ANALYSIS: Deal Terminations Are Down Despite Tough M&A Market

Around this time last year, I thought it was possible that the downward trend in total deal terminations would reverse course for the first time in five years—and it did. But last year’s upswing likely won’t continue in 2023.

The number of terminated controlling-stake mergers and acquisitions so far this year suggests that the overall pattern of decreasing annual deal terminations may continue. But what’s perhaps more interesting is that the portion of terminated deal volumes out of overall completed deal volumes (i.e., deal volumes from closed or terminated transactions) has declined noticeably in the past decade.

Quarterly Breakdown of Terminations

Q3 2023 had the fewest terminated controlling-stake M&A deals (94) of any quarter in the last five years—the next lowest quarter was Q1 2020, which had 99 terminations.

Every year since 2018, there’s been a Q3-to-Q4 increase in the number of deal terminations. 2018 saw the biggest increase, with 37 more terminated deals in Q4 than Q3. However, even if 2023 experiences the same bump in terminated deal count, Q4 2023 would need to have 195 terminations—the highest single quarter number in the last five years—in order to match last year’s total. Given that Q4 2023 has a quarter-to-date count of 57 terminated deals, it seems more likely that 2023’s annual total of deal terminations will be noticeably less than the last few years.

Because the M&A market has been languishing for more than a year, it would make sense that lower deal activity would mean fewer terminated deals. After all, if companies aren’t entering into a merger or acquisition in the first place, then there’s no M&A agreement to be closed or terminated.

But a closer look at termination data reveals a more nuanced picture of the market.

Terminations as Proportion of Completed Deals

When I dove deeper into Bloomberg M&A data, I was surprised to find that, of the total deal volumes for completed (i.e., closed or terminated) controlling-stake mergers and acquisitions, the proportion of deal volumes represented by terminated deals has declined, overall, over the last 10 years.

Despite two spikes in 2016 and 2021 (these were outlier years—2016 saw target companies refuse to sell and increased antitrust enforcement activity, and 2021 broke records for M&A activity), the percentage of deal volumes from terminated M&A deals, out of overall completed deal volumes, dropped from more than 11% to 6% in the last decade.

So far, 2023’s proportion of terminated M&A deals compared to all completed transactions is almost identical to 2022’s number, so it will be worth watching whether the overall downward trend continues once the year’s final numbers are in.

Why the Decline?

Since the proportion of terminated deals appears to be closely following the decrease in annual terminated deal counts, a struggling M&A market can’t be the only reason for the decrease in the number of terminations. After a global pandemic, a year of record-breaking deal activity, and then a couple years of market instability, M&A lawyers and their clients may have adapted and found better ways to anticipate and mitigate risks associated with transactions.

They may be taking more cautious approaches to mergers, for example, because antitrust enforcers have been more aggressive or because the Federal Trade Commission and the Justice Department are gearing up for an overhaul of their merger rules and guidelines.

Perhaps heightened due diligence reviews of target companies have helped decrease the chances of a deal terminating once an agreement has been signed, since conducting thorough due diligence (ideally) decreases the chances of a buyer discovering liabilities that might break the deal later in the transaction process.

Maybe companies have found better ways to address or adjust valuations. In some markets, like commercial real estate, participants have offered incentives to encourage buyers to get deals done. And don’t forget that deal protection devices—like representations and warranties insurance or drafting options such as earnouts and post-closing purchase price adjustments—may also help mitigate the risks of a transaction and prevent parties from terminating a deal once a negotiated M&A agreement has been signed since these devices can help reduce a party’s concerns by addressing liabilities.

My analysis has highlighted some interesting developments in deal terminations, and I’m curious to see what 2023’s total number of terminated deals will be, how their relation to the year’s completed deals will compare to recent trends, and what next year will bring.

Bloomberg Law subscribers can find related content on our M&A Deal Analytics resource.

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