This year’s Study covers almost 500 share and asset deals on which CMS European offices advised in 2021. This is a record number of deals for one year and reflects the M&A boom in 2021. We observed that normal deal metrics applied in most of those transactions: a retreat from the particularly 'buyer-friendly' approach we found in 2020, and a return to more standard seller and buyer provisions.
Although it seems that 'normal service' resumed in 2021, and our findings suggest that there is good reason to be optimistic about future deal activity in Europe, we are cautious about the impact of the recent unlawful invasion of Ukraine.
The increase in the use of locked boxes and the reduction of liability caps in 2021 might appear to indicate a more 'seller-friendly' environment, but this was counterbalanced by continued 'buyer-friendly' provisions still trending in certain areas, suggesting a return to the position prior to the pandemic. There was a sharp increase in the use of earn-outs, with those determined by reference to profits over a two-year period becoming more common, and W&I insurance continued its inexorable rise, particularly in the UK and Germany.
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 to 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).
- 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).
In analysing the 2021 M&A market in Europe, we report on current market standards on risk allocation in M&A deals, comparing 2021 against 2020 and the previous 11-year average for 2010 – 2021.
The special features of this Study are as follows:
- CMS European / US risk allocation comparison – we provide a headline analysis of the differing risk allocation on standard issues in European and US M&A.
- CMS European regional differences – we highlight certain issues peculiar to one or more of the six European regions covered.
- CMS deal size analysis – we analysed our data against three different deal values: firstly, deals up to EUR 25m; secondly, deals in a value range of EUR 25m to EUR 100m; and thirdly, deals exceeding EUR 100m.
- Special Commentary from CMS offices in LATAM, Asia Pacific and Middle East.
We hope the CMS European M&A Study 2022 will again be a useful guide for you in a more and more challenging investment climate.
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