ACG European Capital Tour - Paris.
Spotlight on risk protection trends in private M&A.
Heloise Husson, Unit Leader M&A, Chartis
Jay Rittberg, VP M&A, Chartis
Jean-Patrice Labautiere, Partner, Allen & Overy
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ACG European Capital Tour: Spotlight on risk protection trends in private M&A
1. Spotlight on risk protection trends in
private M&A
Héloise Husson, Unit leader M&A, Chartis
Jay Rittberg, Vice president M&A, Chartis
Jean-Patrice Labautière, Partner, Allen&Overy
2.
3. Market overview
– Analysis of the terms of recent private M&A deals on which we advised in 2011-2012
– Not legal advice !
Increased buyer protection Cash at completion remains king
– Extremely seller-friendly private M&A market before the credit
crunch
– Incremental movement in 2009 and 2010 – Certain funds financing remains the norm
– More meaningful shift in 2011-2012 to a buyer-friendly – Payment in full at completion is also the norm
environment
– Instances of earn-outs borne out in a few deals
– Examples of the buyer-friendly features seen in 2011 and
2012
4. Completion accounts making a comeback in corporate sales (1)
Corporate and other non-private equity sellers
100%
– Private equity sellers sell on
90% Price Adjustment 68%
a locked box basis 80%
– Price adjustments in private equity 70%
sales agreed for a specific reason 60%
– Position in relation to corporate and 50%
2009
2008
other non-private equity sellers is
40%
more revealing 2010
30%
– Completion accounts are now 2011
much more common 20%
10%
0%
Locked Box 32%
5. Completion accounts making a comeback in corporate sales (2)
Corporate and other non-private equity sellers
100%
Net tangible
– Net debt and working capital 90% Price Adjustment assets
Working capital
adjustments are frequently used 80%
– Box usually locked on the basis of 70% Net debt and
audited accounts working capital
60%
– Most common limitation period for 50%
2009
2008 Net assets
claiming under a locked box
2011
provision was six months from 40%
2010
completion 30% Management
accounts
– None of the locked box provisions 20%
included any form of financial limit 3
Audited
accounts
10%
0%
Locked Box Longer months
Claims
7-12 Period
months
6 months
6. Buyers insisting on "worst case scenario" MAC and termination rights
• Rarely seen during "pre-credit crunch" years
• This altered in 2010
• “Business MAC”
• “Market MAC” are generally carved out
• “Worst case scenario MAC“
No termination rights Limited Termination MAC based on MAC - Generic
for material Carve-out for changes
2011
termination rights specific events financial MAC
breach of in economic
warranty effect
defined conditions
20% 16% 8% 20% 24% 78% 12%
2010
28% 16% 4% 16% 24% 12%
7. Buyers insisting on "worst case scenario" MAC and termination rights (2)
– Material breach – Loss of two out of top – 25% diminution in value of
of title warranty five customers shares or assets of target
– Material breach – Revocation of material – Reduction in
of pre-completion licences revenues/assets or increase
covenants – Criminal proceedings in costs/liabilities of Xm in
or material litigation next 12 months
– Cessation of – Change likely to reduce
operations in more current year profits by Xm
than one location
EXAMPLES EXAMPLES EXAMPLES
No termination rights Limited Termination MAC based on MAC - Generic
for material
2011
termination rights specific events financial MAC
breach of
warranty effect
defined
20% 16% 8% 20% 24% 12%
8. Corporate sellers offering full warranty coverage
6% No repetition
• Private equity sellers will generally only
give title and capacity warranties and a no
leakage covenant
Title, capacity and
• Management will generally give full 50%
solvency warranties
repeated
warranties but with limited recourse
• Corporate and other sellers give at least Limited
22%
"reasonable but limited" coverage repetition
• Repetition of representations and Full
26% 22% repetition
warranties at closing is the norm
2010 2011
9. Carve-outs to data room disclosure more common
• In previous years, extremely common for the entire
data room to be disclosed against the warranties
• Specific disclosures not uncommon
• Fair disclosure is the norm
• Carve outs to data room disclosure more common
Disclosure
Data room disclosed - no or specific disclosures against
title, capacity and solvency warranties
Data room disclosed - Data room disclosed – where
excluding documents…. warranties ringfenced specific
disclosed after data….. room 26% disclosures also ringfenced
7%
closed….…
General
