Termination Fee

A termination, or break-up, fee is the amount payable under an acquisition agreement by the seller (buyer) to the buyer (seller) if the acquisition fails to close for reasons specified in the acquisition agreement. The typical range for termination fees is 1-4% of the equity value of the transaction, with larger deals often in the 2-3% range. However, not all deals conform to this standard. AT&T's failed bid for T-Mobile USA in 2011 resulted in the former paying the latter $4 billion in cash and assets, or 10.2% of the $39 billion purchase price. The termination fee is designed to compensate the the willing party for its efforts and expenses incurred to close the transaction if the unwilling party exercises a fiduciary out in the acquisition agreement. From the buyer's perspective, the termination fee also incentivises the seller to complete the transaction, and not shop the deal to other potential acquirors or consider competing offers from other bidders. Termination fees have been criticized for forcing selling shareholders and directors to approve the deal, and ignore alternatives that may be in the better interests of shareholders.