How To Make Money From Failed M&A Transactions
A termination or break-up fee is what the vendor pays the buyer if they decide to pull out of the transaction. Investopedia defines it as “a common fee used in takeover agreements if the seller backs out of a deal to sell to the purchaser. A breakup fee, or termination fee, is required to compensate the prospective purchaser for the time and resources used to facilitate the deal. Breakup fees are normally 1-3% of the deal’s value. ”
But under what circumstances is the fee payable? What if the acquirer isn’t playing ball, is being difficult or is dragging the transaction out? What if their interpretation of the Letter of Intent is different from the interpretation made by the vendor? Does the seller still end up paying the termination fee?
In many cases, yes. And this is a danger that needs to be assessed before embarking on the sale process.
In related news, Yahoo has agree a termination fee of$145 million if it does not meet the terms of the deal with acquirer Verzon. Read more