When Finish Line (NASDAQ:FINL) announced its $1.5 billion buyout deal for Genesco (NYSE:GCO), some Fools wondered what the footwear retailer was thinking. The company believed that the deal would create a powerhouse in its segment, yielding growth opportunities and increased efficiencies. But as of last week, the parties are prepared for litigation, and the deal has plunged into chaos. How did it all go wrong?

After beating out rival Foot Locker (NYSE:FL) with a bid of $54.50 per share, Finish Line began closing its buyout deal. But a couple of months later, subprime lending woes plunged the market into a credit crunch. As a result, prospective purchasers have renegotiated buyout deals for firms like Reddy Ice (NYSE:FRZ) and Home Depot's (NYSE:HD) supply unit.

Finish Line found itself a bit short on cash, forced to raise its debt in order to finance the majority of its purchase. Between a tight credit market and deteriorating footwear sales, things aren't looking good for either firm involved in the deal. Genesco is having trouble finding the finish line, while Thursday's earnings release will reveal how Finish Line is holding up.

After Genesco's ominous quarterly report, Finish Line indicated that it was "evaluating its options in accordance with the terms of the merger agreement." The would-be buyer has requested that Genesco provide additional financial information in order to determine whether a "material adverse effect" has occurred. Finish Line is trying to prove that Genesco's finances have deteriorated so badly that the purchase is no longer reasonable. That's a tough case to fight, since many courts don't want to allow companies to easily slip out of contracts.

As the deal languished, Genesco CEO Hal Pennington launched a preemptive attack on Finish Line, filing a lawsuit to force the completion of the buyout. He wants the merger agreements enforced, believing that Finish Line and UBS need to "live up to their obligations."

Now Finish Line has fired back, charging Genesco with dragging its feet in providing key financial data. Could Genesco's condition be worsening? In light of the industry's general woes, which have even affected top player Foot Locker, the environment does look pretty bad.

Given the lawsuit and fighting words from Genesco's CEO, can the merger still work out? Wall Street doubts it. Genesco's stock trades at a whopping 19% discount from Finish Line's $54.50 buyout offer. In other words, investors are betting that either the deal will fall apart, or that the price tag will fall. As Finish Line and Genesco turn on each other, the footwear industry remains in a funk. This soured deal may provide lots of grist for financial writers, but buying shares now could be Russian roulette for Foolish investors.

Home Depot is an Inside Value pick. Check out other discount stocks with a free 30-day trial.

Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is currently ranked 5,691 out of 65,000 total participants in CAPS. The Fool's disclosure policy goes barefoot.