Why Does a Buyer Back Out of a Deal? The ongoing battle between chemical giants Hexion (Apollo) and Hunstman over Hexion’s attempt to terminate the deal to buy Huntsman, coupled with the recent upheaval in the financial markets raises an issue that is actually quite common in the world of chemical industry M&A, to wit: Why does a buyer back out of a deal? It could be a deal evidenced by a handshake, a deal set forth in a letter of intent, or even a deal set forth in a more binding purchase agreement…
Let’s look the main reasons:
Let’s face it. Just as in any other large population of people, there are unethical buyers out there. It is not uncommon for a buyer to come to an agreement to buy another business at a price that it thinks it will be able to lower at the end of the day. The common strategy is to eliminate other competitive bidders by offering a high price, and then when those other bidders have left the scene after being told they were not the highest, the selected buyer reduces the price, hoping it will have more leverage at that later time and force the seller to make a concession. The whole “auction” process that is employed by many sellers in the M&A world is designed to avoid precisely this type of situation. Such a process will usually work with a seller that has an attractive business and thus a lot of leverage. But we all know that there are many businesses for sale that don’t lend themselves to a competitive “auction” and thus the risk to the seller that the buyer backs out is greater in these situations.
The flip side of this is also not uncommon. There are unethical sellers out there as well. Here the scenario is somewhat different. The seller may start out with a set of financials that are not quite accurate. After a buyer conducts exhaustive due diligence on the numbers, it will seek to reduce the price or back out of the deal altogether if it uncovers some significant misrepresentations.
It can take many months for a business to be sold, and in some cases it may take a year or longer from start to finish. If the business that is being sold declines during that period in a way that was not anticipated, then the buyer will very likely try to renegotiate or back out. For sellers, it is very important that they do not get distracted by the selling process and fail to mind the store during this period.
If the buyer will want to change the manner in which the business is conducted, whether and how that can be done should be left to the buyer. Remember that expansions may require new permitting and that changes in regulations from when the initial plant was built may make such permitting difficult. If your products are marketed solely domestically for domestic use, remember that chemical products sold for use in other countries need to meet the chemical regulation requirements of those other countries. Do not assume that if a product is allowed to be sold in the
It is also not uncommon for a buyer to encounter some problems with the business during due diligence after
As we mentioned before, the selling process can be a long one. Couple this with the fact that a buyer’s hunger for a deal may be short-lived and you can sometimes be faced with a situation where the buyer loses interest.
In large corporations, a seller must always be aware of the internal approval process that is needed by the buyer. Is formal approval of the deal a foregone conclusion? Does the person who is spearheading the acquisition for the buyer have some internal opposition? Will he/she have a hard time getting the approvals that are needed?
This item is saved for last because it is so uncommon. Where there’s a will there’s a way but it is always possible that despite agreement on all the main terms, the parties can’t agree on the wording of the final agreement. Very rare, but possible. Going back to Hexion/Hunstman, which of these reasons is applicable to that dispute? Huntsman is alleging the first reason is applicable and Hexion is alleging the 3rd and 4th reasons are applicable. As spectators, we can only guess from our perch on the sidelines.
|
|
|
the basic terms of a deal are agreed to. In the chemical industry, a common problem that may surface at a later time is often environmental – either relating to ongoing operating practices or historical practices. There are many other “surprises” that can crop up in due diligence. For example, the prospective loss of business with a top customer, a prospective loss of supply from a major raw material vendor, the loss of a key employee, etc.