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Fixed-price deals in European M&A are increasing

Fixed purchase prices are being agreed in an increasing number of corporate transactions in Europe, according to the sixth CMS European M&A Study.

The study reveals that last year the parties agreed a fixed purchase price without scope for adjustment in more than half of all deals.
In the US, however, there was a trend in the opposite direction, with over 85 per cent of transactions containing a variable purchase price. This variation of approach highlights just one of the many differences between European and US market practice.
In its study, CMS reviewed over 2,000 non-listed public and private company deals it completed in Europe between 2007 and 2013. Of this total, 344 deals were conducted in 2013.
In 30 per cent of European deals with clauses stipulating that part of the purchase price should depend on the future performance of the target business (earn-out), a period of three or more years was agreed. This represents an increase of almost 58 per cent compared with 2012, suggesting that sellers are becoming more confident with regard to the medium to long-term prospects. This applies to the German-speaking countries in particular, with a quarter of transactions in Germany, Austria and Switzerland containing an earn-out clause in 2013.
The CMS study also shows that buyers required less deal security (escrow account, purchase price retention or bank guarantee) for warranty claims than they did in 2012. The number of buyers taking security on warranty claims for deals fell by 7 per cent to 35 per cent. Escrow accounts were particularly popular in German-speaking countries, being used in 18 per cent of deals.
“Our analysis shows that deal points are becoming more consistent and much less likely to strongly favour either the seller or the buyer. The distribution of risk between buyers and sellers has stabilised in the past three years. This makes risk allocation in transactions much more predictable than three years ago,” said Dr Thomas Meyding, head of the CMS corporate group.
Nonetheless, regional differences in transaction structures remain across Europe. Sellers in Southern Europe accepted liability caps exceeding 50 per cent of the purchase price far more often (in almost 70 per cent of cases) than sellers in Germany and the UK (around 50 per cent of all sellers) and especially than sellers in France (only 13 per cent). On the other hand, limitation periods for warranty claims are considerably longer in France. De minimis and basket provisions are standard in the UK. Central and Eastern Europe (CEE) sees the most material adverse change clauses and arbitration is the most likely dispute resolution mechanism in this region.

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