The walkaway provision is, essentially, capable of providing either downside protection to the target company or upside protection to the public buyer—or simultaneous protection to both parties—as a way to manage the pricing risks that are inherent in stock swap transactions. The basic mechanics of a target walkaway provision entail that if the buyer’s average stock price prior to closing (based on an averaging period) are less than some agreed-upon value, then the target company can terminate the transaction because the stated value or price per share on the determination date would be lower than that advertised at announcement. Conversely, and less frequently, the buyer may be protected on the upside should its average stock price rise higher than that stipulated in accordance with the merger agreement, thus allowing the buyer to terminate the transaction and avoid giving away its more highly valued shares in the process. Of course, this is only a general description of a merger provision that is mired in complexity, and walkaways may also include additional criteria such as “fill” provisions1 and even “double-triggers.”2
Overwhelmingly, walkaway provisions occur more often on the target side than with the acquirer. In all likelihood, this practice grants significant protection to the target company on any dramatic downside pricing in a stock swap transaction. And, as seen above, walkaway provisions have been stamped into finance sector merger agreements in landslide fashion since 2004. This is significant in that about half of all stock swap transactions announced since 2004 have been in the finance sector. One such example is Susquehanna Bancshares’ acquisition of Tower Bancorp, announced in June of 2011. That merger agreement provided for a target walkway if “the average closing price of Susquehanna common stock as reported on The NASDAQ Global Select Market for the 20 consecutive trading days ending on the third calendar day immediately prior to the effective date of the merger is less than $6.46.” Of course, the transaction went on to completion in early 2012, and the value of the stock offered in the deal had increased by closing time. However, the termination provisions built into the transaction had afforded a 20% downside protection gap to Tower Bancorp as insurance against the worst-case scenario.
Finally, target walkaway provisions reflected a nearly predictable pattern among U.S. stock swap deals between 2004 and 2007 (shown above). Within this four-year period, a mean of 30 stock swaps per year, about 23% of all agreed stock swap deals, included a target walkaway. Thereafter, the 2008 market blow-up resulted in a predictable slump through 2010. At the lowest point in this deal trough, only five U.S. mergers in 2009 included a target walkaway; this small number represented only about 6.1% of all stock swaps in that year (or 82 deals). Public stock swap deals have been in decline since 2008, but the walkaway provision may have found its footing once again. In 2011, 16.4% of stock swaps had applied a target walkaway provision (11 out of 67 deals). Not a bad result, but it is far below the pre-2007 period when confidence was high. Although merger deals have taken a severe beating recently, the relative strength of walkaway provisions is experiencing a healthier dose of applicability in the few stock swap deals coming to market.
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The data used in this research was based on U.S. public targets only.1 A fill provision allows the acquirer to add additional cash consideration to the stock consideration to maintain a floor valuation, prior to the exercise of a target walkaway.2 A double-trigger generally adds a requirement to be met prior to a deal walkaway, in that the acquirer’s average stock prices are compared against an index of comparable public companies. Many current stock swap deals employ this feature as additional protection to the acquirer. Source: MergerMetrics / FactSet Mergers