M&A deal terms are changing
M&A deal terms are changing in 2019. Uncertainty has been a significant factor in 2019.Along with fears of a global economic slowdown, we have also witnessed considerable geopolitical tensions like UK’s decision to leave the European Union, protectionist responses to China as a global investor, market volatility and US China trade tensions.
The economic slowdown along with rising geopolitical issues have put considerable pressure on international M&A.Hence deal teams and the inhouse counsel are increasingly working with their advisors to devise strategies and develop solutions to get deals done.This requires an intimate knowledge of deal terms and current market trends.The geopolitical factors can impact how parties approach deal structure and key provisions of transaction documents.
M&A deal have become seller friendly
- Global M&A transactions have become more seller friendly as more transactions are structured that are friendlier towards the sellers.Almost a majority of the transactions include Lock box mechanism where as only few transactions still continue to have Completion accounts mechanism.
- In the case of a Locked box mechanism, the deal price is fixed at an agreed date based on a set of accounts with sellers giving undertaking that value will not be extracted or leaked from the target before completion.
- Completion accounts on the other hand arrive at the final deal price after completion by reference to accounts drawn up to the date of completion. Hence in this case buyers are able to test and adjust valuation by reference to a target’s actual financials.
- Countries in the Europe especially Germany and France are more favorable towards sellers.Hence a majority of their transactions incorporate a locked box mechanism.
- Private equity firms which have large amount of cash reserves and are emerging as a competitors to strategic acquirers also favor the usage of Locked box mechanism. At the same time US deals are more favorable to buyers which explains the reason why Locked Deal mechanism are not very popular in US.In US majority of the deals use Completion accounts mechanism.
- In case of Carve-outs transaction, completion accounts mechanism are usually preferable due to the lack of robust financial information of the carved out entity.With Brexit going to settle soon, the pound is going to further weaken which may see the emergence of US acquirers with keen interest in sterling transactions and preference of completion accounts mechanism.
M&A Deals are under more scrutiny
- In the current economic climate, deals are under more scrutiny and new legal tools are in place to intervene in deals in sectors that were not considered sensitive earlier. These factors have led to renewed focus on supply chains, trade as well as acquirer and investor jurisdictions.
- Antitrust regulators are more stringent towards responding to new technologies in global economies.This is leading to greater scrutiny of deals in relevant market sectors.
- Antitrust and national security clearances are common conditions now on many deals.
Material Adverse Change clauses in M&A deal
- Material adverse change clauses can refer to events that have a negative impact on the market generally and more specifically on the target company’s business.
- These clauses are more common in US transactions and are relatively uncommon in European transactions.In cases of Asia, a mix of US and Europe style acquisition approach is used.Hence the approach to MAC tend to follow the Sale and Purchase agreements.
- MAC clauses also vary by sectors and are more prominent in sectors that are either regulated or have an impact with the changing regulations.For instance in Oil and gas sector, upstream deals tend to have MAC clauses as myriad challenges such as regulatory, physical, environmental and operational issues can deplete the value of the target to the buyer.
- These MAC once negotiated are then typically drafted tightly so to address one or more potential events rather than broadly seeking to capture any value impacting events.
- As the deal environment is more seller friendly expending commerical goodwill on MAC negotiations will be challenging.
- The uncertainty in the global economy along with increasing tensions in geopolitical climate is having an effect in the Global M&A.
- More buyers are devising new deal strategies and developing solutions in order to close the deals faster with no issues.As the current deal environment is more favorable towards the sellers, Locked box mechanism is gaining popularity among the PE firms as well as other sellers in place of the completion accounts mechanism.