Recently, the 2013 Private Target Mergers & Acquisitions Deal Points Study was finalized by the M&A Market Trends Subcommittee of the Mergers & Acquisitions Committee of the American Bar Association. This bi-annual study, which was first published in 2007, analyzes a variety of deal points commonly negotiated in publicly reported M&A transactions involving a public buyer and a privately held target company. The 2013 study reviews 136 transactions that closed during 2012, with deal values ranging from $17.2 million to $4.7 billion. While the 2013 study reveals a number of interesting insights, this summary focuses on the financial deal points that most directly affect a deal’s bottom line. These findings should provide a useful reference as parties negotiate the appropriate financial terms of their transaction.
Post-Closing Purchase Price Adjustments
The study indicates that 85% of the deals included a post-closing purchase price adjustment, slightly higher than in prior years. While working capital was still the most common adjustment (in 91% of the relevant deals), adjustments for debt, cash and other items increased compared to the previous study. More of the relevant deals excluded current tax assets and current tax liabilities from the definition of “working capital” than in prior years (39% in 2012 versus 20% in 2010). Of the relevant deals, 88% included a payment at closing based on the target’s estimate, and in 74% of such deals the buyer did not have an approval right regarding the payment amount, in each case reflecting an increase over prior years. Most deals (69%) still did not have a separate purchase price adjustment escrow, and in a majority (57%) the true-up was paid from the indemnity escrow, up from 44% in the previous study. Finally, in more deals than in prior years (91% versus 84%), the purchase price adjustment amount did not need to exceed a certain threshold to be paid.
Next, the study shows that fewer deals included earn outs than in the past (25% in 2012 versus 38% in 2010), reflecting more certainty in the M&A market, and 32% of those had an earn out period of 12 months (compared with 36% of deals with earn out periods of 36 months or more in 2010). For the deals with earn outs, a significant majority did not include a covenant to run the business consistent with past practice (76%) or to run the business to maximize the earn out (88%) and a similar majority of earn outs did not expressly accelerate on a chance of control (76%). In addition, the majority of deals with earn outs (68% in 2012 versus 62% in 2010) expressly allowed the buyer to offset any indemnity payments against the earn out and more deals included an express disclaimer of a fiduciary relationship regarding the earn out than in prior years (15% in 2012 versus 3% in 2010).
The study also discusses various points relating to indemnification, some of which we highlight here.
Consistent with past years, the majority of deals (59%) included a deductible, where the seller is only responsible for losses exceeding the deductible, and 32% of deals included a ‘first dollar’ provision, where the seller is responsible for all losses once a certain threshold is met. In addition, a small number of deals (5%) reflected a combination of these provisions, where the seller is only responsible for losses once a threshold is met and then only for losses over a deductible amount set lower than the threshold. These baskets typically represented 0.5% or less of the deal value (56% of the deals) or between 0.5% and 1% of the deal value (32% of the deals), and included carve-outs for fraud and for representations regarding broker’s/finder’s fees, capitalization, due authority, due organization and taxes, among others. Fewer deals used baskets for breaches of covenants (27%) or other indemnity claims (18%) than in prior years, but more deals included ‘mini-baskets’ (or ‘de minimis’ baskets), i.e. a threshold for a single claim to be eligible for indemnification (30% in 2012 versus 17% in 2010).
Reflecting a slight increase over past years, the overwhelming majority of deals with survival provisions (89%) included caps on indemnification that are less than the purchase price, and a small number (5%) had a cap equal to the purchase price. In these deals, over half (60%) had cap amounts that were 10% or less than the deal value, and 29% had cap amounts between 10% and 15% of the deal value, and included similar carve-outs as the baskets.
Similar to past years, a slight majority of deals with survival provisions (55%) had an escrow or holdback that was not the exclusive remedy, and 32% had an escrow or holdback that was the exclusive remedy (versus 24% in 2010). Slightly fewer deals had no escrow or holdback at all (11% in 2012 versus 14% in 2010). Of the deals with escrows or holdbacks, 47% reflected 7% or less of the deal value, 24% reflected more than 7% but less than 10% of deal value, and the remaining 29% reflected 10% or more of the deal value. While this generally reflects a decrease in the size of escrows and holdbacks as a percentage of the deal value compared to prior years, the median transaction value also increased, so the actual dollar amount in the escrows or holdbacks may have increased.