The European merger and acquisition (M&A) climate in 2016 was similar in value and volume to 2014, a good year, but not as frothy as 2015, according to the CMS European M&A Study 2017 from law firm CMS.
The study, which analyses more than 3,200 of the firm’s non-listed European public and private company deals, shows Q4 was the best quarter for 2016, with inbound deals into Europe exceeding the previous year by 36 per cent in value terms.
Asian investors remained highly interested in European targets. Overall in 2016, Europe saw more deals than any other region including North America.
The study reveals changes in risk allocation in 2016 compared with 2015.
Stefan Brunnschweiler (pictured), head of the CMS corporate/M&A group, says: “Buyers are becoming more cautious. The 2016 results show all the signs of buyers taking on less risk and leaving more residual risk with sellers, reversing the steady trend in favour of sellers seen since 2010.”
According to the study, risk allocation issues differ according to deal size. Different norms apply depending on the size of the deal. For example, in the larger EUR100 million deals, earn-outs are rarer and liability caps are proportionately lower.
2016 also saw a record year for earn-outs in virtually every territory, with most buyers no longer prepared to pay a full price upfront. 22 per cent of analysed deals had an earn-out component. The highest proportion of earn-outs were in innovative sectors such as life sciences (33 per cent), TMC (28 per cent), consumer products (26 per cent) and industry (26 per cent). Earn-outs are almost three times as likely to be used in smaller deals under EUR100 million (23 per cent) than in bigger deals over EUR100 million (8 per cent).
The seller’s liability cap which was on a downward trend in previous years has now stabilised. The three territories with the most number of deals have seen an increase in the number of deals where the seller’s liability cap is more than 50 per cent of the purchase price in 2016 compared with 2015: German-speaking countries (33 per cent to 38 per cent), UK (53 per cent to 55 per cent) and France (20 per cent to 30 per cent). The limitation periods for seller liability have become longer, with a greater number of deals having limitation periods exceeding two years.
The study highlights differences in practice within Europe. In the German-speaking countries, earn-outs continued to be popular with 25 per cent of deals containing earn-out provisions. In France, there were low liability caps with 70 per cent of deals having a seller liability cap of 25 per cent or less than the sale price. In the UK, deals with earn-outs almost doubled in popularity compared with 2015 (20 per cent from 12 per cent).
According to the study, North American buyers will be increasingly incentivised to make deals at home, with growing opportunities in a newly protected and lower tax US environment. As the priorities of the new US administration become clear, specifically the “America First” policy, most commentators believe there will be a short to mid-term boom in US based M&A.
Brunnschweiler says: “Since 2010, we’ve analysed thousands of our European deals across a number of sectors. The insights that we’ve gained have brought significant benefits to our clients when negotiating their M&A deals. While companies will still have to deal with business challenges such as digitisation and changing business models, they will also be faced with a certain amount of political uncertainty caused by the French, Dutch and German elections as well as the impact of Brexit this year. However, we believe that European M&A will continue to provide opportunities in 2017.”
Looking at opportunities in the UK market, there is room for optimism as Martin Mendelssohn, CMS UK corporate partner, explains: “We are seeing a very active UK market with deal value up 25 per cent in Q1 of 2017 compared with 2016 and there is actual or rumoured takeover activity in a number of sectors including financial services, pharma, consumer and energy. Public market equity value is giving listed companies a lot of confidence.”
“In the private M&A market, however, buyers are increasingly showing a cautious attitude by the way risk is allocated between sellers and buyers on private M&A deals as they contemplate medium term uncertainty due to the unknown consequences of Brexit,” Mendelssohn adds.
