Country differences remain in deal terms

Regional differences in deal structures remain across Europe, according to a European M&A study by law firm CMS. However, there are signs that there is general convergence on risk allocation in M&A agreements.

CMS reviewed over 2,000 non-listed public and private company deals it completed in Europe between 2007 and 2013, including 344 European deals in 2013 alone.

Its results show that 30 percent of the 2013 European deals with earn-outs – a period when a proportion of the purchase price is dependent on the future performance of the target business – had an earn-out clause of three years or longer, up from 19 percent in 2012. This suggests sellers are becoming more confident in the security of medium to long-term returns from deals, the study said.

The deal analysis also shows that buyers require less deal security – whether through escrow accounts, purchase price agreements or bank guarantees – for warranty claims than they did in 2012. The number of buyers taking security on warranty claims for deals fell by 7 percent to 35 percent of buyers in 2013.

“Our analysis of risk allocation between buyer and seller on deal points in M&A transactions in the last year shows greater consistency. This makes the European M&A landscape much more predictable than three years ago,” said Thomas Meyding, head of the CMS Corporate Group.

But, the study said country and regional-specific differences in many deal terms remain throughout Europe. For instance, deals in Central and Eastern Europe were the most likely in Europe to have a material adverse change (MAC) clause (28 percent), whereas the European average was 14 percent. The clause allows the buyer to walk away from a bid if a significant event negatively impacts a target company before deal completion.

And local knowledge is an important thing to have, say legal sources, as GPs don’t want to find themselves negotiating the terms they always do when you could be asking for more.

The differences between deal terms in Europe and the US also continued to differ in 2013. More than half of all European deals had a fixed purchase price without scope for adjustment. In the US, however, there was a growing trend in the opposite direction, with more than 85 percent of deals containing purchase price adjustment clauses.

“It’s remarkable that the gulf between Europe and US seems to be getting wider rather than narrower in relation to some standard deal points,” said Martin Mendelssohn, CMS corporate partner.