May 7, 2020

Study: Private Target Deal Terms

This SRS Acquiom study reviews the financial & other terms of 1,200 private target deals that closed during the period from 2015 through 2019. Here are some of the key findings about trends in last year’s deal terms:

– The median size of management carveouts, while still rarely used, grew to 11.1% of merger consideration. Meanwhile, full acceleration of options vesting continued to decline in 2019 to 27%–a drop of 20% from 2016-2017.

–  Post-Closing Purchase Price Adjustments (PPAs): separate PPA escrows continue to grow in popularity. In the past this has been strongly correlated with RWI, but it is gaining popularity even in deals without RWI policies. GAAP consistent with past practices is again the prevalent standard for PPA measurement, though GAAP alone is losing ground to other measures (such as non-US accounting standards).

–  Earnouts have waxed and waned in popularity the last few years, increasing to 22% of non-life science deals in 2019 (compare 13% in 2018 and 23% in 2017, see slide 24). In addition, the median earnout potential as a percentage of the closing payment returned to 41%, after a recent low of 30% in 2018. Finally, offsets to earnouts for indemnity claims fell 8% to 68% of deals.

– For accuracy of seller’s representations, while “in all material respects” remains the standard in a bare majority of agreements, a “Material Adverse Effects” formulation continued to gain ground in 2019, increasing in “at signing” clauses from 31% in 2018 to 44% and remaining high at 48% of “at closing” clauses.

– Inclusion of both standalone and back-door “Material Adverse Change” conditions in a single agreement increased 10% from 47% in 2018.

– The median general survival period for indemnity escrows remains 15 months, but there is more variability in lengths than last year. Median escrow size for the year was 9.9% of transaction value, with an average of 8.9%. The average and median escrow/holdback size for non-RWI deals ticked up to 12.5% and 10.5%,respectively, in 2019.

There is plenty of other interesting stuff to review in this study, including more on financial terms, closing conditions, indemnification, dispute resolution and termination fee arrangements.

John Jenkins