1998 was a notable year for chemical industry acquisitions and divestitures as a number of very large transactions were announced. Exxon and Mobil, Degussa dn Huls, Hoechst and Rhone Poulenc, Viag and Alusuisse-Lonza, Hercules and BetzDearborn…..all were participants in major transactions.

But what about the flip side? What about those relatively rare transactions that are announced and then collapse before closing? As illustrated above, 1998 had some notable examples of these as well.

In the article that follows, we will examine some of the reasons why a deal can collapse. For those that are active in the M&A field, learning from the dead deal is just as important as learning from the deal that gets done.

Why Deals Fall Through

When a "deal" is announced, most of the time it has not closed yet. The parties may have a handshake on a deal, or they may have signed a letter of intent or a purchase agreement. But there is still a lot that has to be done in order to get to a closing. While most deals like this do ultimately close, there are a number that will fall through for a variety of reasons:

Clash of Cultures and/or Egos – The time between a handshake, letter of intent or purchase agreement and the actual closing is often an opportunity for each party to get to know the other better. If a basic incompatibility between people and/or cultures becomes apparent during this period, one or both sides may decide to call the deal off.

Antitrust Problems – Getting government clearance is required in many deals and is usually sought after the "deal" has been cut but before closing. A deal can die when the government decides to challenge it or tries to modify it and one or both parties decide not to fight. A deal can also die because the government investigation takes an inordinate amount of time and one or both sides loses interest in doing the deal.

New Information – Due diligence will invariably continue after a deal had been made, often right up to the closing date. In addition, business conditions may change significantly before the actual closing. In either case, if new information uncovered in due diligence or changed business conditions are significant enough, the deal may no longer be justified on its original terms and one or both sides may back out if new terms cannot be agreed to.

Financing Problems – Many deals are made subject to the buyer obtaining financing. It is not uncommon for the buyer to be unable to get such financing on acceptable terms and for the deal to be called off because of it.

Environmental Problems – Environmental issues are often dealt with in detail after a deal has been made but before closing. In the chemical industry, environmental issues probably take up more time than any other single issue, both in due diligence and in negotiations. It is no surprise therefore that deals can fall apart because environmental issues cannot be resolved.

Change in Management – When a particular individual is championing a deal and that person is later replaced or reassigned before the deal is closed, there is always a chance that the person who takes over has a different view of the deal and decides to kill it.

One Party Reneges – There are many cases where one party simply tries to renegotiate a deal that has already been agreed to. A common scenario is where the buyer comes in with a high offer early on with the hope of getting the deal, and then tries to lower the price at a later time when it is in a stronger negotiating position.

Caution: Stated reasons for killing or modifying a deal may not be the real reasons – Many of these reasons can also serve as excuses for one party who has decided to simply renegotiate or back out of a deal. For example, a buyer who is simply reneging on an agreed-to price may try to explain his/her actions by referring to new information obtained in due diligence. Or he/she may blame a revised and lower offer on his/her bank and financing difficulties. A seller on the other hand who cools on a deal may use a lengthy antitrust investigation as an excuse to back out. Or he/she may suddenly become intransigent negotiating environmental issues knwoing the buyer will walk.

How to protect against the dead deal? Determine early on if people and cultures are compatible and make sure you know who the decision maker is for the other side. Anticipate all antitrust objections and consider fall-back scenarios to get the deal through. Don’t leave important items of due diligence until the end. Check out a buyer’s financial capability fully before a deal is agreed on. Tie a buyer down as much as possible so there is little wiggle room left as you approach closing.

With thorough preparation and sound negotiating tactics, dead deals can be kept to a minimum.