Sellers rule the M&A market but times are changing
It’s still a good time to sell a company but the mergers and acquisitions market is shifting, according to the latest DLA Piper Global M&A Intelligence Report.
While 2015 was the best year for deals since 2007, 2016 turned out to be a mixed year due to global uncertainty over the UK’s decision on Brexit and Trump’s election to the White House in the US.
DLA Piper head of international corporate, Bob Bishop, says in 2017 the result of the UK election and effectively a hung parliament has lifted that level of uncertainty again, with the market slowing up a little bit and more deals being canned.
“It is still a decent market and still a seller’s market but it has become a market typified by being suitable for someone with an attractive asset and a good asset,” he says. “As we speak it is literally shifting – good assets are being sold with good tension and poor assets are really struggling.”
Mr Bishop says it’s unlikely the UK government will negotiate a new trade arrangement with the EU within the two-year deadline and “that level of uncertainty I think will continue to impact markets generally."
The report shows share deals remain the most common deal type, accounting for 82% of the deals analysed – 1000 M&A transactions globally that the law firm was involved in during 2016.
Auctions – where a group of buyers make their final and best bids and the company selling goes for the best bid – are becoming more common across all geographies and are now appearing in the Asian market.
Mr Bishop says auctions are likely to remain popular as opposed to negotiations with individual buyers.
“The market got a little bit lazy at one point where too many advisers were counselling their clients to have a wide auction to get the best price and that often didn’t yield the best results. Sometimes a tighter, less formal auction with two to three parties is the answer and sometimes having the threat of an auction is enough for a bilateral negotiation,” Mr Bishop says.
Private equity sellers are more likely to undertake an auction – in 64% of larger deals compared to just 16% for trade sellers – to get the best possible price and achieve the cleanest exit, often combined with the use of warranty and indemnity insurance.
Mr Bishop says private equity owners used to have a bad reputation for wanting to buy on certain terms and then wanting to sell on different terms on the way out but that has changed and they are now more willing to buy and sell in the same environment.
“They realise that to be successful and invest their money there are limited opportunities in the market and they need to be pretty aggressive in terms of meeting market expectations and not driving a bargain that is too hard, otherwise they won’t get the assets they want to invest their money in because others will be more competitive on terms.”
Completion accounts remain the main pricing mechanism for share deals although locked box mechanisms are increasing in both auction and non-auctions sales in Europe.
DLA Piper local partner Reuben Woods predicts the locked box will be an emerging trend in the New Zealand market.
He says the two main areas that companies find themselves in dispute in relation to M&A transactions post completion are warranties but, probably more so, completion adjustment mechanisms.
When these are used, the price the buyer pays for the target company is adjusted on completion of the deal so the final price is not known for some time. Under a locked box mechanism the parties agree to a fixed equity price based on a recent historical balance sheet of the target company readied before signing the deal. It shifts the economic risk on to the buyer.
“We’ve dealt with warranties through W&I insurance and now the completion accounts as a potential area for dispute. These are dealt with commonly overseas by way of a locked box mechanism which provides no completion adjustment,” Mr Wood says. “It sort of had a flare of popularity four to five years ago [in New Zealand] I would say, then it seemed to die down a little, but I think it is coming back because the UK and US have really taken it up with vigour.”