Hirschler Mergers & Acquisitions Team Provides Preview of 2019 ABA Private Target Deal Points Study

12.09.2019

Hirschler is pleased to provide highlights from the 2019 American Bar Association Private Target Deal Points Study. Released exclusively to the members of the ABA M&A Committee on December 2, the latest study sheds new light on the impact representations and warranties (R&W) insurance is having on deal points in M&A transactions involving privately-held targets.

The latest biannual Deal Points Study offers a robust, 15-month analysis of acquisitions of privately-held targets by publicly-held buyers. The study draws data from 151 middle market transactions executed or closed in 2018 or the first quarter of 2019. Transactions included in the study ranged from $17 million to $500 million and the average transaction value was $207.8 million.

Notable Highlights

• More deals are using R&W insurance: 52% of deals in the 2019 study as compared to 29% in the 2017 study.
• 95% of all deals contained a post-closing adjustment, which is up from 86% of deals under the 2017 study.  87% (up from 73% in 2017) of these adjustments were based on more than one metric.
• The most common survival periods for non-fundamental representations and warranties remained 18 months (38%) or 12 months (35%).  However, there was a meaningful jump in the number of deals with no survival (14%, up from 7% in the 2017 study).
• 63% of deals contained an indemnification basket of 0.5% or less – just over half of those baskets were included in deals with R&W insurance.  In the 2017 study only 45% of deals contained a basket of 0.5% or less and just over 1/3 of those deals included R&W insurance.
• Caps on a seller’s indemnification obligations continue to fall – the average across all deals is 8.99% of total transaction value – 12% for deals without R&W insurance and 5.82% for deals with R&W insurance. There was a significant increase in the number of deals with a 1% or less cap, which is directly tied to R&W insurance – 30% of all deals had a 1% or less cap, almost all of which were deals with R&W insurance.
• Average indemnification escrows and holdbacks continued to fall (now at 5.57% of total transaction value down from 6.66% in the 2017 study), but this is attributable to R&W insurance.  For deals without R&W insurance, escrows and holdbacks rose from 8.6% to 9.4% of transaction value as compared to the 2017 study.
• In fewer deals, the escrow and R&W insurance are the sole sources of recovery for fundamental reps (14% of deals, down from 23% in the 2017 study).

New Deal Terms

• Despite court guidance to make the definition of “material adverse effect” (MAE) more specific as to dollar amounts and/or duration, only a handful of deals contain such specificity in their definitions.  The study has continually found that very few deals report a dollar amount listed in the MAE definition. This year, the study also confirms that only 3% of deals contained reference to specific durational requirements for finding an MAE.
• 13% of deals included a #metoo representation that specifically referred to claims of sexual harassment, 50% of which were qualified by knowledge.
• 68% of deals included a specific representation regarding compliance with privacy laws and 70% of deals included a representation regarding the target’s information technology systems and unauthorized access or use.

To learn more about the findings of the 2019 study, contact a member of the Hirschler M&A practice group.