In a year defined by low interest rates, buyers continued to look to spend cash reserves on mature acquisition targets, according to SRS | Shareholder Representative Services’ 2012 SRS M&A Deal Terms Study.
The new study, which reports on over 200 data points and builds on data from prior SRS studies, covers 342 acquisitions on which SRS served as the shareholder representative, including mergers, asset purchases and stock purchases.
In aggregate, these deals represent USD55.3bn in stated deal value with USD42.7bn paid at closing, USD4.9bn held in escrow and USD7.7bn in defined earn-out consideration. For the first time, the study analyses equity investment data and termination fees, and includes more detailed data on carve-outs, indemnification caps and survival periods.
Sellers with positive EBITDA at exit increased from 28 per cent of the sample in 2011 to 38 per cent in 2012 with companies taking a median of seven years to exit. This may indicate that sellers are finding ways to reduce burn rates to achieve profitability prior to exit, giving buyers a more stable and mature pool of potential targets.
Increased maturity also seems to mitigate potential valuation gaps in uncertain economic times, and earn-outs continue to appear on the minority of deals outside of the life sciences sector. When an earn-out is used, parties are incorporating clearer, binary measurements, such as product launch and unit sales, rather than earnings metrics that can be more problematic and lead to disputes.
“Many key deal benchmarks have varied widely over the past several years, due to challenging macro-economic conditions,” says Mark Bettencourt, partner at Goodwin Procter. “This latest SRS survey, which provides important perspective on a breadth of deals across the market, indicates that in some areas, such as high-order indemnification terms including allocation of post-closing liability and related risk in private M&A transactions, deal terms are beginning to stabilise.”
Median deal size rose slightly to USD75m in 2012 from USD70m in 2011, but deals USD50m or less grew to 42 per cent of deals in 2012, up from 33 per cent in 2011.
The size of management carve-outs as a percentage of overall transaction value is down from 2011.
Data shows more seller favourable terms on issues such as an increase in available offsets against buyer indemnification claim amounts and an increase in deals that require that claims exceed a minimum threshold.
Mandatory alternative dispute resolution, such as mediation and arbitration, has steadily declined, down to 26 per cent of deals in 2012 from 41 per cent in 2010.
“Buyers continue to put cash to work on low-risk targets, and attractive sellers are in a good position to exit as usual,” says Sean Arend, executive director, corporate development at Shareholder Representative Services. “We may be in store for an uptick in M&A in 2013, as a result of a backlog of deals that cautious buyers put off this year.”
