Breakup Fees in Mergers and Acquisitions

GS III- Industry & Economy

Acquisitions

Google’s $32 billion acquisition of cybersecurity firm Wiz includes a $3 billion+ breakup fee—one of the highest ever—raising concerns about its impact on M&A (Mergers and Acquisitions) deals.

What is a Breakup Fee?

A breakup fee is a penalty paid when an M&A deal fails due to regulatory issues, financing problems, or a party withdrawing from the agreement.

Purpose:

• Compensates for lost opportunities and expenses.
• Discourages deal abandonment by increasing the financial risk of backing out.
• Helps cover due diligence costs and other expenses incurred during negotiations.

Types of Breakup Fees:

1. Standard Breakup Fee: The seller pays if they withdraw or accept another bid.
2. Reverse Breakup Fee: The buyer pays if the deal collapses due to regulatory issues or financing failure.
3. Mutual Breakup Fee: (Rare) Both parties agree to exit under predefined terms.

Antitrust Concerns in M&A

• Definition: Antitrust issues arise when companies gain excessive market power, leading to monopolies, reduced competition, or unfair pricing.
• Key US Antitrust Laws:
  • Sherman Act (1890): Prevents monopolistic practices.
  • Clayton Act (1914): Restricts anti-competitive mergers and acquisitions.
  • Federal Trade Commission (FTC) Act (1914): Enforces fair competition.

Market Impact of High Breakup Fees

• Regulatory Scrutiny:
  • High breakup fees often indicate potential antitrust risks.
  • Google’s previous $23 billion bid was blocked over competition concerns, and the new deal faces US regulatory review.
• Competitive Landscape:
  • Large breakup fees can deter rival bidders by making deal withdrawal costly.
  • They may impact smaller firms, making it harder for them to compete in M&A deals.