2011 purchase agreement study

2,866 views
2,761 views

Published on

Published in: Economy & Finance, Business
0 Comments
3 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
2,866
On SlideShare
0
From Embeds
0
Number of Embeds
62
Actions
Shares
0
Downloads
155
Comments
0
Likes
3
Embeds 0
No embeds

No notes for slide

2011 purchase agreement study

  1. 1. 2011 PURCHASE AGREEMENT STUDY Houlihan Lokeys Mergers & Acquisitions GroupPurchase Agreement Study 2011_R1_JCedit2.indd 1 10/21/11 10:14 AM
  2. 2. The 2011 Purchase Agreement Study was prepared by Matt Spencer, Vice President (310.788.5366) and Sanjuro Kietlinski, Associate (310.789-5745) of Houlihan Lokey’s Corporate Finance business. If you have questions or comments, please contact them directly or a member of Houlihan Lokey’s M&A Group at 310.553.8871.Purchase Agreement Study 2011_R1_JCedit2.indd 2 10/21/11 10:14 AM
  3. 3. 2011 PURCHASE AGREEMENT STUDY The 2011 Purchase Agreement Study (the Study) summarizes selected terms of middle-market change-of-control transactions in which Houlihan Lokey served as the financial advisor to either the buyer or the seller.(1) The Study is based on both public and private transactions that vary by industry and size. The Study analyzes the terms of the indemnification provisions with respect to the representations (reps), warranties and covenants contained in their respective purchase agreements. These terms are negotiated by attorneys and investment bankers. There is no consensus on what constitutes “fair and normal” or “market,” as terms vary based on the specific facts and circumstances of a transaction. However, as illustrated by the data in the Study, certain patterns emerge. The Study also presents the mean, median, maximum and minimum values of the corresponding terms of each subject transaction. The magnitude of the numerical values is measured as a percentage of purchase price. Although it is difficult to capture all of the nuances of the broader market, the Study is intended to provide valuable benchmarks within the middle market to buyers and sellers, and their shareholders, boards, management, attorneys and other advisors. Since the Study is limited to middle-market transactions with purchase prices ranging from approximately $10 million to more than $1 billion, the indemnification terms may exhibit greater variation than those of larger transactions. Houlihan Lokey has prepared the Study on an annual basis since 2002. Consistent with previous years’ studies, the Study illustrates data for 2010 relative to prior years. (1) The Study includes transactions closed in 2002 – 2010; many of the transactions were private, so there is limited publicly disclosed information about them. 1Purchase Agreement Study 2011_R1_JCedit2.indd 3 10/21/11 10:14 AM
