In a review of 1,700 deals done between 2007-2012, CMS’ fifth annual M&A Study shows that there are key differences in the risk allocation between the US and Europe – reflecting interesting cultural and regulatory variations in the markets.
"Now in its fifth year, the M&A study is fascinating reading for businesses looking to do deals across borders, and understand the norms in other countries," says Cornelius Brandi, executive chairman of CMS. "It exemplifies the value that CMS delivers to clients in providing both multi-national expertise and a deep understanding of the issues that drive businesses today."
Thomas Meyding, head of CMS corporate group, says: "Our analysis of the deal structures chosen illustrates very different behaviours on either side of the Atlantic. Attitudes to risk and reward vary significantly and this is clearly shown by the legal provisions that are used."
For example, MAC clauses are much more popular in the US (being used in 93 per cent of deals) than in Europe where they only appear in 14 per cent. Another sizeable difference exists in the use of working capital adjustments as a criterion for purchase price adjustment, used in 77 per cent of cases in the US as opposed to just 34 per cent in Europe. The explanation for this may simply be the diversity that one sees in 50 different countries as opposed to 50 different states in one country.
Other key findings include:
• Earn-out deals are more popular in the US. 38 per cent of US deals had an earn-out component compared with just 16 per cent in Europe in 2012.
• Not only are baskets much more prevalent in the US, but the basis of recovery is different. In the US, 62 per cent of relevant deals are based on “excess only” recovery as opposed to “first dollar” recovery compared with only 29 per cent in Europe in 2012 for excess only recovery.
• Basket thresholds tend to be lower in the US with 88 per cent being less than one per cent of the purchase price compared with 49 per cent in Europe and that is probably because there is less payback for purchasers because of the prevalence of excess only recovery.
Meyding concludes: “Europe may not seem as exciting as some of the emerging economies, but there is no doubt that US businesses are certainly keeping an eye out for opportunities there.
"There are, however, good reasons for optimism in 2013. Many corporates have strong balance sheets and access to cash. Private equity owners always need to realise investments at certain stages of their life cycle and many are nearing the end of their investment holding period. Many US corporations are increasingly ready to make acquisitions, including European acquisitions, as they benefit from US energy self-sufficiency and lower energy costs."