The European M&A market has returned to pre-covid pandemic levels, according to the annual European M&A Study by international law firm CMS. Last year saw an unprecedented 22% increase in mergers and acquisitions in Europe. However, risks and uncertainties still exist in the current political climate.
Record number of deals
The CMS European M&A Study contains a multi-year analysis of key legal provisions within M&A agreements. It is the most comprehensive of its kind and is based on a proprietary database comprising more than 5.000 deals. This 14th edition adds nearly 500 deals that CMS advised on in Europe in 2021 – a record number of deals for one year and reflective of the current M&A boom.
Notable increases
CMS observed that 'normal' deal metrics were applied in most transactions, with increased earn-outs, a retreat from the “buyer friendly approach” observed in 2020, and a return to the more standard approach to risk sharing that was observed before the pandemic. CMS has advised on significantly more deals in 2021 compared to 2020 (+22%).
The primary deal driver for transactions continues to be buyers entering a new market (43%). Over a third (36%) of deals were the acquisition of know-how or acqui-hire acquisitions. There was also a notable increase in deals involving the acquisition of a competitor (32%), up 10% on 2020 (22%).
Louise Wallace, Head of the CMS Corporate/M&A Group, said:
“Our findings suggest that there is good reason to be optimistic about future deal activity in Europe. In many ways, ‘normal' service resumed in 2021, with more familiar patterns in deal metrics and growing business and investor confidence, but we wait to see how robustly M&A activity will continue in 2022 in the light of the invasion of Ukraine.”
Louise Wallace
Roman Tarlavski, Partner Corporate/M&A at CMS in Amsterdam, added:
"The market was booming in 2021 and the first weeks of 2022, having bounced back from a short-lived dip in activity caused by the pandemic. This boom manifested itself in all sectors, with notably high valuations fueled by the low cost of available finance and the sheer volume of cash looking for a home. These circumstances have not changed and should be able to deliver similar results for the remainder of this year, provided that the war in Ukraine is terminated quickly."
Roman Tarlavski
Signs of a return to the pre-pandemic status quo include:
- Significant increase in earn-out structures
The use of these structures jumped from 21% in 2020 to 26% in 2021, indicating a general move to ensure that the price paid for a business is measured over a longer period than purely by reference of the financial years dominated by the pandemic.
- PPA provisions return to pre-pandemic levels
The number of transactions featuring purchase price adjustment provisions returned to 47%, just above the 2010-2020 average of 45%, suggesting that a greater proportion of buyers are able to insist on PPA provisions.
- Shorter limitation periods
Two-thirds of transactions now have a limitation period of 12-24 months, marking a change from 2021’s findings that limitation periods had increased.
- De minimis and basket sizes return to market norm
Applying in the majority of transactions (74% and 67% respectively).
- Increase in liability caps
The level of liability caps at less than 50% of the purchase price increased significantly in 2021. Deals where the cap was equal to the purchase price remained constant at 30%, but those with a cap of less than 10% increased significantly to 22%, from 16% in 2020.
- Use of locked box transactions
A large increase in non-PPA deals (59% in 2021 vs 51% in 2020).
- Steady use of Warranty & Indemnity (W&I) insurance
The popularity of W&I insurance saw a marginal increase, from 17% in 2020 to 19% in 2021.
- Arbitration as a dispute resolution mechanism
The continued use of arbitration, seen in 33% of deals, up from 32% in 2020.