  4. 4. DEAL STATISTICS • Houlihan Lokey has analyzed a large universe of transactions that closed between 2002 and 2010. • The data on the following pages is presented on an annual basis to understand patterns that might exist over time. In certain cases the data is presented for all years in the aggregate. • The subject transactions provide a mix of strategic and financial buyers, as well as a mix of stock and asset sales. • In every year of the Study, the majority of the target companies have been sold to strategic buyers. • Strategic buyers acquired 61% of the target companies in all of the subject transactions between 2002 and 2010, while financial buyers acquired 39%. • Of the financial buyer transactions, a total of 87% were platform acquisitions and 13% were add-on acquisitions. B U YE R S T R U C T U R E (2) Buyer Mix Financial Buyer Mix Year Strategic Financial Platform Add-On 2002 67% 33% 88% 13% 2003 68% 32% 63% 38% 2004 55% 45% 75% 25% 2005 61% 39% 100% 0% 2006 73% 27% 63% 38% 2007 57% 43% 86% 14% 2008 62% 38% 93% 7% 2009 67% 33% 100% 0% 2010 52% 48% 94% 6% All Years 61% 0.612529002 39% 0.387470998 87% 0.872340426 13% 0.127659574 (2) Financial buyer percentages are based only on companies classified as either "platform" or "add-on" acquisitions and do not include companies that were classified as neither. 2Purchase Agreement Study 2011_R1_JCedit2.indd 4 10/21/11 10:14 AM
  5. 5. DEAL STATISTICS • The vast majority of all of the subject transactions between 2002 and 2010 were structured as all-cash transactions and purchases of stock. • Stock was purchased in 83% of the subject transactions. • The buyer paid all cash in 90% of the subject transactisions.(3) T R A N S A C T IO N S T R U C T U R E (3) (3) Cash Stock Cash & Stock Year For Stock For Assets Subtotal For Stock For Stock 2002 71% 17% 88% 4% 8% 2003 64% 24% 88% 4% 8% 2004 71% 24% 95% 3% 3% 2005 82% 16% 98% 0% 2% 2006 69% 18% 87% 2% 11% 2007 79% 17% 96% 1% 2% 2008 75% 18% 93% 0% 7% 2009 75% 13% 88% 0% 13% 2010 65% 7% 72% 2% 26% All Years 74% 0.612529002 17% 0.387470998 90% 0.872340426 1% 0.127659574 8% (3) In 2010, Houlihan Lokey changed the way it accounted for earn-outs. Prior to 2010, an earn-out did not affect the transaction structure. In the 2010 figures, cash transactions that included an earn-out were classified as "hybrid" transactions. 3Purchase Agreement Study 2011_R1_JCedit2.indd 5 10/21/11 10:14 AM
  6. 6. DEAL STATISTICS B U YE R S T R U C T U R E (4) Strategic vs. Financial Financial Buyer – Platform vs. Add-On (5) Add-On 13% Financial 39% Strategic 61% Platform 87% T R A N S A C T IO N S T R U C T U R E (4) Stock vs. Assets Cash vs. Stock and / or Cash Stock Assets 10% 17% Stock 83% Cash 90% (4) Data presented in this section includes all subject transactions that closed in 2002 – 2010. (5) Financial buyer percentages are based only on companies classified as either "platform" or "add-on" acquisitions and do not include companies that were classified as neither. 4Purchase Agreement Study 2011_R1_JCedit2.indd 6 10/21/11 10:14 AM
  7. 7. OVERVIEW CONTINGENT PAYMENT • Of all subject transactions, 18% contained earn-outs. • The percentage of transactions contained earn-outs remained at 21% from 2009 to 2010. • The median earn-out as a percentage of purchase price was 9% in 2009 and 2010. • Of all subject transactions, 20% had rollovers. • The percentage of transactions with rollovers increased to 25% in 2010. • The median rollover as a percentage of purchase price fell sharply from 15% in 2009 to 4% in 2010. • Of all subject transactions, 5% had seller notes. • The percentage of transactions that had seller notes decreased between 2009 and 2010. • The median seller note, as a percentage of purchase price, decreased from 16% in 2009 to 9% in 2010. E A R N -O U T S R O L L O VE R S SELLER N OTES Percentage Included in Subject Transactions 2008 16% 18% 6% 2009 21% 18% 6% 2010 21% 25% 2% All 18% 20% 5% Median Percentage of Purchase Price 2008 11% 12% 12% 2009 9% 15% 16% 2010 9% 4% 9% 5Purchase Agreement Study 2011_R1_JCedit2.indd 7 10/21/11 10:14 AM
