What is a deal break?

A deal breaks when the merger agreement ends before the deal closes.

Say Woodgrove agreed to buy Litware for $50.00 a share, and Litware traded at $48.00. Then a regulator blocks the deal, and the companies end the agreement.

Litware holders don't receive the $50.00 offer. Their shares keep trading, now without the offer behind them.

The agreement lists who may end it and when. Common reasons:

A regulator objects

Antitrust or other regulators sue to block the deal, or the parties give it up during the review.

Holders say no

The target's holders vote it down, or too few shares are tendered in a tender offer.

A better offer

The target's board ends the agreement to take a rival's offer, as the agreement allows. If that deal closes, holders get the rival's price instead.

Financing fails

The buyer's funding falls through, and it doesn't close. That may breach the agreement rather than give a right to end it.

The target's business changes

The buyer claims a material adverse effect. Whether that lets it end the agreement depends on the agreement, and the target may dispute it.

Time runs out

The deal passes its outside date, and a party with the right to end the agreement does so.

Most deals close. Of 2,182 US deals for publicly traded targets that closed or failed from 1990 to 2007, 92% closed, so about 8% failed. The count includes deals paid in cash, stock or both, and leaves out deals with more than one bid.

Other counts give other rates, depending on which deals they include and what counts as failing.

In the same deals, those that later failed had wider median spreads soon after announcement than those that closed.

When a deal breaks, the shares usually fall. The offer no longer stands behind the price.

Where they settle depends on the company and on what the failure revealed.

A study covered 236 failed US bids for public companies from 1980 to 2008. Targets of all-cash bids kept an average gain of about 15% after market moves. That gain runs from 25 trading days before the bid to 25 trading days after the failure. Targets of all-stock bids kept no clear gain.

Many targets get another bid later. In the same study, about 50% of targets of failed bids had received a successful bid within five years, against about 20% of similar companies.

The undisturbed price is a reference for where the shares traded before the deal. It's not a floor or a forecast.

Depending on why the deal broke, one company may owe the other a fee.

The target may owe the buyer a termination fee. Or the buyer may owe the target a reverse termination fee.

Holders don't receive either fee. A reverse fee goes to the target company and adds to its cash.

A break usually costs a holder far more than closing pays. With an offer of $50.00, a price of $48.00 and an undisturbed price of $38.00:

If it closes

50.00 − 48.00 = $2.00 a share gained.

If it breaks

Back at $38.00, 48.00 − 38.00 = $10.00 a share lost, five times the gain.

A holder doesn't need to do anything when a deal breaks. The shares stay in the account and keep trading. Shares tendered into an offer that ends without a purchase are returned.

A deal that ended this way shows the stage After failure. Depending on why it ended, a termination fee or a reverse termination fee may be owed.

The spread is usually small next to what the shares can fall if the deal breaks. That is why the list carries the terms that bear on closing: conditions, approvals, fees and dates. The undisturbed price shows where the shares traded before the deal; after a break they can trade above or below it.