Introducing A New Premium Feature: Failed Deals

Last October I wrote an article titled “Big Game Hunters: Going After Those Juicy Merger Arbitrage Spreads” that explored the odds of success for announced mergers & acquisitions, the length of time it takes deals to close and some of the reasons deals failed.

I analyzed 2,614 deals from our database and found that 95% of all deals ended up closing with some variability between the years based on market conditions. For example only 90% of the 154 deals announced in 2020 closed, while 98% of the 206 deals announced in 2012 ended up closing. The news was not all bad during the pandemic years as four deals announced in 2020 and six deals announced in 2021 ended up with new higher offers.

I wrote the following about failed deals in that article:

Why do deals fail?

Failure in arbitrage land is not perceived the same way it is perceived in life or in entrepreneurship. Failure is not the stepping stone to success. Failure in arbitrage hurts. When a deal with 5% upside blows up, it can wipe out anywhere from 30% to 50% of your capital. This might be the reason arbitrageurs have gone on to have very successful investing careers after they left the arbitrage world. You are constantly assessing the probability of success, trying to figure out what could go wrong and paying attention to details that other investors might ignore.

The corollary to this is that deals sometimes trade at wider spreads than they should and for the risk arbitrageurs who like to go out on the risk spectrum, this can turn into a high risk/high return roller coaster, especially when leverage is involved.

As you can see from the table above, regulatory issues remain the main reason for deal failure, accounting for more than a third of all failures. While two companies, including Change Healthcare, recently challenged the Department of Justice in court and won, this is not common. Antitrust and cross-border issues will continue to weigh on deals and these deals typically start their journey with large spreads as we saw with Kroger’s (KR) acquisition of Albertsons (ACI), which started trading with a juicy spread of 30%.

Interestingly, the two deals with wide spreads we discussed in that article, the acquisition of Spirit Airlines (SAVE) by JetBlue (JBLU) and the acquisition of Activision Blizzard (ATVI) by Microsoft (MSFT) have both headed in opposite directions. The spread on the Spirit Airlines deal has widened as the deal is widely expected to fail following regulatory issues. On the other hand the spread on the Activision deal has contracted since the market’s probability of the deal closing has improved following encouraging news out of the European Union, the U.K. and Japan.

Markets are constantly evolving and the regulatory environment and financing conditions we are currently experiencing are very different from what we saw just two years ago. Since the economy and the market move in cycles, observing what happened to deals over long periods of time can be helpful in assigning probabilities to how the future might unfold when it comes to new deals.

Towards that end, we are announcing the launch of a new feature for premium members today that will allow them to view all failed mergers and acquisitions since we started tracking deal data in 2010. The list includes not just how those companies performed post-failure but also gives subscribers the ability to dive in deeper into each deal to view the spreads and deal updates leading up to the failure.

Our internal processes and tools evolved over the years and more recent data is likely to be richer than data on some of the older deals. Along with Cluster Insider Purchases and Flip Floppers, this is our third premium feature release this month and we have several more planned in the coming months. Happy hunting.