  8. 8. OVERVIEW CONTINGENT PAYMENT P E R C E N T A G E IN C L U D E D IN S U B J E C T T R A N S A C T IO N S Earn-Outs Rollovers Seller Notes 30% 30% 7% 25% 25% 6% 25% 6% 6% 5% 20% 20% 21% 21% 4% 15% 15% 18% 18% 16% 3% 10% 10% 2% 5% 5% 2% 1% 0% 0% 0% 2008 2009 2010 2008 2009 2010 2008 2009 2010 M E D IA N P E R C E N T A G E O F P U R C H A S E P R IC E Earn-Outs Rollovers Seller Notes 20% 20% 20% 16% 16% 16% 16% 12% 12% 15% 12% 12% 12% 8% 11% 8% 8% 9% 9% 9% 4% 4% 4% 4% 0% 0% 0% 2008 2009 2010 2008 2009 2010 2008 2009 2010 6Purchase Agreement Study 2011_R1_JCedit2.indd 8 10/21/11 10:14 AM
  9. 9. OVERVIEW VALUATIONS • Despite an uncertain economic environment, market multiples increased in 2010. • Mean and median EBITDA multiples each increased in 2010, with mean EBITDA multiples returning to 2007 levels. • The mean EBITDA multiple increased from 7.4x in 2009 to 8.7x in 2010. • The median EBITDA multiple increased from 6.8x in 2009 to 7.4x in 2010. • Overall, EBITDA multiples increased in 2010 after decreasing for the previous three years, with 2010 multiples returning to historical means and medians (relative to all subject transactions between 2002 and 2010). E N T E R P R IS E VA L U E / E B IT D A E N T E R P R IS E VA L U E / R E VE N U E Year Mean Median Mean Median 2002 6.7x 6.8x 1.0x 0.8x 2003 6.8x 6.8x 1.0x 0.8x 2004 7.7x 7.2x 1.0x 1.1x 2005 7.8x 7.7x 1.5x 1.0x 2006 9.9x 9.8x 2.2x 1.6x 2007 8.8x 8.9x 1.4x 1.1x 2008 8.2x 7.2x 1.5x 1.2x 2009 7.4x 6.8x 1.2x 1.1x 2010 8.7x 7.4x 1.3x 1.0x All Years 8.2x 7.6x 1.4x 1.2x 7Purchase Agreement Study 2011_R1_JCedit2.indd 9 10/21/11 10:14 AM
  10. 10. OVERVIEW VALUATIONS • Historically, larger deals have traded at higher EV/EBITDA multiples than smaller deals. In all but two of the time periods shown below, deals greater than $100 million traded at higher multiples than those less than $100 million. E N T E R P R IS E VA L U E / E B IT D A Less than $100 M Greater than $100 M Year Mean Median Mean Median 2002 6.7x 6.8x 7.0x 6.9x 2003 6.9x 6.8x 6.3x 6.7x 2004 7.4x 7.2x 8.6x 7.5x 2005 7.3x 6.7x 8.8x 8.7x 2006 9.3x 9.8x 10.6x 9.9x 2007 8.6x 8.5x 9.1x 9.4x 2008 7.8x 6.9x 9.1x 7.9x 2009 7.8x 5.9x 6.8x 7.2x 2010 6.7x 6.9x 12.1x 9.3x 14.0x All Years 7.7x 7.2x 9.3x 8.6x 12.0x 12.1x 10.0x 10.6x 8.0x 8.8x 9.3x 9.1x 9.1x 8.6x 8.6x 7.4x 7.3x 7.8x 7.8x 6.0x 6.7x 7.0x 6.9x 6.8x 6.7x 6.3x 4.0x 2.0x 0.0x 2002 2003 2004 2005 2006 2007 2008 2009 2010 Less than $100 M Greater than $100 M Median = 7.2x Median = 8.6x 8Purchase Agreement Study 2011_R1_JCedit2.indd 10 10/21/11 10:14 AM
