In a review of 1,700 deals done between 2007-2012, CMS’ fifth annual M&A Study shows that, despite difficult economic times, sellers have been able to limit their liability significantly in the transactions analysed for the report.
“Now in its
fifth year, the M&A study is fascinating reading for businesses looking to
do deals across borders and understand the norms in other countries” said
Cornelius Brandi, Executive Chairman of CMS. “It exemplifies the value that CMS
delivers to clients in providing both multi-national expertise and a deep
understanding of the issues that drive businesses today.”
Thomas Meyding, Head of CMS Corporate Group,
comments, “2012 was another uncertain year in which global M&A activity
flatlined – with total deal value almost exactly the same as in 2011. Despite
the challenges of finding potential purchasers in today’s market, once sellers
have done so, they tend to
get a good deal in terms of risk allocation.”
Helen Rodwell, the CEE
Head of Corporate Group added: “In Central and Eastern
Europe 2012 was undoubtedly overshadowed by widespread economic turmoil. The
prolonged market uncertainty manifested itself in a reduction in the overall
number of M&A transactions. Despite this downward trend, our Corporate
team remained busy across the region, and was named ‘CEE M&A Legal Adviser
of the Year’ by the Financial Times and mergermarket in December
2012. The
CEE region remains attractive to investors and I’m confident that 2013 will
again bring a steady flow of deals.”
2012 saw an
increase in the number of
locked box deals – particularly across Europe – where the rise was most
noticeable in jurisdictions such as the UK, Benelux and CEE. One possible
explanation is that there were more financial or private equity sellers in 2012
who traditionally favour this type of mechanism.
It is also apparent that liability caps are
still moving downwards, with 54% of deals now having a liability cap of less
than half the purchase price. General warranty limitation periods are becoming
more standardised around the 12–24 month period. There is also a significant
reduction in the number of deals with a seller non-compete covenant.
The main buyer-friendly
trend is the relative success of more purchasers in obtaining security for
warranty claims.
The key
conclusions of the CMS European M&A Study 2013 are as follows:
– Earn-out – unlike in the US, there remains little appetite overall for
earn-out deals in Europe (only 16% in 2012).
– De minimis and baskets – the use of these provisions is
increasingly commonplace throughout Europe. However, unlike in the US, the
standard basis of recovery remains ‘first dollar’ and this trend strengthened
during 2012.
– Liability caps – caps are still much higher than in the US.
– Limitation periods – after fluctuations during the 2007–2010 period, the
limitation period of 18–24 months has remained the most popular throughout 2011
and 2012 at a constant 32% of deals.
– Security for warranty claims – as in 2011, buyers remained cautious,
looking to obtain some form of security (whether it be use of an escrow
account, retention or bank guarantee) in 42 % of deals in 2012.
– MAC clauses – these remain relatively rare being a feature in only 14%
of deals in Europe, which is a significant contrast to the US where the
overwhelming majority (93%) of deals have MAC clauses.
– Non-compete covenants – whilst in 2011 more than
half of the deals had non-compete provisions (53%), for the first time since
2007, the pendulum swung in the opposite direction in 2012, with only 46% of
deals containing a seller non-compete covenant.
