Can Deal Failure Be Predicted?

What is it about?

We utilize a transaction-level ex-post measure of deal failure, the write-down of acquisition goodwill, to ascertain the link between synergy expectations and deal failure realizations. We find that acquirer announcement period returns have moderate power in forecasting the probability of impairment and poor power in forecasting the magnitude of impairment. Symptoms of deal failure –forced CEO turnover, poor long-term stock and operating performance, and distressed delisting – are associated with firms with goodwill impairment events, but acquirer announcement returns fail to forecast these ex-post outcomes. Unforecastable events, rather than overpayment anticipated at deal announcement, play a dominant role in deal failure.

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Why is it important?

It is almost regarded as a self-evident truth that if there is a negative market reaction to a merger announcement, the merger is a bad deal. We question this conventional wisdom. We find that announcement returns do a poor job in predicting goodwill impairments, which is really the right ex-post measure of a deal failure. In short, unforecastable events, rather than overpayment anticipated at deal announcement, play a dominant role in deal failure.

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