  11. 11. OVERVIEW VALUATIONS • Historically, larger deals have traded at higher EV/Revenue multiples than smaller deals. In all but three of the time periods shown below, deals greater than $100 million traded at higher multiples than those less than $100 million. E N T E R P R IS E VA L U E / R E VE N U E Less than $100 M Greater than $100 M Year Mean Median Mean Median 2002 1.1x 0.9x 0.4x 0.5x 2003 1.0x 0.8x 1.0x 0.8x 2004 1.0x 1.1x 1.3x 1.3x 2005 1.2x 0.9x 1.9x 1.2x 2006 2.1x 1.5x 2.3x 1.7x 2007 1.2x 1.0x 1.7x 1.4x 2008 1.3x 1.1x 1.8x 1.5x 2009 1.3x 1.1x 1.3x 1.5x 2010 0.8x 0.7x 2.1x 2.0x All Years 1.2x 1.1x 1.8x 1.4x 2.5x 2.3x 2.0x 2.1x 2.1x 1.9x 1.8x 1.5x 1.7x 1.3x 1.3x 1.3x 1.3x 1.0x 1.2x 1.2x 1.1x 1.0x 1.0x 1.0x 0.8x 0.5x 0.4x 0.0x 2002 2003 2004 2005 2006 2007 2008 2009 2010 Less than $100 M Greater than $100 M Median = 1.1x Median = 1.4x 9Purchase Agreement Study 2011_R1_JCedit2.indd 11 10/21/11 10:14 AM
  12. 12. TRANSACTION TERMS INDEMNIFICATION – ALL YEARS • Basket: Of the transactions in which the reps and warranties survived the closing, the vast majority had a basket. Deductible baskets accounted for 77% of the baskets and dollar-one baskets accounted for the other 23% of the baskets. • Cap: Of the transactions in which the reps and warranties survived the closing, 74% had a cap. • Escrow: Of the transactions in which the reps and warranties survived the closing, 66% had an escrow. IN D E M N IFIC A T IO N S T R U C T U R E S Percentage of Transactions with Baskets Percentage of Transactions with Caps Percentage of Transactions with Escrows Without Without Without Basket Cap Escrow 26% 26% 34% With With Escrow Basket With Cap 66% 74% 74% O VE R A L L IN D E M N IFIC A T IO N A S A P E R C E N T A G E O F P U R C H A S E P R IC E (6) Mean Median Max Min All Baskets 0.8% 0.7% 8.2% 0.1% Deductible 0.8% 0.7% 8.2% 0.1% Dollar-One 0.7% 0.6% 2.3% 0.1% Cap 14.8% 10.0% 100.0% 0.5% Survival (months) 19 18 96 9 Escrow 8.0% 7.4% 34.2% 0.0% Escrow (months) 19 18 96 1 (6) Data presented in this section includes all subject transactions that closed in 2002 – 2010. 10Purchase Agreement Study 2011_R1_JCedit2.indd 12 10/21/11 10:14 AM
  13. 13. TRANSACTION TERMS INDEMNIFICATION – BASKET B A S K E T D E VE L O P M E N T S Baskets as a Percentage of Purchase Price Deductible vs. Dollar One 0.9% 100% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 80% 86% 0.7% 0.7% 0.7% 80% 81% 0.7% 0.7% 0.7% 0.7% 0.7% 60% 71% 70% 73% 75% 73% 0.6% 61% 0.6% 0.6% 0.6% 0.6% 40% 0.5% 20% 0.4% 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2002 2003 2004 2005 2006 2007 2008 2009 2010 Mean Median Deductible Dollar One Median = 0.75% Median = 0.67% D IS T R IB U T IO N O F B A S K E T S 2010 All Years Dollar One Dollar One 19% 23% Deductible Deductible 77% 81% 11Purchase Agreement Study 2011_R1_JCedit2.indd 13 10/21/11 10:14 AM
  14. 14. TRANSACTION TERMS INDEMNIFICATION – CAP C A P D E VE L O P M E N T S Cap as a Percentage of Purchase Price Survival Period (Months) 40% 36% 25 22 35% 21 21 20 20 19 20 18 18 18 1818 18 18 18 30% 17 17 15 16 25% 23% 15 19% 20% 17% 14% 10 15% 12% 12% 12% 11% 10% 10% 10% 10% 10% 10% 10% 10% 10% 8% 5 5% 0% 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2002 2003 2004 2005 2006 2007 2008 2009 2010 Mean Median Mean Median Median = 12.3% Median = 10.0% Median = 20 Median = 18 C A P S T A T IS T IC S 2002 2003 2004 2005 2006 2007 2008 2009 2010 Caps as a % of Purchase Price Mean 35.9% 19.1% 12.1% 9.7% 10.9% 16.9% 14.1% 9.9% 12.3% Median 22.7% 11.7% 10.0% 8.1% 9.8% 10.0% 10.0% 9.6% 9.6% Survival Period (Months) Mean 21 21 22 17 20 18 20 19 17 Median 18 18 18 15 16 18 18 18 18 12Purchase Agreement Study 2011_R1_JCedit2.indd 14 10/21/11 10:14 AM
