The past few months have seen three high profile tech deals collapse over merger control scrutiny. One deal was prohibited, two deals were abandoned due to regulatory concerns. What the deals also have in common: Hefty break fees to be paid by the acquirers for not (being able to) closing the transactions. These break fees amount to approx. USD 1.2 billion overall.
The deals I am referring to are Amazon’s acquisition of iRobot (abandoned yesterday), Adobe’s acquisition of Figma (abandoned in December 2023) and Booking’s acquisition of eTraveli (prohibited by the European Commission in September 2023). All of these went through intense merger control scrutiny and public discussion globally – no doubt with enormous internal and external costs for the involved companies beyond the break fees.
What is a break fee?
A quick recap: Break fees to be paid by the acquirer are also called “reverse break fees”, “break-up fees” or “termination fees”. Whatever the expression, they all refer to the same situation: An acquirer does not or cannot close a pre-agreed acquisition of another company, and in turn has to pay a fee to the seller or the target company.
Break fees are usually agreed in the transaction agreement (e.g., the SPA). Acquirers are naturally not keen to offer them, but sometimes break fees can be a building block to convince a seller to indeed sell the target company. With a break fee, sellers have some security that an acquirer is confident to be able to solve potential regulatory concerns and that (material and immaterial) costs to the business will be recouped at least to some extent if a transaction falls through in the end.
What were the transactions about?
This post will not go into the (antitrust) details of each transaction – whole articles were and will be written on the merger control implications of each of them (for example here and here). However, it seems to be fair to say that none of the three deals was a clear-cut merger between close competitors. The parties in each transaction put forward that their respective businesses were at least to some degree complementary. Amazon/iRobot might be the clearest example: In this deal, Amazon (this guest needs no introduction) wanted to acquire a manufacturer of robot vacuum cleaners.
In particular because of the perceived complementarity, the deals were closely watched by the antitrust community: Where a company cannot even acquire another company active in a different space because regulators have concerns over conglomerate effects or ecosystems being strengthened, will big tech deals be feasible at all going forward? What will be the effect on transactions outside of the tech space? How will divergence between regulators develop, not least given that the UK regulator had cleared both Booking/eTraveli and Amazon/iRobot, contrary to the European Commission?
Answers to these questions are still in the making and the courts will also have their say – Booking has appealed the Commission’s prohibition. While learnings from the cases will likely play an important role in merger control for years to come, we already have the answer to what the deals have cost the acquirers in terms of break fees: approx. USD 1.2 billion.
How high were the break fees?
Admittedly, of the total sum, Adobe alone had to pay approx. USD 1 billion as a break fee. Booking paid approx. USD 90 million, and Amazon is set to pay approx. USD 94 million.
While the absolute numbers are interesting, for practitioners it is important to put them in relation to the overall deal value. Break fees could be seen rising to as high as 15% of deal value until a couple of years back.
These heights seem to be over: In the cases at hand, the break fees represent around 5% of the respective deal values, which still seems to be at the upper end of an historic average range.
What are the takeaways?
As you have read above, there are numerous takeaways from a merger control perspective. Some of them will only surface over time, including when the Booking/eTraveli prohibition is published.
When it comes to break fees, the cases are a good reminder that break fees need to be assessed thoroughly when negotiating a deal because (failed) M&A can be very costly – and that does not even factor in developments such as iRobot announcing to lay off 31% of its staff following the abandonment of the Amazon deal.
Photo by Karolina Grabowska
Antitrustpolitics.com 