What is a termination fee?
A plain guide to a number on the deal list: what it is, how to read it, and the maths.
What it is
The fee the target pays the buyer if the agreement ends in one of the cases it lists. Typically, the target ends the agreement to accept a better offer from another buyer.
The fee goes to the buyer; shareholders don't receive it.
How the fee works
Say Woodgrove agrees to buy Litware for $50.00 a share, or $1 billion in all. The merger agreement sets a termination fee of $35 million.
That's 35 ÷ 1,000 = 3.5% of the deal value.
Then a rival offers $55.00 a share. Litware's board ends the deal with Woodgrove to accept it, as the agreement allows.
Litware, the company, then pays Woodgrove the $35 million.
When the target pays it
The merger agreement lists when the fee is owed. Three cases are common:
- A better offer
- The target's board ends the agreement to take a competing offer. The offer must count as a superior proposal under the agreement. The board must also follow the agreement's steps.
- A changed recommendation
- The board stops recommending that holders approve the deal. The buyer then ends the agreement before the vote.
- A tail
- The deal fails for another listed reason. For example, holders vote it down after a rival bid goes public. Then, within a set time, the target agrees to or closes a rival deal. The time is usually six to twelve months after the agreement ends.
For other failures, such as a refused regulatory approval, it depends on the agreement. It may set this fee, a reverse termination fee paid by the buyer, or no fee.
Why deals have one
A merger costs the buyer time and adviser fees. It can also mean giving up other opportunities.
In the listed cases, the fee compensates the buyer. It also makes a competing deal more expensive for a rival bidder.
Delaware courts judge a fee against the whole deal and its other protections. There's no single permitted percentage.
Courts have shown concern about fees above about 3% of the price. But they have also accepted higher ones.
How big termination fees are
The median termination fee is 2.6% of transaction value, and the mean is 2.4%.
Fees range from 0.2% to 6.0%, and about 63% fall between 2.0% and 3.5%.
These figures cover 123 deals for US public targets announced in 2024, each with a transaction value above $50 million and a disclosed termination fee.
The median varies with the deal:
- Cash or stock
- The median was 2.7% in all-cash deals and 1.9% in all-stock deals.
- Kind of buyer
- It was 2.6% for strategic buyers against 2.4% for financial buyers, such as private equity funds.
- A lower fee at first
- 11 deals had a lower fee for a period after signing, often a go-shop. During that period the median fee was 1.3%, and 2.7% after it.
What it means for shareholders
The fee passes from the target company to the buyer. Shareholders don't receive it.
When the target pays it, the cash leaves the company.
If the target leaves for a rival as the agreement allows, it usually pays the fee to the first buyer. Holders receive the rival deal's price once that deal closes: in the example, $55.00 a share.
On Tracking Alpha
The Target fee column shows it as a share of the deal value. The checklist shows the dollar amount with its quote.
Some agreements set more than one fee. The list then shows the main one, not a lower fee for a go-shop.
How it is worked out
Termination fee % = termination fee ÷ deal value
Worked examples
Examples, with made-up numbers
One fee
Deal value $1.0B, termination fee $35M.
- 35 ÷ 1,000 = 3.5%
A lower fee during a go-shop
Deal value $2.0B. The fee is $30M for a bidder who makes a proposal during a 30-day go-shop, and $70M otherwise.
- During the go-shop:30 ÷ 2,000 = 1.5%
- Otherwise:70 ÷ 2,000 = 3.5%
- The Target fee column shows the main fee:3.5%
Per share
Deal value $1.0B for 40M shares at $25.00 each, termination fee $35M.
- Per share:35 ÷ 40 = $0.875
- Of the offer:0.875 ÷ 25.00 = 3.5%
Easily confused with
- Reverse termination fee
- Paid the other way, by the buyer to the target. The agreement lists the cases, such as some refused approvals or failed financing.
- Go-shop
- A period after signing when the target can look for better offers. Agreements with one often set a lower fee for some bidders who make proposals during it.
Questions
Is a breakup fee the same as a termination fee?
Yes. Breakup fee and break fee are other names for it: what the target pays the buyer if the agreement ends in a listed case. A fee the buyer owes the target is a reverse termination fee.
What is a standard termination fee in M&A?
There's no standard fee, and Delaware courts set no fixed percentage. For US public targets in 2024, the median was 2.6% of transaction value. About 63% of fees were between 2.0% and 3.5%.
Who pays the termination fee in a merger?
The target company pays it to the buyer, in the cases the agreement lists. A common one is the target ending the deal to accept a superior proposal.
Do shareholders receive the termination fee?
No. The target company pays it to the buyer, so the cash leaves the company.
Sources
Tracking AlphaBy Jera Value · Reviewed
Related terms
- Reverse termination feeThe fee the buyer pays the target if the agreement ends in one of the cases it lists. Typically, a regulator refuses approval or the buyer's financing fails.
- Deal valueThe total value of the deal as the companies state it when they announce or revise it.
- Go-shopA period after signing when the target may actively look for a better offer.