  15. 15. TRANSACTION TERMS INDEMNIFICATION – ESCROW E S C R O W D E VE L O P M E N T S Escrow Value as a Percentage of Purchase Price Escrow Period (Months) 12% 30 11% 10% 9% 9% 25 23 24 9% 8% 9% 8% 8% 20 20 20 8% 8% 7% 7%7% 18 18 19 8% 7% 7% 20 18 18 18 18 17 18 18 18 6% 16 15 6% 5% 6% 15 4% 10 2% 5 0% 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2002 2003 2004 2005 2006 2007 2008 2009 2010 Mean Median Mean Median Median = 7.8% Median = 7.6% Median = 19 Median = 18 E S C R O W S T A T IS T IC S 2002 2003 2004 2005 2006 2007 2008 2009 2010 Escrow as a % of Purchase Price Mean 10.6% 8.6% 6.9% 6.1% 7.8% 9.1% 8.5% 7.0% 7.5% Median 9.3% 7.6% 5.7% 5.5% 7.8% 8.4% 7.9% 7.1% 7.3% Escrow Period (Months) Mean 23 20 18 16 20 17 18 19 20 Median 24 18 18 15 18 18 18 18 18 13Purchase Agreement Study 2011_R1_JCedit2.indd 15 10/21/11 10:14 AM
  16. 16. TRANSACTION TERMS ENVIRONMENTAL INDEMNIFICATION PROVISIONS • Special indemnification provisions for environmental reps and warranties were present in 18% of the subject transactions. Examples of provisions include exclusion of environmental claims from the cap, increasing the cap for environmental claims, changing the basket size, and lengthening the survival period. • Only 13% of the transactions had larger environmental caps than the general indemnification cap. • Of the deals with special baskets for environmental indemnification, 62% were deductible baskets (vs. 77% of the general indemnification deductible baskets). • The median environmental indemnification survival period was 36 months (vs. an 18-month median general indemnification survival period). (7) O VE R A L L E N VIR O N M E N T A L IN D E M N IFICA T IO N A S A PE R CE N T A G E O F P U R C H A S E PR ICE Mean Median Max Min All Baskets 1.0% 0.6% 20.0% 0.0% Cap 20.8% 11.7% 100.0% 0.1% Survival (months) 43 36 102 6 (7) Data presented in this section includes all subject transactions that closed in 2002-2010. 14Purchase Agreement Study 2011_R1_JCedit2.indd 16 10/21/11 10:14 AM
  17. 17. APPENDIX INDEMNIFICATION – BY YEAR 2 0 1 0 O VE R A L L IN D E M N IFIC A T IO N A S A P E R C E N T A G E O F P U R C H A S E P R IC E Mean Median Maximum Minimum All Baskets 0.8% 0.6% 2.7% 0.3% Deductible Baskets (81%) 0.8% 0.6% 2.7% 0.3% Dollar-One Baskets (19%) 0.6% 0.6% 1.0% 0.3% Cap 12.3% 9.6% 73.6% 2.7% Survival Period (months) 17 18 25 12 Escrow 7.5% 7.3% 20.0% 0.0% Escrow Period (months) 20 18 36 12 2 0 0 9 O VE R A L L IN D E M N IFIC A T IO N A S A P E R C E N T A G E O F P U R C H A S E P R IC E Mean Median Maximum Minimum All Baskets 0.8% 0.8% 1.6% 0.3% Deductible Baskets (73%) 0.7% 0.7% 1.0% 0.3% Dollar-One Baskets (27%) 0.9% 0.9% 1.6% 0.4% Cap 9.9% 9.6% 24.8% 3.0% Survival Period (months) 19 18 60 11 Escrow 7.0% 7.1% 12.7% 2.0% Escrow Period (months) 19 18 60 1 2 0 0 8 O VE R A L L IN D E M N IFIC A T IO N A S A P E R C E N T A G E O F P U R C H A S E P R IC E Mean Median Maximum Minimum All Baskets 0.8% 0.6% 8.2% 0.1% Deductible Baskets (86%) 0.9% 0.6% 8.2% 0.1% Dollar-One Baskets (14%) 0.8% 0.7% 2.3% 0.2% Cap 14.1% 10.0% 100.0% 0.6% Survival Period (months) 20 18 96 9 Escrow 8.5% 7.9% 26.7% 0.5% Escrow Period (months) 18 18 96 3 15Purchase Agreement Study 2011_R1_JCedit2.indd 17 10/21/11 10:14 AM
