Released just prior to the new year, the enhanced American Bar Association Private Target Deal Points Study sheds new light on the impact representations and warranties (R&W) insurance is having on deal points in M&A transactions involving privately-held targets.
Moreover, unlike previous ABA Deal Points Studies that analyzed data from the prior calendar year, the latest biannual Deal Points Study offers a more robust, 18-month analysis of acquisitions of privately-held targets by publicly-held buyers. The study draws data from 139 middle market transactions executed or closed between January 2016 and June 2017. Transactions included in the study ranged from $30 million to $500 million and the average transaction value was $176.3 million.
Study data shows R&W insurance was present in more than 29% of deals. Other notable trends cited in the latest study:
- The use of post-closing purchase price adjustments remained static (present in 86% of all deals) but became more complex.More than 70% of all deals included a purchase price adjustment that was based on multiple metrics, an increase of over 20 percentage points from the prior study.
- The use of a purchase price adjustment escrow, separate and apart from any indemnification escrow, increased by 20 percentage points.
- The use of “deductible” indemnification baskets (as opposed to “first dollar/tipping” baskets) continued its upward trend, as did the average size of the baskets.
- 95% of all indemnification baskets were 1% of transaction value or less, with 0.79% being the average size.
- The use of “materiality scrape” provisions increased by 15 percentage points.
- The average size of indemnification caps continued to decline, to 12.2% of transaction value; however, the presence of R&W insurance had a large impact on the average indemnification cap.In deals with R&W insurance, the average cap was just under 6% of transaction value while the average cap for deals without R&W insurance was just under 15% of transaction value.
- Approximately a third of all escrows or holdbacks were 3% of transaction value or less.However, it was more likely that the escrow or holdback did not act as the acquirer’s sole remedy for recovering post-closing losses.
- 90% of all deals had a survival period of 18 months or less for non-fundamental representations and warranties.
Hirschler’s Mergers and Acquisitions Practice Group is preparing a summary of key takeaways from the latest study. To schedule a brief presentation of study highlights and related M&A deal negotiation tips, please contact us.