Latest ABA M&A Deal Points Study Highlights New Data Points, Impact of Reps and Warranties Insurance

01.05.2018

Released just prior to the new year, the enhanced American Bar Association Private Target Deal Points 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.

Moreover, unlike previous ABA Deal Points Studies that analyzed data from the prior calendar year, the latest biannual Deal Points Study offers a more robust, 18-month analysis of acquisitions of privately-held targets by publicly-held buyers. The study draws data from 139 middle market transactions executed or closed between January 2016 and June 2017.  Transactions included in the study ranged from $30 million to $500 million and the average transaction value was $176.3 million.

Study data shows R&W insurance was present in more than 29% of deals. Other notable trends cited in the latest study:

• The use of post-closing purchase price adjustments remained static (present in 86% of all deals) but became more complex.More than 70% of all deals included a purchase price adjustment that was based on multiple metrics, an increase of over 20 percentage points from the prior study.
• The use of a purchase price adjustment escrow, separate and apart from any indemnification escrow, increased by 20 percentage points.
• The use of “deductible” indemnification baskets (as opposed to “first dollar/tipping” baskets) continued its upward trend, as did the average size of the baskets.
• 95% of all indemnification baskets were 1% of transaction value or less, with 0.79% being the average size.
• The use of “materiality scrape” provisions increased by 15 percentage points.
• The average size of indemnification caps continued to decline, to 12.2% of transaction value; however, the presence of R&W insurance had a large impact on the average indemnification cap.In deals with R&W insurance, the average cap was just under 6% of transaction value while the average cap for deals without R&W insurance was just under 15% of transaction value.
• Approximately a third of all escrows or holdbacks were 3% of transaction value or less.However, it was more likely that the escrow or holdback did not act as the acquirer’s sole remedy for recovering post-closing losses.
• 90% of all deals had a survival period of 18 months or less for non-fundamental representations and warranties.

Hirschler’s Mergers and Acquisitions Practice Group is preparing a summary of key takeaways from the latest study.  To schedule a brief presentation of study highlights and related M&A deal negotiation tips, please contact us.