  18. 18. APPENDIX INDEMNIFICATION – BY YEAR 2 0 0 7 O VE R A L L IN D E M N IFIC A T IO N A S A P E R C E N T A G E O F P U R C H A S E P R IC E Mean Median Maximum Minimum All Baskets 0.7% 0.7% 1.5% 0.1% Deductible Baskets (80%) 0.8% 0.8% 1.5% 0.1% Dollar-One Baskets (20%) 0.6% 0.6% 1.3% 0.2% Cap 16.9% 10.0% 100.0% 1.1% Survival Period (months) 18 18 48 12 Escrow 9.1% 8.4% 26.2% 1.3% Escrow Period (months) 17 18 48 3 2 0 0 6 O VE R A L L IN D E M N IFIC A T IO N A S A P E R C E N T A G E O F P U R C H A S E P R IC E Mean Median Maximum Minimum All Baskets 0.6% 0.6% 1.8% 0.1% Deductible Baskets (61%) 0.6% 0.6% 1.1% 0.1% Dollar-One Baskets (39%) 0.6% 0.5% 0.8% 0.2% Cap 10.9% 9.8% 26.1% 3.9% Survival Period (months) 20 16 96 9 Escrow 7.8% 7.8% 15.6% 1.2% Escrow Period (months) 20 18 48 2 2 0 0 5 O VE R A L L IN D E M N IFIC A T IO N A S A P E R C E N T A G E O F P U R C H A S E P R IC E Mean Median Maximum Minimum All Baskets 0.7% 0.8% 1.6% 0.1% Deductible Baskets (75%) 0.8% 0.8% 1.6% 0.2% Dollar-One Baskets (25%) 0.6% 0.5% 1.6% 0.1% Cap 9.7% 8.1% 41.0% 0.5% Survival Period (months) 17 15 36 9 Escrow 6.1% 5.5% 16.0% 1.3% Escrow Period (months) 16 15 24 1 16Purchase Agreement Study 2011_R1_JCedit2.indd 18 10/21/11 10:14 AM
  19. 19. APPENDIX INDEMNIFICATION – BY YEAR 2 0 0 4 O VE R A L L IN D E M N IFIC A T IO N A S A P E R C E N T A G E O F P U R C H A S E P R IC E Mean Median Maximum Minimum All Baskets 0.8% 0.8% 1.6% 0.2% Deductible Baskets (73%) 0.8% 0.8% 1.6% 0.2% Dollar-One Baskets (27%) 0.8% 0.9% 1.3% 0.3% Cap 12.1% 10.0% 36.5% 0.5% Survival Period (months) 22 18 84 12 Escrow 6.9% 5.7% 15.2% 2.3% Escrow Period (months) 18 18 48 6 2 0 0 3 O VE R A L L IN D E M N IFIC A T IO N A S A P E R C E N T A G E O F P U R C H A S E P R IC E Mean Median Maximum Minimum All Baskets 0.7% 0.7% 1.4% 0.2% Deductible Baskets (70%) 0.7% 0.6% 1.4% 0.3% Dollar-One Baskets (30%) 0.7% 0.7% 1.0% 0.2% Cap 19.1% 11.7% 100.0% 1.0% Survival Period (months) 21 18 36 12 Escrow 8.6% 7.6% 25.0% 1.0% Escrow Period (months) 20 18 36 12 2 0 0 2 O VE R A L L IN D E M N IFIC A T IO N A S A P E R C E N T A G E O F P U R C H A S E P R IC E Mean Median Maximum Minimum All Baskets 0.7% 0.7% 1.5% 0.1% Deductible Baskets (71%) 0.8% 0.8% 1.4% 0.4% Dollar-One Baskets (29%) 0.6% 0.6% 1.5% 0.1% Cap 35.9% 22.7% 100.0% 4.2% Survival Period (months) 21 18 36 12 Escrow 10.6% 9.3% 34.2% 2.1% Escrow Period (months) 23 24 48 12 17Purchase Agreement Study 2011_R1_JCedit2.indd 19 10/21/11 10:14 AM
