CMS Publishes 3rd Annual European M&A Study


European legal and tax services provider CMS has launched the CMS European M&A Study 2011, which analyses exclusive data compiled from more than 1,000 of its own M&A de since 2007, including some 300 deals in 2010 alone. The Study shows a clear shift back toward sellers, following last year’s significant swing toward buyers.

«Recent data shows a recovery is in full swing in all major M&A markets including Russia» said John Hammond, Senior partner of CMS’s Moscow office. «As this recovery continues, we will see contractual risk being pushed to buyers — although no one expects an immediate return to 2007 market conditions any days soon».

The Study reports on key trends from 2010, including purchase price adjustments, locked box mechanisms, earn-outs, de minimis and basket provisions, liability caps and limitation periods. The Study also tracks trends over the four-year period 2007-2010. Some of the key findings include:

• A more marked reduction in purchase price adjustments, down a further 13% points in 2010 from 2009, and a much greater use in Continental Europe of locked box mechanisms, which depend on thorough financial due diligence by the buyer and a stable working capital position;

• Earn-out periods became shorter, as demonstrated by 65% of earn-outs being payable within 24 months, compared with just 51% in 2009, indicating that sellers are banking on a quicker return;

• A 7% increase in 2010 from 2009 on deals featuring a repetition of all warranties on closing;

• A slight decrease in the number of deals with de minimis provisions; more deals had basket threshold provisions and still more deals featured recovery on an ‘excess only’ basis, indicating perhaps a gradual movement towards US deal norms;

• The percentage of transactions where the liability cap exceeded 50% of the purchase price has declined when measured against the peak of the last two quarters of 2009;

• The proportion of deals with general warranty limitation periods exceeding 24 months has generally flatlined at around 27% since its peak in the second quarter of 2009, and declined notably in the last quarter of 2010;

• A decline in the use of arbitration as the dispute resolution mechanism with just 32% of 2010 deals featuring an arbitration clause, as against 40% in 2009.

While these observations seem to signal an overall trend toward seller-friendly provisions in Europe generally, there are significant regional differences highlighted by the Study.

• In Russia, as in the rest of Central and Eastern Europe (CEE), earn-out deals were rare (only 8%) and non-compete clauses are much less commonly used than elsewhere in Europe. Arbitration is also the main dispute resolution process — 76% compared with the European norm of 33% in 2010. «This reflects continuing nervousness about the experience and sophistication of local courts and also the prevalence of English language documents, particularly for cross-border deals.» said John Hammond, Senior partner of CMS’s Moscow office.

• In the UK, sellers were more successful at offloading risk and limiting their liability during 2010 than they were in 2009," said Martin Mendelssohn, a CMS corporate partner in London, «We expect to see more aggressive liability caps and shorter limitation periods during 2011. There continues to be a significant focus on working capital adjustments in UK deals and, to this extent, the UK has more in common with US deal practice than with the rest of Europe.»

• In German-speaking countries, there was a notable increase of liability caps and decrease in liability caps of more than 50% of the purchase price, which is a return to the average of the three-year period between 2007-2009. Escrow accounts were more frequently used as a security for warranty claims and cartel clearances were the most likely pre-condition to closing. «During 2010, we saw something of a return to normal in the M&A market,» said Dr Meyding. «That is most apparent in the increased number of transactions. However, there are also increasing signs that the distribution of contractual risks is evening out, with a swing toward a sellers’ market,» added the head of the international CMS Corporate/M&A Practice Group. «These changes indicate a return to normal in the M&A market and a trend back to more seller-friendly contract provisions.»

• In France, 2010 M&A activity witnessed two periods: the first semester was a «wait & see» mode followed by a much more proactive second semester. French M&A shows outstanding particularities that distinguish France from the other European regions: (i) one third of the deals used earn-outs, more than any other region; (ii) every recorded deal had a liability cap, with French deals having the highest proportion of low liability caps (almost 50% had a liability limitation of up to 25% of the purchase price); and (iii) France provides for the highest number of deals subject to buyer’s financing condition. «The financing market is still under pressure and the gradual return is fragile», said Jacques Isnard, CMS Corporate Partner in Paris, «In addition, investors are keen to make deals in 2011 but the macro-economic situation undermines their confidence»

The Study also highlights significant cultural and regulatory differences between Europe and the United States. Chiefly, the comparison shows material adverse change (MAC) clauses are used in 80% of deals in the US compared with just 16% of deals in Europe. Basket thresholds for warranty claims are much more prevalent in the US, and the basis of recovery differs (‘excess only’ being more popular in the US). Working capital adjustments continue to be by far the most frequently used criteria for purchase price adjustments in the US, and basket thresholds tend to be lower in the US with 89% being less than 1% of the purchase price, compared with 49% in Europe. To get a copy of the Study, please contact CMS Marketing Manager, Elena Netuzhilina at elena. netuzhilina@cmslegal. ru.

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