CMS’s 8th annual M&A Study predicts an uncertain year despite the record levels of deal value in 2015. In the study, CMS analyses over 2,000 of its non-listed European public and private company deals between 2010 and 2015.
The uncertainty is attributed to a number of grey or black swan events including the long predicted slowdown of China’s economic growth and the greatest migration to Europe for a century across a fragile Schengen zone. The report also indicates that US interest rates and the clampdown on inversion deals, the divisive US election, a more aggressive corporate tax climate and the says: “We have moved into a less stable environment in 2016 after a record year for M&A in 2015, but the major strategic moves made in so many industries in 2015 are bound to elicit a forthright response from competitors. Opportunities for decisive M&A continue.”
“Martin Mendelssohn, CMS UK Corporate Partner, adds: “We have had five years of increasing stability in the private M&A market with parties concentrating their energy on price certainty. There have been seller-friendly outcomes for standard risk allocation issues during that period. But now, the uncertainty of Brexit has slowed down the market. The outcome of the UK EU referendum is not the sort of thing that can be legislated for in private M&A sale and purchase agreements. With so many implications, we just have to await the outcome.”
The study revealed that deal value in Europe was up 22 per cent in 2015 to EUR 990 billion compared to 2014, despite a drop in volume of 6 per cent. 2015 also saw the highest final quarter on record with deal value exceeding EUR 420 billion. Although deal volume declined overall by 6 per cent, CMS transacted 13 per cent more deals in 2015 than the previous year.
The study found that buyers, in general, had to pay more to complete deals and spent more time and energy negotiating price. This can be seen from the increasing number of transactions which had a focus on the pricing provisions. In 2015, 49 per cent of deals had a purchase price adjustment provision compared with 43 per cent in the previous five years. 56 per cent of the remainder had a ‘locked box’ term (compared with just 41 per cent in the previous five years), a ‘locked box’ being another indicator of price focus. Meanwhile, buyers were more relaxed about other risk allocation provisions, with sellers being able to negotiate lower liability caps and limitation periods compared with the previous five years.
The availability of warranty & indemnity (W&I) insurance protects buyers against unknown risk on M&A deals. W&I insurance has increasingly become mainstream in 2015, alleviating risk for sellers and buyers alike.
The study also highlights fundamental differences between US and European practice which continue to apply on risk allocation for sellers and buyers on private M&A deals.
