February 26, 2020

M&A Trends: A Review of the Last Decade

This recent study from SRS Acquiom & Bloomberg Law addresses some of the major trends in private company deal terms over the past decade.  Overall, the conclusion is one that probably won’t come as much of a surprise to you – sellers have had a very good run.

From the rise of RWI to the decline of the 10b-5 rep & the narrowing of indemnification terms, the news for sellers has generally been pretty darn good when it comes to deal terms.  On the other hand, about the only pro-buyer trend that’s gotten traction over the past decade is the increase in the scope & prevalence of materiality scrapes.

To me, one of the most interesting aspects of the study didn’t involve the buyer v. seller scorecard.  Instead, it was how the study highlighted the fact some provisions that we take for granted today were far from ubiquitous a decade ago.  Check out this excerpt on purchase price adjustments:

Purchase Price Adjustments are expected in nearly every deal now; it may surprise some to learn that in 2010 just 51% of deals included a specific PPA mechanism (though another 29% allowed buyers to recoup any shortfall via indemnity). In 2018, 81% of deals included a specified PPA procedure (and 9 percent via indemnity). Similarly, in 2010 many PPA mechanisms included only working capital, but the number of deals including other financial metrics, like cash and debt, have steadily increased (see graph below). Finally, the use of a separate escrow to guarantee the purchase price adjustment has swelled from just 17% of deals in 2013 to 56% in 2018.

Given how well sellers have done overall, you might expect that purchase price adjustments have become more seller-favorable over the past decade.  But the study says that’s not necessarily so – In fact, the purchase price adjustment methodology (GAAP, GAAP consistent with past practices, etc.) hasn’t moved consistently in any particular direction.

Overall, the study says that purchase price adjustment mechanisms have become more sophisticated over the past decade. Given the fact that the intricacies of post-closing adjustments were addressed in high-profile Delaware litigation within the past 5 years, that’s probably not too surprising either.

John Jenkins