disclosure bundle
4%
disclosed 15%
34% 7% Data room disclosed – specific
Data room 7% disclosures against identified
warranties
disclosed
Specific
disclosures only
10. Thresholds for warranty claims lower
1,000+
800
– Difficult to determine a market practice
for de minimis levels 600
Deal size
– In 2010, thresholds in the 1.5% to 3%
range were most common
400
– Levels fell in 2011-2012
– Thresholds rather than deductibles
200
0
Threshold
0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%
(% deal value)
De minimis
0 120 240 360 480 600 720+
(’000)
11. Caps variable and time limits unchanged
– Caps for warranty claims variable but average is 25-35%
– 100% cap for the title and capacity warranties
– Time limits for claims largely unchanged (18 months)
– Time limits for claims under the tax warranties are generally applicable statutes of limitation
Cap Time limit (for non-tax warranties)
2 years
15% 15% 15% 1 year
15% 24%
10% 10% 10% 20 months
9%
5% 5% 5% 5% 5%
0-9% 11-19% 20% 21-29% 30% 31-39% 40% 50% 61-69% 71-79% 100%
52%
(% of deal value) 18 months
12. Increasing use of escrow accounts and W&I insurance
• Escrow accounts securing warranty claims
• Escrow arrangements for other purposes
• Set off mechanisms if deferred consideration or loan notes
• Rep and warranty insurance more widespread
Escrow amount (% of deal value) Escrow period (months)
6
20% 12
12
14% 18
10% 20
9% 30
5% 5% 36
3% 2% 48
13.
14.
15. Trends in US M&A and Role of Insurance
• Highly competitive auctions for quality businesses
• Many buyers are more risk averse after 2008 credit crisis
• Buyers that allow sellers to exit an investment with all or substantially all of
their consideration at closing may have an advantage over other bidders
• Transactional Insurance allows buyers and sellers to shift deal risks to the
insurance markets.
16. Trends in US Transactional Risk Management
• More requests for insurance and bound policies in 2012 than any year on record
• As market has matured over 15 years, more entrants have joined.
• Increased capacity allows for towers of up to $300 - $400 million
• Increased competition and increased demand has caused stabilization of rates and terms.
• Rates on line of 2-3.5% of limit.
• Retentions in range of 1-3% of deal value.
• Just 6 years ago, rates and retentions were as much as double current market levels.
17. Trends in US Representations and Warranties Purchasing
• Repeat Buyers Represent Greater Percentage of Deals
• Private Equity Continues to Drive M&A Insurance Market
• Other Large Scale Buyers Include:
• Individuals and VC funds selling to large corporations
• Strategic acquirers competing with private equity firms in auctions.
• Cross-border transactions
18. Trends in US Representations and Warranties Insurance Claims
• Some markets see claims on almost 1:4 deals.
• Millions of dollars in claims paid.
• Representations most frequently claimed against:
• No undisclosed liabilities
• Compliance with laws
• Financial statements
• Positive claims experience has allowed markets to be more competitive on certain terms
and to streamline underwriting process.
19. Traditional solutions in French transactions
• Additional Representations and warranties/sweeper
• Broader/larger indemnities
• Purchase Price adjustments, earn-out , reduction of purchase price
• Bank guarantee (including first demand)
• Escrow arrangement
• W&I Insurance remains an « out of the box »solution
20. Examples of strategical uses in France 1/3
• Auction bid : European Target (French parent)
• US corporate Bidder
• Extensive US type reps and warranties catalogue
• Italian Seller with limited credit
• Low warranty cap (1% of the VT)
Excess insurance bridged the gap to win the deal
21. No Insurance Insurance
Transaction Value Transaction Value
Can be
reduced to
zero
SPA CAP Escrow Insurance limit
Seller’s exposure
SPA threshold SPA Threshold
22. Examples of strategical uses in France 2/3
• Exit of French FCPs from a US Target
• Substancial transaction value
• High cap and extensive catalogue reps on business
• French FCPs, minority shareholders
• Reps exposure limited to title and maximizing return on
investment
Insurance on title warranties provided clean exit to FCPs
23. Examples of strategical uses in France 3/3
• US PE fund sale before liquidation
• Target includes a French subs. closing a site
• Ongoing social litigation blocking the sale
• Foreign investor refuses to bear the risk
• Specific indemnity tailored for this risk
Insurance on specific indemnity provided certainty