Spotlight on risk protection trends inprivate M&AHéloise Husson, Unit leader M&A, ChartisJay Rittberg, Vice president M&A,...
Market overview– Analysis of the terms of recent private M&A deals on which we advised in 2011-2012– Not legal advice !  I...
Completion accounts making a comeback in corporate sales (1)                                          Corporate and other ...
Completion accounts making a comeback in corporate sales (2)                                         Corporate and other n...
Buyers insisting on "worst case scenario" MAC and termination rights       • Rarely seen during "pre-credit crunch" years ...
Buyers insisting on "worst case scenario" MAC and termination rights (2)                               – Material breach  ...
Corporate sellers offering full warranty coverage                                                       6%     No repetiti...
Carve-outs to data room disclosure more common• In previous years, extremely common for the entire  data room to be disclo...
Thresholds for warranty claims lower                                                            1,000+                    ...
Caps variable and time limits unchanged– Caps for warranty claims variable but average is 25-35%– 100% cap for the title a...
Increasing use of escrow accounts and W&I insurance• Escrow accounts securing warranty claims• Escrow arrangements for oth...
Trends in US M&A and Role of Insurance•   Highly competitive auctions for quality businesses•   Many buyers are more risk ...
Trends in US Transactional Risk Management•   More requests for insurance and bound policies in 2012 than any year on reco...
Trends in US Representations and Warranties Purchasing•   Repeat Buyers Represent Greater Percentage of Deals•   Private E...
Trends in US Representations and Warranties Insurance Claims•     Some markets see claims on almost 1:4 deals.•     Millio...
Traditional solutions in French transactions•   Additional Representations and warranties/sweeper•   Broader/larger indemn...
Examples of strategical uses in France 1/3•   Auction bid : European Target (French parent)•   US corporate Bidder        ...
No Insurance                  InsuranceTransaction Value            Transaction Value                                     ...
Examples of strategical uses in France 2/3•    Exit of French FCPs from a US Target•    Substancial transaction value     ...
Examples of strategical uses in France 3/3•   US PE fund sale before liquidation•   Target includes a French subs. closing...
ACG European Capital Tour: Spotlight on risk protection trends in private M&A
ACG European Capital Tour: Spotlight on risk protection trends in private M&A
ACG European Capital Tour: Spotlight on risk protection trends in private M&A
ACG European Capital Tour: Spotlight on risk protection trends in private M&A
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ACG European Capital Tour: Spotlight on risk protection trends in private M&A

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ACG European Capital Tour - Paris.
Spotlight on risk protection trends in private M&A.
Heloise Husson, Unit Leader M&A, Chartis
Jay Rittberg, VP M&A, Chartis
Jean-Patrice Labautiere, Partner, Allen & Overy

Published in: Economy & Finance
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ACG European Capital Tour: Spotlight on risk protection trends in private M&A