  20. 20. DEFINITIONS TRANSACTION TERMS AND STRUCTURE Purchase Price The total consideration paid to the target company and/or its shareholders by the buyer upon consummation of the transaction. The purchase price amount includes cash, debt assumed, seller notes and escrowed amounts, and excludes noncompete payments, earn-out payments, royalty payments, revenue sharing payments and other specified adjustments. Transaction Type The method in which the target and the buyer exchange value. The target sells either assets or stock, and the buyer provides consideration primarily in the form of either cash or stock. Seller Note Loan issued by the selling shareholder(s) to the buyer, to finance a portion of the purchase price. Earn-Outs Conditional supplementary payments incorporated in the purchase agreement. Because earn-out payments are contingent on the future performance of the acquired company, they are not included in the purchase price. Rollover Indicates an amount of equity retained by the selling shareholder(s) and is measured as a percentage of total equity of the new company and the dollar value of equity retained. Financial Buyer A buyer, such as a private equity firm, that is structured as an investment vehicle rather than a corporate entity. Platform Acquisition: A financial buyer acquiring a company in a new line of business. Add-On Acquisition: A financial buyer acquiring a company to merge with a company the buyer owns. Strategic Buyer A corporate entity that operates in the same or similar industry as the target company and generally expects to receive strategic benefits from the acquisition, such as the realization of synergies or improvement in market position. 18Purchase Agreement Study 2011_R1_JCedit2.indd 20 10/21/11 10:14 AM
  21. 21. DEFINITIONS KEY INDEMNIFICATION TERMS Basket The dollar amount set forth as the minimum loss that must be suffered by the buyer before the buyer can recover damages under the indemnification provisions. Deductible Basket: Seller is only responsible for damages exceeding the basket amount (e.g., under a deductible basket of $100, if a claim of $150 is made then the seller must pay $50). Dollar-One Basket: Seller is responsible for all damages once damages reach the threshold basket amount (e.g., under a dollar-one basket of $100, if a claim of $150 is made then the seller must pay $150). Cap The maximum amount of damages the buyer can recover from the seller under the indemnification provisions. Survival Period The length of time (in months) after the closing date during which the representations and warranties must be true and the seller is responsible for indemnifying the buyer (e.g., claims by the buyer must be made on or before that date). Escrow Purchase consideration consisting of money, securities, or other property or instruments withheld from the seller and deposited into an account at closing to provide protection to the buyer for the future payment of indemnification claims. Escrow Period The length of time (in months) after the closing date that the escrow is held before being released to the seller. 19Purchase Agreement Study 2011_R1_JCedit2.indd 21 10/21/11 10:14 AM
