Sixth edition of CMS M&A Study: More fixed-price deals in European M&A

Frankfurt/Main – Fixed purchase prices are being agreed in an increasing number of corporate transactions in Europe. The sixth CMS European M&A Study reveals that last year the parties agreed a fixed purchase price without scope for adjustment in more than half of all deals. In the US, however, there was a trend in the opposite direction, with over 85% of transactions containing a variable purchase price. This variation of approach highlights just one of the many differences between European and US market practice.

In its study, CMS reviewed over 2,000 non-listed public and private company deals it completed in Europe between 2007 and 2013. Of this total, 344 deals were conducted in 2013.

In 30% of European deals with clauses stipulating that part of the purchase price should depend on the future performance of the target business (earn-out), a period of three or more years was agreed. This represents an increase of almost 58% compared with 2012, suggesting that sellers are becoming more confident with regard to the medium to long-term prospects. This applies to the German-speaking countries in particular, with a quarter of transactions in Germany, Austria and Switzerland containing an earn-out clause in 2013.

The CMS Study also shows that buyers required less deal security (escrow account, purchase price retention or bank guarantee) for warranty claims than they did in 2012. The number of buyers taking security on warranty claims for deals fell by 7% to 35%. Escrow accounts were particularly popular in German-speaking countries, being used in 18% of deals.

"Our analysis shows that deal points are becoming more consistent and much less likely to strongly favour either the seller or the buyer. The distribution of risk between buyers and sellers has stabilised in the past three years. This makes risk allocation in transactions much more predictable than three years ago," said Dr Thomas Meyding, Head of the CMS Corporate Group.

Nonetheless, regional differences in transaction structures remain across Europe. Sellers in Southern Europe accepted liability caps exceeding 50% of the purchase price far more often (in almost 70% of cases) than sellers in Germany and the UK (around 50% of all sellers) and especially than sellers in France (only 13%). On the other hand, limitation periods for warranty claims are considerably longer in France. De minimis and basket provisions are standard in the UK. Central and Eastern Europe (CEE) sees the most MAC (material adverse change) clauses and arbitration is the most likely dispute resolution mechanism in this region.

Other key conclusions of the CMS European M&A Study 2014 are as follows

• Baskets – the upward trend in the use of baskets (i.e. an aggregate financial threshold below which a buyer cannot make a claim) was maintained in 2013 and recovery on a “first dollar” basis continued to be standard in Europe in contrast to the US, where once again in the majority of transactions recovery was on an “excess only” basis.
• Warranty & Indemnity insurance – W&I insurance remains an important option for solving the warranty gap when sellers (e.g. financial sellers) refuse or cannot give warranties. W&I insurance was used in 9% of deals in 2013, representing only a slight rise over 2011/2012 (8%).
• Limitation periods – in contrast to 2012, a limitation period of 12–18 months was the most common choice in 2013, with notable increases in the use of this particular limitation period in the UK, France and in Central and Eastern Europe.
• Security for warranty claims – the number of buyers looking to obtain some form of security (whether use of an escrow account, purchase price retention or bank guarantee) decreased in 2013 but in the applicable transactions the parties most often agreed on retention of part of the purchase price.
• MAC clauses – the proportion of deals with a MAC clause remained unchanged at 14% in 2013 and use of such clauses is still rare in Europe compared with the USA, where most (94%) deals have MAC clauses.
• Non-compete covenants – 49% of transactions had non-compete clauses, up from 46% in 2012.
• Arbitration – the number of deals with an arbitration clause increased from 33% in 2012 to 37% in 2013.

CMS European M&A Study 2014 >>

The full study including further country-specific results is available to journalists on request.

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