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Private Equity Strategies

Tools of the Trade: Two-Thirds of Deals Have Material Closing Issues

Monday, May 20, 2013

By: Bailey McCann, Private Equity Strategies:

While indemnification claims, purchase price adjustments, earn-out achievement disputes, and other post-closing issues in private-target M&A transactions remain common, data from a new survey shows that claim resolution is becoming more efficient. According to the latest “M&A Post-Closing Claims Study,” from SRS | Shareholder Representative Services, two thirds of all deals had issues arise after closing, and one in five deals with claims had exposure exceeding half of the escrow.

The study analyzes post-closing issues and payouts across 420 private-target acquisitions, comprising $66.7bn in stated deal value with $6.7bn held in escrow and $9bn in potential earn-out consideration.

The study shows that earn-out milestones for technology and other deals outside of the life sciences sector were achieved 50% of the time, an improvement over previous years. However, claim activity across all types of deals is still frequent. Nearly 20% of expired-escrow deals saw a claim come in the last week of escrow. These claims are having a big impact, final escrow releases in nearly a third of expired-escrow deals get delayed due to outstanding claims, and the average time of those delays is 7 months.

Claims over breaches of representations and warranties are by far the most common, accounting for 57% of claims. Purchase price adjustment claims pursuant to a post-closing purchase price adjustment mechanism (e.g. working capital) were second with 27%. Tax claims became more frequent (26%) due to the average target being a more mature taxpayer. In addition, state and local governments have become more aggressive about revenue collection, especially for sales and use taxes.

Claims are also coming in multiples. Expired-escrow deals saw on average 3.6 claims, and those claims call for as much as 30% of escrow dollars. 20% of those claims ask for half or more of the escrow dollars.

Price adjustments are happening two thirds of the time. 72% of deals with a PPA mechanism had a post-closing purchase price adjustment.

This article was published in Opalesque's Private Equity Strategies our monthly research update on the global private equity landscape including all sectors and market caps.
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