General market sentiment indicates that 2019 will be another very active year for M&A deals, according to the 6th edition of law firm Seyfarth Shaw’s Middle-Market M&A SurveyBook of Key M&A Deal Terms.
The data analysed for this year’s survey suggests that the private target middle-market M&A environment will likely continue its seller-friendly trend. The Survey authors expect “add-on” acquisition activity to comprise a high percentage of middle-market deal value in 2019 as private equity-backed platforms continue to grow their businesses and improve fund performance through add-on investments. A desire to expand geographically, plus diversify products and services, enhance technological capabilities and acquire talent (acqui-hiring) are anticipated to be key strategic drivers of M&A activity in 2019.
Given the substantial and continued growth in the use of representation and warranty (R&W) insurance in private middle-market M&A transactions, this year’s Survey tracks data from deals that included R&W insurance separately from deals where no R&W insurance was utilised. More than 40 per cent of the transactions reviewed for the Survey included R&W insurance, representing an increase of greater than 10 per cent from 2017. Buyers increasingly use R&W insurance in acquisition proposals to make their bids more competitive and attractive to sellers. In 2018, the Survey also notes a growing number of “no survival” private target acquisitions, in which the buyer’s only recourse for breaches of representations and warranties was to the R&W insurance policy, or to an escrow related to the amount of the policy deductible, and then to the R&W insurance policy.
This year’s Survey also considers the number of private target acquisition agreements that included “fraud” exceptions to certain limitations on buyers’ indemnification rights and remedies, such as caps and baskets, and whether and how “fraud” was defined across those transactions. Furthermore, it reviews the governing law chosen by the parties to the 2018 private target acquisition agreements surveyed. As an additional reference tool for deal makers, the Survey includes a summary of important distinctions between Delaware and New York law on several key issues commonly addressed in private target acquisition agreements. New to this year’s Survey is an M&A forecast and spotlight on the Cannabis industry, an emerging area of investment in the United States.
