M&A Negotiation: Undoing the Deal

In M&A negotiation and beyond, calling off an agreement before closing can be easier said than done.

By Katie Shonkon / Business Negotiations

After parties have invested considerable time and money in a negotiation, agreement can come to seem like an inevitable end point. You may think you have an ironclad contract, but because negotiations can be difficult to undo, we’d be wise to examine very closely the pros and cons of signing a deal. That’s the lesson health-care company Abbott Laboratories learned the hard way after agreeing to merge with diagnostic-device provider Alere. 

Discover step-by-step techniques for avoiding common business negotiation pitfalls when you download a copy of the FREE special report, Business Negotiation Strategies: How to Negotiate Better Business Deals, from the Program on Negotiation at Harvard Law School.

An M&A negotiation, then questions

On January 30, 2016, Abbott agreed to buy Alere for $56 per share, or about $5.8 billion. The merger, which Abbott would finance by taking on debt, was set to make Abbott the largest provider of rapid medical tests in addition to boosting Abbott’s diagnostic sales to about $7 billion, according to Abbott CEO Miles White. The companies predicted that the deal, which did not have a precise closing date, would yield combined cost savings of $500 million by 2019.

But the M&A negotiation quickly soured. In mid-March, Abbott learned that Alere was being investigated as part of a U.S. government crackdown on bribery of foreign government officials by American companies. The investigation into Alere’s business dealings in Africa, Asia, and Latin America reportedly had been underway during Abbott and Alere’s negotiations, but Alere had certified in its purchase agreement with Abbott that it had been in compliance with the U.S. Foreign Corrupt Practices Act (FCPA) since 2014.

Putting up roadblocks

Violations of the FCPA are not always a deal breaker between merging companies, according to Crain’s Chicago Business. But Abbott reportedly argued to Alere that it had earned the legal right to back out of the deal as a result of the investigation. To do so, Abbott offered to pay Alere the $50 million termination fee stipulated in their contract.

Determined to see the deal go through, Alere refused to accept the fee. Abbott CEO White responded by threatening to make life a “living hell” for Alere executives unless they agreed to drop the merger, according to a lawsuit Alere filed in August. With Alere still insisting on moving forward, Abbott reportedly sought interviews with dozens of Alere employees and demanded one million pages of Alere documents. Alere alleges that Abbott also began stalling on responding to requests related to regulatory approvals.

Further complications

Just a week after approaching Alere about ending their merger, Abbott announced a deal to acquire St. Jude Medical, another medical-device manufacturer, for $25 billion. Together, the two purchases were expected to place a huge financial burden on Abbott, tripling its debt, according to the New York Times. Credit-rating agency Moody’s threatened to downgrade Abbott’s credit rating if it closed both mergers as planned. Suddenly, Abbott appeared to have another motivation for calling off its planned partnership with Alere.

The shadow over the merger darkened further in July, when the Wall Street Journal broke the news that Alere was facing a federal criminal investigation over its Medicare and Medicaid billing practices. As a result, Alere’s shares tumbled to $31.47, well below the $56 per share Abbott had agreed to pay earlier in the year.

From partners to combatants

In August, Alere filed its lawsuit against Abbott, accusing its would-be partner of suffering from “buyer’s remorse” after their M&A negotiation and asking a judge to force the merger to close within a few months. According to Alere, Abbott had been aware of Alere’s financial issues and government investigations in January, a month before it signed the merger deal. Alere said Abbott had been trying to scuttle the deal by making an “endless and steady stream of unreasonable and extremely burdensome requests” for documents and interviews.

In its legal response, Abbott accused Alere of delaying and withholding information about its finances and federal probes. Saying it needed more time to conduct due diligence on the extent of Alere’s problems and its financial health, Abbott objected to what it characterized as the “breakneck proceedings” sought by Alere.

Facing the prospect of buyer’s remorse

Although the fate of the Abbott-Alere deal is still unclear, the conflict suggests the following lessons for M&A negotiation strategy, corporate negotiation, and other types of dealmaking:

  • Temper your optimism. In the flush of dealmaking, when goodwill and enthusiasm are running high, it’s tempting to cut corners on due diligence. But keep in mind that most of us tend to be overly optimistic about the future. The best negotiators in business consider the potential risks and downsides of a deal as thoroughly as they can.
  • Avoid ratcheting up tensions. When disputes arise, parties often react with threats or by filing a lawsuit. To avoid escalating the conflict, stick with collaborative negotiation as long as possible, or try mediation. This may be especially important if you face the task of working together one day as partners, as Abbott and Alere currently do.

First published in the December 2016 issue of the Negotiation Briefings newsletter, published by the Program on Negotiation at Harvard Law School.

Discover step-by-step techniques for avoiding common business negotiation pitfalls when you download a copy of the FREE special report, Business Negotiation Strategies: How to Negotiate Better Business Deals, from the Program on Negotiation at Harvard Law School.