A “break-up fee” is common on Wall Street if a seller or buyer backs out of a deal after considerable transaction costs and due diligence has been incurred. But for PR M&A deals gone awry? Not so much.
A recent case in point regarding the breakup fee: Marriott’s potential acquisition of Starwood Hotels & Resorts Worldwide. In effect, an auction (a bidding war) was created and Marriott needed to match the offer by a Chinese investor, Anbang Insurance Group.
Combining Starwood and Marriott would create the world’s largest hotel chain. Marriott’s reported profitability was 14 percent, per $14.5 billion in revenue; Starwood’s was at 23 percent, per $5.8 billion revenue. Both hotel chains average around $120 per available room. Cost synergies/savings are estimated to be $250 million.
To complete this deal would cost Marriott another billion dollars, increasing the offer from $12.2 billion, to $13.2 billion. However, if Starwood accepts the offer from the Chinese investor group, or any other suitor, the company would need to pay Marriott a break-up fee of $450 million. Ouch.
In the PR industry, break-up fees are not common, but they should be. Here’s why:
- If the seller has sellers remorse and decides he or she doesn’t want to move forward after the agreed to transaction has incurred substantial legal, accounting and consultant fees in due diligence and contract preparation.
- If the seller backs out because they receive a higher offer than the one outlined in an agreed to non-binding letter of intent from an initial buyer.
- If the buyer backs out because they cannot obtain the financing needed for the down payment. The Wall Street Journal earlier this week ran a Page One story discussing how banks turn down acquiring companies seeking financing if the seller debt being assumed by buyer is in excess of their bank guide lines. The banks are attempting to avoid high-risk transactions.
A break-up fee on Wall Street is typically 1 percent to 3 percent of the proposed transaction. The break-up fee for Starwood is 3.4 percent of proposed transaction. It may be based on a sliding scale, depending on the size of the deal. It may also be a mutually agreed- to amount.
For example, in the PR industry it may be that buyer and seller mutually agree in the Letter of Intent that if a seller decides not to move forward after due diligence is performed and contracts are prepared, the seller will pay the buyer a $50K break-up fee. Another scenario: If the buyer pulls the plug for no good faith, legitimate reason they will pay the seller $50K.
Break-up fees will reduce the number of deals that implode at the eleventh hour. It won’t hurt potential deals and can certainly help.
What do you think?