Posted in Finance, Accounting and Economics Terms, Total Reads: 193
Definition: Sweetheart Deal
Sweetheart Deal, as name suggest, is a kind of deal between two parties which is too good to be real for one of the party. In other words, one party is offered more from a deal than the real valuation/value of the commodity is being traded. These kinds of deals occur for variety of reasons and different interpretations follows them.
• Party offering Sweetheart deals wants to make sure that the receiving party cannot turn down such a lucrative offer
• For avoiding re –negotiations on the offers being made
• There might be a hint of corruption somewhere, at times.
It may also be possible that deal (sweetheart) occurring between two parties are beneficial to both the parties but at the same time puts any third party to a disadvantage. This also indicates some malaise practice at some level. Sweetheart deals usually come under attention into concerned regulator and may lead to some investigation, if required.
Following example best describe the sweetheart deal:
Say, Mr. X is a businessman. He deals into two different businesses of mining and telecom. At some point of time, his Mining business went through a downfall and it comes to a stage of closing down this particular business. On the other hand, his telecom business is running fine.
Looking for an exit from mining business, market valuation of his company is 1 dollar (say).He expects to get less than a dollar because company is already into debt and market will also account the fact that brand of the company have also taken a hit because of non-performance.
Yet, Mr. Y, again a big businessman offers Mr. X to buy his stakes and take over the mining company for 1.2 dollars. Mr. Y could offer such a lucrative offer for inorganic growth due to any of the reason mentioned above.
This will account to be a Sweetheart deal for Mr. X.