While indemnification claims, purchase price adjustments, earn-out achievement disputes, and other post-closing issues in private-target M&A transactions remain common, data shows that claim resolution is becoming more efficient.
SRS | Shareholder Representative Services, the post-closing expert for private-company mergers and acquisitions, has released the 2013 SRS M&A Post-Closing Claims Study, which analyses post-closing issues and payouts across 420 private-target acquisitions, comprising USD66.7bn in stated deal value with USD6.7bn held in escrow and USD9bn in potential earn-out consideration.
The study presents aggregate data from nearly 700 claims, including new data points on specific claim types, claim and escrow payouts, and earn-out milestone achievement rates. Overall, the study shows that two thirds of all deals had issues arise after closing, and one in five deals with claims had exposure exceeding half of the escrow. Additionally, earn-out milestones for technology and other deals outside of the life sciences sector were achieved 50 per cent of the time.
“Parties should focus on the issues that are likely to impact returns and the timing of payouts after closing,” says Paul Koenig, co-chief executive and managing director of SRS. “Better access to information is helping buyers and sellers resolve post-closing issues more effectively or avoid them altogether.”
Additional key findings from the study include:
• Eighteen per cent of deals had at least one claim made in the final week of the escrow period.
• Final escrow releases were delayed due to claims in 30 per cent of deals.
• Seventy three per cent of deals with post-closing purchase price adjustment mechanisms saw adjustments, which were more often buyer-favourable than seller-favourable. Twenty seven per cent of adjustments were ultimately modified from the initial amount claimed.
• Ten per cent of earn-out milestones that were initially claimed as missed eventually resulted in a payout for shareholders.
• Tax claims became more frequent due to the average target being a more mature taxpayer. In addition, state and local governments have become more aggressive about revenue collection, especially for sales and use taxes.
“The SRS Claims Study is instructive for deal makers seeking to mitigate potential post-closing exposures as they negotiate transactions and finalise deal documents,” says Chris Letang, managing director and head of SRS’ post-closing claims team. “While it is difficult to avoid all disputes, our data shows that the claims resolution process has become much more efficient, allowing buyers to collect on agreed losses and shareholders to realise final merger consideration on a more timely basis.”
