January 27, 2016
The American Bar Association recently published its 2015 Private Target Deal Points Study, a survey of publicly available M&A transactions involving private target companies that closed in 2014. While each and every deal is unique with its own dynamics, this study is commonly used to inform "what's market" in negotiations involving acquisitions of private companies. Below are selected highlights regarding key economic-centric transaction terms that are often considered by parties in negotiating acquisition documents.
The study analyzes 117 acquisition agreements involving private company targets being acquired by public companies (compared to 136 in the last deal study, which was published in 2013 and covered transactions that closed in 2012), with transaction values ranging from $50 million to $500 million (with an average transaction value of $186 million and a median transaction value of $130.5 million). Asset deals comprised 17% of the study sample. We note that despite an overall strong pace for M&A deal volume in 2014, the number of transactions surveyed by this study actually decreased from the prior study, and the size range of the transactions was considerably narrower. This result is likely due to more transactions being completed by private company and financial buyers in 2014. Buyers also appear to be successfully narrowing the seller-favorable nature of some of the surveyed deal terms.
Purchase Price Adjustments: Purchase price adjustments at closing continue to be very common, but with a variety of metrics used to calculate such adjustments and fewer buyer approval rights prior to payment.
- Purchase Price Adjustments – 86% of the surveyed transactions include post-closing purchase price adjustments, and while the majority of adjustments were based on more than one metric, working capital (83%) comprised the most common metric used for such adjustments, with cash (38%), debt (33%), and a metric other than working capital, earnings, debt, assets or cash, respectively, being the next most common (41%).
- Estimated Payments at Closing – 89% of the surveyed transactions include payments at closing based on the seller's estimate, and the buyer does not have an express right to approve the estimated payment amount 84% of the time (up from 74% in 2012).
- Separate Escrow for Post-Closing Purchase Price Adjustments– there is no separate escrow for post-closing purchase price adjustments 75% of the time (compared to 69% in 2012), with any true-up payment coming from the indemnity escrow 50% of the time (compared to 58% in 2012).
Earnouts: The popularity of earnouts stayed relatively consistent from 2012, but with less seller-favorable terms related to acceleration upon a change of control.
- Earnouts – 74% of the surveyed transactions do not have an earnout, but for those that do have an earnout, most earnouts are comprised of either earnings/EBITDA (39%) or a metric other than revenue or earnings/EBITDA (39%).
- Acceleration of Earnout – 65% of earnouts did not accelerate on a change of control (compared to 76% not accelerating on a change of control in 2012).
Indemnification: While the predominant survival periods stayed constant from 2012, there was a greater variety of survival periods than identified in prior years. Deductibles rather than "first dollar" baskets continued to be favored. Indemnification cap amounts of less than 10% of the transaction value continued to be the most common amount, but there was greater fluctuation for cap amounts greater than 10%.
- Survival/Time to Assert Claims (Generally) – the most common survival period for representations/warranties in general was 18 months (36% – down from 44% in 2012), followed by 12 months (23%) and 12 to 18 months (16%).
- Carve Outs to Survival Limitations – the most common representations/warranties or other concepts that were excluded from the general time limitation to assert a claim noted above, and which typically survive for a longer period of time, were the due authority rep (86% – up from 75% in 2012), due organization rep (80% – up from 67% in 2012), taxes rep (78%), capitalization rep (76%) and broker's/finder's fees rep (61%). Interestingly, fraud survived for a longer period of time than the general time limitation 58% of the time (compared to 42% in 2012), and a breach of the target's covenants survived for a longer period of time only 40% of the time.
- Baskets – the most common type of basket was a "deductible" (65%), with "first dollar" being used only 26% of the time. The most common indemnification basket range was consistent with 2012, with the most common being 0.5% or less of the transaction value (52% of the time), followed by greater than or equal to 0.5% to 1% (38% of the time).
- Carve Outs to Basket – the most common carve outs for claims that would otherwise be subject to the basket were breaches of seller/target covenants (83% – up from 73% in 2012), due authority rep (85% – up from 70% in 2012), due organization rep (80% – up from 62% in 2012), fraud (80% – up from 61% in 2012), and taxes (74% – up from 56% in 2012).
- Cap Amounts as Percentage of Transaction Value – the median cap amount was consistent with 2012 (10%), with the most common amount being less than 10% of the transaction value (50% of the surveyed transactions). The next most common amount was between 10 and 15% of the transaction value, which appeared in 22% of the transactions (compared to such range appearing in 29% of surveyed transactions in 2012).
- Carve Outs to Cap Amounts – carve outs to the cap amount were generally consistent with prior years, with the most common being fraud (82%), a breach of the due authority rep (76% – up from 65% in 2012), due organization rep (69% – up from 56% in 2012), capitalization rep (65%), and the taxes rep (65% – up from 52% in 2012).
Escrows/Holdbacks: There were fewer escrows/holdbacks relative to 2012, but the most common amount of such escrows/holdbacks increased materially from 2012.
- Escrows/Holdbacks – 77% of the surveyed transactions included an escrow/holdback (down from 89% in 2012), with the most common amounts being in the 10 to 15% of transaction value range (23%), and 7 to 10% range (19%). These are materially higher than in 2012, when the most common amounts were in the 7 to 10% of transaction value range (24%) and 3 to 5% transaction value range (22%). The median escrow/holdback amount also increased slightly, with the median being 7.5% of transaction value compared to 7.14% of transaction value in 2012.
Note that some of the metrics in this summary are rounded, and some of the variances from prior years' data may be due to differences in how data was analyzed by the study working group members from year-to-year. The information contained in this advisory should be read in conjunction with the 2015 Private Target Deal Points Study and the other studies referenced in this advisory, and is qualified in its entirety by such studies. The findings presented in this advisory do not necessarily reflect the personal views of the authors of this advisory or the views of Davis Graham & Stubbs LLP.
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