A return of the sellers’ market, and increased deal flow – these are among the headline findings of the CMS European M&A Study 2011 launched today.
The study analyses exclusive data compiled from more than 1,000 of its own M&A deals since 2007, including some 300 deals in 2010 alone. The Study shows a clear shift back toward sellers, following last year’s significant swing toward buyers.
“During 2010, we saw a 25 per cent increase in the number of M&A deals compared to 2009, a trend which is continuing into 2011,” said Thomas Meyding, Head of the CMS Corporate Group. “The shift of contractual risks back to buyers is unlikely to reach the levels of 2007, before the financial crisis, but there are certainly swings back to a sellers’ market, as more investors are keen to do business.”
The Study reports on key trends from 2010, including purchase price adjustments, locked box mechanisms, earn-outs, de minimis and basket provisions, liability caps and limitation periods. The Study also tracks trends over the four-year period 2007-2010. Some of the key findings include:
A more marked reduction in purchase price adjustments, down a further 13% points in 2010 from 2009, and a much greater use in Continental Europe of locked box mechanisms, which depend on thorough financial due diligence by the buyer and a stable working capital position;
Earn-out periods became shorter, as demonstrated by 65% of such earn-outs being payable within 24 months compared with just 51% in 2009, indicating that sellers are banking on a quicker return;
A 7% increase in 2010 from 2009 on deals featuring a repetition of all warranties on closing;
A slight decrease in the number of deals with de minimis provisions; more deals had basket threshold provisions and still more deals featured recovery on an ‘excess only’ basis, indicating perhaps a gradual movement towards US deal norms;
The percentage of transactions where the liability cap exceeded 50% of the purchase price has declined when measured against the peak of the last two quarters of 2009;
The proportion of deals with general warranty limitation periods exceeding 24 months has generally flatlined at around 27% since its peak in the second quarter of 2009, and declined notably in the last quarter of 2010.
“Here in the UK, sellers were more successful at off-loading risk and limiting their liability during 2010 than they were in 2009 ", says Martin Mendelssohn (pictured), a CMS corporate partner in London, "We expect to see more aggressive liability caps and shorter limitation periods during 2011. There continues to be a significant focus on working capital adjustments in UK deals and, in this regard among others, the UK has more in common with US deal practice than with the rest of Europe.
The Study highlights significant cultural and regulatory differences between Europe and the United States. Chiefly, the comparison shows material adverse change (MAC) clauses are used in 80% of deals in the US compared with just 16% of deals in Europe. Basket thresholds for warranty claims are much more prevalent in the US, and the basis of recovery differs (‘excess only’ being more popular in the US). Working capital adjustments continue to be by far the most frequently used criteria for purchase price adjustments in the US, and basket thresholds tend to be lower in the US with 89% being less than 1% of the purchase price compared with 49% in Europe.
“The return of financial players to M&A activity quickened the pace of deals in 2010 and made the market more competitive”, adds Mendelssohn. “We expect this trend to continue through 2011 and to pave the way for more seller-friendly M&A deal making.”
