Winning at the Acquisition Game by Timothy Galpin

Author:Timothy Galpin [Galpin, Timothy]
Language: eng
Format: epub
ISBN: 9780191899362
Publisher: OUP Oxford
Published: 2020-08-18T00:00:00+00:00

Break Fees and Reverse Break Fees

A “break fee” or “reverse break fee” (also referred to as inducement fees or failure costs) are deal protection measures where a party to a transaction agrees to pay a fee to another party if the transaction fails due to the occurrence of a specified event. A break fee may be payable by the seller (a “break fee” or “seller break fee”) or a buyer (a “reverse break fee”). Seller break fees are commonly requested by buyers and regularly agreed to by sellers in US transactions. While seller break fees can provide protection for buyers, parties must consider jurisdictional permissibility. Break fees are generally prohibited under the UK takeover code due to concerns that deal protection mechanisms (including break fees) discourage potential bidders from submitting competing bids. In the EU, according to a study examining over 190 deals signed between July 2015 and June 2017, 10 percent of European private M&A transactions featured a seller break fee, up from 8 percent in 2016 (Browne, 2017). Break fee and reverse break fee amounts typically range from 1 percent to 5 percent of the deal’s enterprise value.

Buyers often insist on a break fees because they know the target board is legally obligated to try to get the best possible value from a sale for their shareholders by looking for other bidders. If a better offer comes along after a deal is announced, but not yet completed, the target board is expected (due to its fiduciary obligation to shareholders) to support the new higher bid. The break fee seeks to counteract this and protect the buyer for the time and resources already expended in the deal process (e.g. due diligence, negotiations, advisory fees, and so forth). This is especially important in public M&A deals where the transaction and terms are made public, facilitating competing bidders to emerge, making break fees customary in public deals, but not as common in private M&A deals.

While buyers protect themselves via break fees, sellers often protect themselves with reverse break fees, allowing the seller to collect a fee should the buyer walk away from a deal. Risks faced by the seller are different from those faced by the buyer. For example, sellers generally do not have to worry about other bidders coming along to spoil a deal. Instead, sellers are usually most concerned with the acquirer not being able to secure financing for the deal, the deal not getting antitrust or regulatory approval, not getting buyer shareholder approval (when required), and not completing the deal by a specific “drop dead date.” For example, when Verizon Communications acquired Vodafone’s interest in Verizon Wireless in 2014, Verizon Communications agreed to pay a US$10B reverse break fee should it be unable to secure financing for the purchase. However, in the 2016 Microsoft purchase of LinkedIn, LinkedIn did not negotiate a reverse break fee, most likely because financing (Microsoft had over US$105B cash on hand) and antitrust trust concerns were minimal (Wall Street Prep, 2019).

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