Companies often focus on negotiation, valuation, and integration planning during the Mergers and Acquisitions (M&A) process. However, one of the most critical—yet often underestimated—factors in a successful deal is completion risk.
Completion risk refers to the possibility that a proposed deal may not close as intended. Even after parties have agreed on terms and signed a deal, various events can prevent the transaction from reaching completion. These obstacles typically arise from regulatory hurdles, financing challenges, or material adverse changes (MACs) that alter the attractiveness or feasibility of the deal.
1. Regulatory Obstacles
One of the most common sources of completion risk comes from regulatory approvals. In many industries, especially those that are heavily regulated like telecommunications, pharmaceuticals, or finance, government agencies must approve large transactions to ensure they don’t violate antitrust laws or national security interests.
Example: In 2018, the proposed $44 billion merger between Qualcomm and Broadcom was blocked by the Committee on Foreign Investment in the United States (CFIUS). Despite strong financial terms and shareholder approval, the U.S. government intervened, citing national security concerns, and the deal collapsed.
2. Financing Problems
Completion risk also arises if the buyer is unable to secure the necessary financing. This is particularly relevant in leveraged buyouts, where a significant portion of the purchase price comes from borrowed funds. Market fluctuations, credit rating changes, or poor due diligence can all affect the ability to raise capital.
Example: In 2007, private equity firm Cerberus Capital Management agreed to buy United Rentals for $6.6 billion. However, amid the global financial crisis, Cerberus could not secure the funding and ultimately walked away from the deal, paying a breakup fee instead.
3. Material Adverse Changes (MACs)
A Material Adverse Change clause allows a buyer to withdraw from a deal if the target company experiences significant negative developments before closing. While MAC clauses are subjective and often lead to disputes, they are designed to protect buyers from acquiring a suddenly riskier or less valuable business.
Example: In 2020, LVMH attempted to pull out of a $16 billion acquisition of Tiffany & Co., citing both the COVID-19 pandemic and threats of tariffs from the French government as material adverse events. After a legal battle, the companies renegotiated and eventually completed the deal at a slightly lower price.
Mitigating Completion Risk
Experienced dealmakers use several strategies to manage completion risk:
- Reverse termination fees, where buyers pay a fee if they can’t close.
- Covenants ensuring both parties act in good faith and maintain business operations during the interim.
- Detailed due diligence to uncover potential red flags early.
- Regulatory planning, including pre-clearance discussions with authorities.
Conclusion
Completion risk is an ever-present factor in M&A transactions. While signing a deal is a major milestone, it is not the finish line. Regulatory scrutiny, financing uncertainty, and unforeseen business changes can all derail even the most promising deals. Understanding and mitigating completion risk is essential for ensuring that a merger or acquisition not only begins well—but ends well, too.