In a choppy market, you would think that the acquirer in an M&A deal bears all the risk. If they buy a company, and the market moves south, management often falls under fire from investors.
These days, targets are saying the same thing. If they agree to a friendly deal, and then the markets turn sour before the shareholder votes, there's the risk that the acquirer could walk away.
For that reason, reverse break fees are becoming more common. These payments are made by the acquirer if they decide to walk away from the deal. In essence, they act as insurance for a target who has gone out on a limb and gotten its board on side with a takeover offer.
The latest break fee appears in Minmetals Resources Ltd.'s $1.3-billion bid for Anvil Mining Ltd . If Minmetals decides to walk away, it will have to pay Anvil $20-million. (And Anvil will have to pay a typical break fee of $53-million if agrees to be bought by someone else.)
Anvil chief executive officer Darryll Castle addressed the issue in an interview with The Globe and Mail on Friday. In times like this, "the buyer wants to make sure that if things really get bad, they can walk away," he said. "By the same token, we want to make sure that we're not just giving the buyer a free option."
"It's absolute balance that you try to aim for," he added. "In the market circumstances now, I think it was warranted to have a reverse break fee."
That structure is becoming much more common, and there is chatter on Street that reverse break fees will stick around, especially if the market stays volatile.