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CMS European M&A Study 2019: Sellers set the agenda, despite market uncertainty

27/03/2019

The "seller-friendly" dynamic in European M&A transactions strengthened during 2018, notwithstanding a drop-off in volumes towards the end of the year. This comes in marked contrast to the United States market, where risk allocation continues to favour the buyer.

These conclusions were published by CMS today in the 11th edition of its annual European M&A Study, a multi-year analysis of the key legal provisions within M&A agreements. The study is the most comprehensive of its kind and is based on a proprietary database comprising more than 4,000 deals over a 12-year period.

Stefan Brunnschweiler, Head of the CMS Corporate/M&A Group, said: “Brexit and wider geopolitical challenges are weighing on European M&A. Yet while volumes have tailed off, we’re still seeing a sellers’ market when it comes to the terms of completed deals. In our view, this won’t change. Buyers remain hungry for growth and when they see opportunities, they want to capitalise on them.”

Roman Tarlavski, partner Corporate/M&A at CMS in Amsterdam, adds: 

Acquisitions will stay an attractive option to generate returns as long as funds are readily available and the interest rate stays low.
Roman Tarlavski

Key findings of the report include:

  • Decreased use of purchase price adjustments (PPA)
    Around 44% of deals included a PPA compared with 48% in 2017. This represents a notable movement against the overall trend in recent years.

  • Significant increase in the application of locked box structures
    Of the deals that did not involve a PPA, 59% used a locked box in 2018 which represents a significant increase over the 49% in 2017.

  • Earn-outs continue to grow in popularity
    There was a two-percentage point year on year increase in the use of earn-outs in 2018. A quarter of small and mid-cap deals now involve earn-outs.

  • A record year for Warranty & Indemnity (W&I) insurance
    Sellers are increasingly offloading their warranty exposure by pre-packaging a buyer’s W&I policy. Nearly a third (30%) of deals valued over 100 million euros now involve this form of insurance. “This product has undergone a considerable development over the last few years and its user-friendliness has increased substantially”, according to Tarlavski.

Regional differences
France has the lowest use of seller liability caps and applies de minimis and basket provisions on fewer transactions proportionately than the rest of Europe. However, the use of these provision has increased dramatically in the United Kingdom.

The concept of data room disclosure has not become widely adopted in Southern Europe. Only 7% of transactions in the region reflect such a provision compared with 74% for the Benelux and 61% for the United Kingdom.

CEE leads in the use of MAC clauses (an increase this year) and continues to apply more arbitration than other European jurisdictions. Once again, the German-speaking countries reflect their geographic setting and sit in the middle on most risk allocation issues.

In contrast to Europe, the United States is a buyer’s market. This is reflected in a much more frequent application of purchase price adjustments and MAC clauses.

About the study
The CMS European M&A Study 2019 provides insight into the legal provisions of merger & acquisition agreements, makes comparisons across Europe and with the United States, and identifies market trends. CMS analysed private M&A agreements relating to both non-listed public and private companies in Europe for the twelve-year period 2007-2018. Of the 4,109 CMS transactions we analysed, 458 relate to 2018 and 3,651 relate to the period 2010-2017.

Download the CMS European M&A Study

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Roman Tarlavski
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