Deal sizes: although the median deal size* rose slightly to $75 million in 2012 from $70 million in 2011, deals $50 million or less grew to 42% of deals in 2012, up from 33% in 2011. An increase in the percentage of smaller deals in and of themselves doesn’t tell us much. I’d like to know what percentage of those acquisitions are takeunders versus takeovers—a takeunder in this case means that the consideration paid is less than invested capital. That’s the key statistic on the health of the acquisition market from the 42%-of-the-market-seller’s perspective.
Seller financial performance: acquisitions remain heavily weighted toward Sellers with revenue, and Sellers in the aggregate continue to show improved earnings since 2009. Coupled with a slight increase in Seller-favorable terms generally, data suggests that some degree of market leverage is returning to Sellers that have survived the downturn even as M&A activity remains deliberate. I don’t believe this last point reflects the reality of the market– unless your company is cash flow positive, a ‘slight increase’ in Seller-favorable terms means nothing given the place form which we are starting: highly favorable terms for the buyer. The trends absolutely support that buyers are looking for non-dilutive acquisitions.
Cash vs. stock deals: cash is still king in M&A as long-term interest rates decline. That’s for sure!
Earn-outs: usage of financial metrics (revenue and earnings) and multi-metric achievement tests is declining, accompanied by a shift toward longer earn-out periods. Beware the earnout, it is often used by the buyer as a subterfuge for reducing the back-end payment of the acquisition.
Indemnification trends: median R&W survival periods and escrow sizes have leveled off at 18 months and 10–12% of transaction values, respectively, since 2009. Other terms are increasingly Seller favorable, for example, an increase in available offsets against Buyer indemnification claim amounts and requiring that claims exceed a minimum threshold. I’ve seen very bad behavior here and am glad the median statistics show Seller favorable trends because it can’t get much worse than it has been…
Alternative dispute resolution (“ADR”): mandatory ADR such as mediation and arbitration has steadily declined since 2010, down to 26% of deals in 2012 from 41% in 2010. I am a strong advocate of binding ADR. Large corporations like to avoid this because they want to wait the little guy out and they have plenty of salaried staff on hand to go to court or posture as if they are prepared to do so. I’d like to see this trend reverse.
Post-closing expense funds: the median size as a percentage of the indemnification escrow continues to trend upward, at 2.08% in 2012. This is consistent with ADR declining, as more resources that should be going to shareholders are being wasted on post-closing disputes.