  22. 22. Investment Banking Services Corporate Finance Financial Restructuring Financial Advisory M ergers and A cquisitions n Chapter 11 Planning n Fairness Opinions n Sellside & Buyside Transactions n Restructuring Debt and Equity n Solvency Opinions n Leveraged Transactions n Debtor-in-Possession (“DIP”) Financing n Valuation Opinions n Minority Equity Transactions n Exchange Offers n Transaction Advisory Services n Plans of Reorganization n Tax & Financial Reporting Valuation C apital M arkets n Distressed Mergers and Acquisitions n Portfolio Valuation & Advisory Services n Private Debt and Equity Placements n Derivatives Valuation & Advisory Services n PIPEs and Registered Directs n Dispute Resolution & Financial Expert Opinions n Liability Management n Equity Capital Markets n High-Yield Capital Markets 2010 M&A Advisory Rankings 2010 Global Distressed Debt & M&A Fairness Advisory Rankings U.S. Transactions Under $1 Billion Bankruptcy Restructuring Rankings Announced or Completed Deals – 2001 to 2010 # of # of # of R ank A d viso r D e a ls R ank A d viso r D e a ls R ank A d viso r D e a ls 1 H o u lih a n L o k e y 117 1 H o u lih a n L o k e y 74 1 H o u lih a n L o k e y 642 2 Goldman Sachs & Co. 99 2 Lazard 58 2 JP Morgan 516 3 Lazard 82 3 Rothschild 50 3 Bank of America Merrill Lynch 368 4 Bank of America Merrill Lynch 77 4 Moelis & Co. 28 4 Morgan Stanley 323 5 JP Morgan 73 5 Blackstone Group LP 25 5 UBS 304 Source: Thomson Reuters. Source: Thomson Reuters, January 2011. Source: Thomson Reuters.Purchase Agreement Study 2011_R1_JCedit2.indd 22 10/21/11 10:14 AM
  23. 23. Houlihan Lokey is a trade name for Houlihan Lokey, Inc. and its subsidiaries and affiliates which include: Houlihan Lokey Financial Advisors, Inc., a California corporation, a registered investment advisor, which provides investment advisory, fairness opinion, solvency opinion, valuation opinion, restructuring advisory and portfolio management services; Houlihan Lokey Capital, Inc., a California corporation, a registered broker-dealer and SIPC member firm, which provides investment banking, private placement, merger, acquisition and divestiture services; and Houlihan Lokey (Europe) Limited, a company incorporated in England which is authorized and regulated by the U.K. Financial Services Authority and Houlihan Lokey (China) Limited, a company incorporated in Hong Kong SAR which is licensed in Hong Kong by the Securities and Futures Commission, which provide investment banking, restructuring advisory, merger, acquisition and divestiture services, valuation opinion and private placement services and which may direct this communication within the European Economic Area and Hong Kong, respectively, to intended recipients including professional investors, high-net-worth companies or other institutional investors. 0611Purchase Agreement Study 2011_R1_JCedit2.indd 24 HL.com CAPITAL MARKETS MERGERS & ACQUISITIONS FINANCIAL RESTRUCTURING FINANCIAL ADVISORY SERVICES Global 500 corporations. For more information, visit www.HL.com. $1 billion, according to Thomson Reuters. Houlihan Lokey has 14 offices and more than 800 employees in the United Houlihan Lokey is an international investment bank with expertise in mergers and acquisitions, capital markets, financial restructuring, and valuation. The firm is ranked globally as the No. 1 restructuring advisor, the No. 1 M&A fairness opinion advisor over the past 10 years, and the No. 1 M&A advisor for U.S. transactions under States, Europe and Asia. The firm serves more than 1,000 clients each year, ranging from closely held companies to10/21/11 10:14 AM

×