Research SpotlightBifurcated Termination Fees and Common Termination Events
Termination fees are a deal protection mechanism that help safeguard targets and acquirers from third party interlopers by requiring one or both parties to pay a termination fee should one of them walk away from the transaction prior to its completion.
Generally, a termination fee is disclosed as a total fee, in millions of dollars. On certain occasions, this fee is bifurcated depending on the termination event(s) by which a party is exercising its right to back out of a deal. Among these termination events are breach of merger agreement; drop dead date exceeded; failure to close; occurrence of an intervening event; lack of financing; lack of regulatory approval; lack of shareholder approval; suffering from a material adverse change; acceptance of a superior proposal; and withdrawal of recommendation.
MergerMetrics has been actively reviewing recent and historical public transactions to establish a comprehensive universe of deals with bifurcated termination fee information. A total of 54* transactions have been identified to-date, of which, 27 deals have bifurcated fees on the target side only, 13 on the acquirer side only, and 14 on both target and acquirer sides - all such deals announced between August 2009 and July 2014.
A termination fee can be split into multiple money levels or buckets. Some merger agreements are designed to have a single bifurcated amount for either a specific termination event or multiple events; other agreements stipulate a multi-level termination fee bifurcation based on a number of termination events. The majority of the cases only have one level, where they agree to pay one set lower fee if a defined event occurred. For targets, this was evident in 37 transactions. The chart below breaks down the typical money level splits noted for the 54 transactions that were examined.
Using the top ten largest transactions (by value) with bifurcated termination fees, following are some examples of deals with different bifurcated termination fee levels.
In the February 2014-announced transaction involving Forest Laboratories, Inc. and Actavis plc, both parties provisioned for a single level bifurcated termination fee based on lack of shareholder approval - $250 mil for Forest Laboratories and $335 mil for Actavis. Another transaction with a single level bifurcated termination fee is the February 2013-announced Dell Inc. management-led buyout, where a single amount of $180 mil were to be owed by Dell for termination related to a superior proposal or withdrawal of recommendation.
An example of a transaction with more than one bifurcated termination fee level is the December 2012-announced deal involving NYSE Euronext and IntercontinentalExchange, Inc. On one hand, NYSE were to pay $100 mil in the event of a lack of shareholder approval or $300 mil for termination pursuant to a breach of merger agreement or withdrawal of recommendation. On the other, IntercontinenalExchange were to owe NYSE $100 mil in the event of a lack of shareholder approval; $300 mil in the event of a withdrawal of recommendation or breach of merger agreement, or; $450 mil pursuant to an intervening event.
*Based on full acquisitions of US public targets only (Read more about MergerMetrics' tracking criteria by accessing the FAQ section of FactSet Mergers). Does not include Go-Shop Termination Fees for which there is a separate search and report item of the same name. MergerMetrics will continue to review its entire database universe to identify deals with bifurcated termination fee information.
**Undefined, early termination, and target walkaway provision-related
***Newco incorporation treatment-related, bankruptcy court denial-related, cash shortfall, litigation trigger event, and injunctions/restraints not covered under regulatory approval
Source: FactSet Mergers/MergerMetrics