I just saw a wonderful presentation on trends in private equity deal terms, part of Emory's M&A Workshops sponsored by our Center for Transactional Law and Practice. Two M&A lawyers from Paul Hastings in Atlanta, Frank Layson and Erik Belenky, presented results of a study of 48 private equity acquisitions of public companies signed between January '06 and May '07. Deal trends for the period reflect a marked shift in bargaining power toward sellers and away from buyers. No surprise, given the easy financing and wealth of buyers in the market during the sample period. To the M&A lawyer, these trends may be old news, but we academics don't always get down to (or even near!) the front lines as much as we'd like. What was especially appealing about this talk was that instead of the standard offering of war stories and impressionistic assessments, they actually had data! Pie charts and everything!
Interesting trends include the following:
1. Reverse break-up fees:
74% of the deals contained reverse break-up fees, payable by the buyer for failing to close or failing to perform a material covenant or obligation. Fees ranged between 1% and 4% of the deal value, and often mirrored the amount of the seller's break-up fee.
An interesting legal question is the interplay between the reverse break-up fee and other affirmative buyer obligations (e.g., best efforts clauses). Is the fee the equivalent of an option for the seller to walk away from the deal? Or might there be additional liability for failing to exert best efforts? See the recent Delaware Chancery Court decision in United Rentals, Inc. v. RAM Acquisition Corp. (Cerberus).
2. No financing contingencies:
98% of the deals contained no financing contingency.
3. Financing commitment letters delivered at signing:
96% of the deals required delivery of commitment letters, with sellers often enjoying either third-party beneficiary status to sue the lender or a provision requiring the buyer-sponsor to take enforcement action against a breaching financer.
4. Sponsor guarantees of obligations and covenants of the acquisition vehicle (66% of deals).
5. Go-shop provisions:
66% of deals contained a go-shop clause, which allows the seller to solicit competing bids for some period post-signing.
Our next M&A workshop is on February 22. Emory's own Bill Carney will be debating Chancellor William Chandler on the continuing value of Delaware corporate law. Also don't forget our Center's conference next May on Teaching Drafting and Transactional Skills: The Basics and Beyond. For information on our events and activities, please contact Tina Stark, who directs the Center.
UPDATE: Steven Davidoff, the newly minted NYT Deal Professor, has a post today on M&A deal points as well. He looks at 4 recent private equity deals (announced since December, as compared to the not-so-recent deals covered in the study I describe above), and it appears that the credit crunch has not affected deal terms too much.
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1. Posted by Kate Litvak on January 25, 2008 @ 9:51 | Permalink
Deal trends for the period reflect a marked shift in bargaining power toward sellers and away from buyers. [Followed by the discussion of deal terms advantageous to sellers]
Practitioners love to make these statements, but they never made sense to me. If sellers now have more "bargaining power," why is this "bargaining power" not entirely reflected in deal price, instead of being shuffled into "deal terms"? If deal terms are priced, they should not depend on parties' bargaining power because it's the total package of in-kind and in-cash transfers that depends on bargaining power. If deal terms are not priced, they should not depend on bargaining power either -- because parties can presumably just toss them randomly! Not to mention the usual question: whatever happened to M&M?
Sounds like the usual practitioner gibberish -- though I would love to see their deal documents, sans "analysis".