Hirschler is pleased to provide its valued clients with advance highlights from the 2021 American Bar Association Private Target Deal Points Study. Released exclusively to the members of the ABA M&A Committee on December 30, the latest study sheds new light on the initial impact COVID-19 is having on deal points in M&A transactions involving privately-held targets.
The latest biannual Deal Points Study offers a robust, 15-month analysis of acquisitions of privately-held targets by publicly-held buyers. The study draws data from 123 middle market transactions executed or closed in 2020 or the first quarter of 2021. Transactions included in the study range from $30 million to $750 million and the average transaction value is $233.6 million.
- The use of representations and warranties (R&W) insurance is continuing to rise: 65% of deals in the 2021 study as compared to 52% of deals in the 2019 study and 29% in the 2017 study.
- The number of “public company” styled deals—deals in which the sellers did not have traditional indemnification liability to the buyer following the closing—more than doubled to 33% of deals in the 2021 study as compared to 14% of deals in the 2019 study.
- Earnouts were down from 27% in the 2019 study to 20% in the 2021 study.
- Caps on a seller’s indemnification obligations continue to fall. The average across all deals is 6.08% of total transaction value—9.07% for deals without R&W insurance and 3.81% for deals with R&W insurance.
- Average indemnification escrows and holdbacks continue to fall (now at 3.5% of total transaction value down from 5.57% in the 2019 study and 6.66% in the 2017 study).
- Adjustment escrows were increasingly a buyer’s sole source of recovery for a post-closing purchase price adjustment—39% in the 2021 study as compared to 26% in the 2019 study.
New Deal Terms
- The study looked at the impact of COVID-19 on purchase agreements entered into after March 11, 2020 and found:
- “COVID-19” or “pandemic” was listed as a carveout from the definition of “material adverse effect” (MAE) in 67% of deals, meaning in those deals, the impact of COVID-19 would not be taken into account to determine if an MAE had occurred.
- 32% of deals had a specific COVID-19 representation.
- A small number of deals included standalone indemnification for Paycheck Protection Program loans (3%) and COVID-19 related matters (1%).
- The study found that 20% of deals defined the consequences resulting from a buyer’s late delivery of a post-closing purchase price adjustment statement, a deal point that may become more important in light of the Delaware court’s February 2021 decision in Schillinger Genetics, Inc.
- Termination fees, payable by either buyer or seller, were also highlighted in this year’s study, which reported that 22% of deals included some sort of termination fee.
To learn more about the finding of the 2021 study, contact a member of the Hirschler M&A practice group.
Kristen M. Chatterton