  1. 1. Spotlight on risk protection trends inprivate M&AHéloise Husson, Unit leader M&A, ChartisJay Rittberg, Vice president M&A, ChartisJean-Patrice Labautière, Partner, Allen&Overy
  2. 2. Market overview– Analysis of the terms of recent private M&A deals on which we advised in 2011-2012– Not legal advice ! Increased buyer protection Cash at completion remains king – Extremely seller-friendly private M&A market before the credit crunch – Incremental movement in 2009 and 2010 – Certain funds financing remains the norm – More meaningful shift in 2011-2012 to a buyer-friendly – Payment in full at completion is also the norm environment – Instances of earn-outs borne out in a few deals – Examples of the buyer-friendly features seen in 2011 and 2012
  3. 3. Completion accounts making a comeback in corporate sales (1) Corporate and other non-private equity sellers 100%– Private equity sellers sell on 90% Price Adjustment 68% a locked box basis 80%– Price adjustments in private equity 70% sales agreed for a specific reason 60%– Position in relation to corporate and 50% 2009 2008 other non-private equity sellers is 40% more revealing 2010 30%– Completion accounts are now 2011 much more common 20% 10% 0% Locked Box 32%
  4. 4. Completion accounts making a comeback in corporate sales (2) Corporate and other non-private equity sellers 100% Net tangible– Net debt and working capital 90% Price Adjustment assets Working capital adjustments are frequently used 80%– Box usually locked on the basis of 70% Net debt and audited accounts working capital 60%– Most common limitation period for 50% 2009 2008 Net assets claiming under a locked box 2011 provision was six months from 40% 2010 completion 30% Management accounts– None of the locked box provisions 20% included any form of financial limit 3 Audited accounts 10% 0% Locked Box Longer months Claims 7-12 Period months 6 months
  5. 5. Buyers insisting on "worst case scenario" MAC and termination rights • Rarely seen during "pre-credit crunch" years • This altered in 2010 • “Business MAC” • “Market MAC” are generally carved out • “Worst case scenario MAC“ No termination rights Limited Termination MAC based on MAC - Generic for material Carve-out for changes2011 termination rights specific events financial MAC breach of in economic warranty effect defined conditions 20% 16% 8% 20% 24% 78% 12%2010 28% 16% 4% 16% 24% 12%
  6. 6. Buyers insisting on "worst case scenario" MAC and termination rights (2) – Material breach – Loss of two out of top – 25% diminution in value of of title warranty five customers shares or assets of target – Material breach – Revocation of material – Reduction in of pre-completion licences revenues/assets or increase covenants – Criminal proceedings in costs/liabilities of Xm in or material litigation next 12 months – Cessation of – Change likely to reduce operations in more current year profits by Xm than one location EXAMPLES EXAMPLES EXAMPLES No termination rights Limited Termination MAC based on MAC - Generic for material2011 termination rights specific events financial MAC breach of warranty effect defined 20% 16% 8% 20% 24% 12%
  7. 7. Corporate sellers offering full warranty coverage 6% No repetition• Private equity sellers will generally only give title and capacity warranties and a no leakage covenant Title, capacity and• Management will generally give full 50% solvency warranties repeated warranties but with limited recourse• Corporate and other sellers give at least Limited 22% "reasonable but limited" coverage repetition• Repetition of representations and Full 26% 22% repetition warranties at closing is the norm 2010 2011
  8. 8. Carve-outs to data room disclosure more common• In previous years, extremely common for the entire data room to be disclosed against the warranties• Specific disclosures not uncommon• Fair disclosure is the norm• Carve outs to data room disclosure more common Disclosure Data room disclosed - no or specific disclosures against title, capacity and solvency warranties Data room disclosed - Data room disclosed – where excluding documents…. warranties ringfenced specific disclosed after data….. room 26% disclosures also ringfenced 7% closed….… General disclosure bundle 4% disclosed 15% 34% 7% Data room disclosed – specific Data room 7% disclosures against identified warranties disclosed Specific disclosures only
  9. 9. Thresholds for warranty claims lower 1,000+ 800– Difficult to determine a market practice for de minimis levels 600 Deal size– In 2010, thresholds in the 1.5% to 3% range were most common 400– Levels fell in 2011-2012– Thresholds rather than deductibles 200 0 Threshold 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% (% deal value) De minimis 0 120 240 360 480 600 720+ (’000)
  10. 10. Caps variable and time limits unchanged– Caps for warranty claims variable but average is 25-35%– 100% cap for the title and capacity warranties– Time limits for claims largely unchanged (18 months)– Time limits for claims under the tax warranties are generally applicable statutes of limitation Cap Time limit (for non-tax warranties) 2 years 15% 15% 15% 1 year 15% 24% 10% 10% 10% 20 months 9% 5% 5% 5% 5% 5% 0-9% 11-19% 20% 21-29% 30% 31-39% 40% 50% 61-69% 71-79% 100% 52% (% of deal value) 18 months
  11. 11. Increasing use of escrow accounts and W&I insurance• Escrow accounts securing warranty claims• Escrow arrangements for other purposes• Set off mechanisms if deferred consideration or loan notes• Rep and warranty insurance more widespread Escrow amount (% of deal value) Escrow period (months) 6 20% 12 12 14% 18 10% 20 9% 30 5% 5% 36 3% 2% 48
  12. 12. Trends in US M&A and Role of Insurance• Highly competitive auctions for quality businesses• Many buyers are more risk averse after 2008 credit crisis• Buyers that allow sellers to exit an investment with all or substantially all of their consideration at closing may have an advantage over other bidders• Transactional Insurance allows buyers and sellers to shift deal risks to the insurance markets.
  13. 13. Trends in US Transactional Risk Management• More requests for insurance and bound policies in 2012 than any year on record• As market has matured over 15 years, more entrants have joined. • Increased capacity allows for towers of up to $300 - $400 million• Increased competition and increased demand has caused stabilization of rates and terms. • Rates on line of 2-3.5% of limit. • Retentions in range of 1-3% of deal value. • Just 6 years ago, rates and retentions were as much as double current market levels.
  14. 14. Trends in US Representations and Warranties Purchasing• Repeat Buyers Represent Greater Percentage of Deals• Private Equity Continues to Drive M&A Insurance Market• Other Large Scale Buyers Include: • Individuals and VC funds selling to large corporations • Strategic acquirers competing with private equity firms in auctions. • Cross-border transactions
  15. 15. Trends in US Representations and Warranties Insurance Claims• Some markets see claims on almost 1:4 deals.• Millions of dollars in claims paid.• Representations most frequently claimed against: • No undisclosed liabilities • Compliance with laws • Financial statements• Positive claims experience has allowed markets to be more competitive on certain terms and to streamline underwriting process.
  16. 16. Traditional solutions in French transactions• Additional Representations and warranties/sweeper• Broader/larger indemnities• Purchase Price adjustments, earn-out , reduction of purchase price• Bank guarantee (including first demand)• Escrow arrangement• W&I Insurance remains an « out of the box »solution
  17. 17. Examples of strategical uses in France 1/3• Auction bid : European Target (French parent)• US corporate Bidder • Extensive US type reps and warranties catalogue• Italian Seller with limited credit • Low warranty cap (1% of the VT) Excess insurance bridged the gap to win the deal
  18. 18. No Insurance InsuranceTransaction Value Transaction Value Can be reduced to zero SPA CAP Escrow Insurance limit Seller’s exposure SPA threshold SPA Threshold
  19. 19. Examples of strategical uses in France 2/3• Exit of French FCPs from a US Target• Substancial transaction value • High cap and extensive catalogue reps on business• French FCPs, minority shareholders • Reps exposure limited to title and maximizing return on investment Insurance on title warranties provided clean exit to FCPs
  20. 20. Examples of strategical uses in France 3/3• US PE fund sale before liquidation• Target includes a French subs. closing a site • Ongoing social litigation blocking the sale• Foreign investor refuses to bear the risk • Specific indemnity tailored for this risk Insurance on specific indemnity provided certainty

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