures since the start of the global financial crisis in 2008. It’s also significantly higher than the overall long-term average deal failure rate of 5.7%.
Last year saw some major deals collapse. Chinese company Anbang Insurance backed out of acquiring Starwood Hotels and Resorts for $15.5 billion. A massive $160 billion deal between pharma giants Pfizer and Allergan fell apart.
Oil giant Halliburton proposed acquisition of Baker Hughes in a deal valued at $38.7 billion and Staples’s attempt to buy rival Office Depot for $5.5 billion were other casualties.
Over the past 25 years, China, Australia and Singapore are among the countries with the highest proportion of failed deals, while Japan, India and South Korea are among the countries with the lowest rates of deal failure.
From the period between 1992 and 2016, 12.9% of the deals failed in China, while in Australia the rate of was 11.9%and for Singapore, which ranked third on the list, it was 9.2%.
Chinese firms, which have emerged as the most aggressive buyers globally, have also faced significant failure rates. For example, deals by Chinese acquirers for Australian targets had a 23.3% failure rate, while those with Indian targets had a 25% failure rate.
Interestingly, the failure rate for deals involving public sector company targets is significantly higher than for private targets. According to data provided in the report, the long-term public target average failure rate was 11.1% since 1992, while the longterm private target average failure rate was just 3.7% and the overall average deal failure rate was 5.7%.
And among sectors, the materials, real estate and energy and power sectors had the highest rates of deal failure. The consumer, industrials and healthcare sectors had the lowest deal failure.
The report pointed to some predictors for failure in deal completions for public targets, first of which was the absence of a termination fee.
The second most significant factor was the size of the deal, as acquisitions of larger targets were less likely to be completed.
The third most significant factor influencing public target deal failure was if the target’s initial reaction to a deal announcement was to consider it a hostile or unsolicited acquisition.
For private targets, there were four significant predictors including the relative size of the target compared to the acquirer. Deals involving larger targets relative to smaller acquirers were less likely to be completed.
Second, the completion of deals involving private targets with more liquid acquirers had a lower probability of failure.
The study also found that the method of payment offered by an acquirer was the third most significant factor influencing the probability of a private target deal failure. Deals where cash was the only form of consideration offered to the target’s shareholders were less likely to fail.
The fourth again was the absence of a termination fee.