- Our 2008 Trends Report for US M&A surveyed what has turned out to be just the opening stages of a fundamental adjustment in M&A deal terms.
- In the years leading up to 2007, an abundance of acquisition financing on "borrower friendly" terms, bulging coffers at private equity sponsors, generally high and rising stock prices, and strong economic fundamentals led to an economic and transactional environment highly favorable to sellers. Sellers took advantage, and merger agreements for the acquisition of public companies fell into a pro-seller pattern:
- The economic downturn and drying up of credit markets beginning in mid 2007 and gaining momentum since have radically changed perspectives:
- With M&A deal volume plummeting in the US, many had looked to non-US transactions (particularly in emerging markets) to supply activity.
(a) Closing conditions giving buyers few walkways - aside from antitrust and other regulatory approvals, buyer closing conditions were largely limited to material adverse change ("MAC") deteriorations in the seller's business, and the accuracy of the seller's representations (themselves subject to a MAC standard).
(b) MACs - inherently pro-seller (MACs have been held by the courts to require an unexpected downturn in the target's business that is consequential to the company's long-term earnings power over a period that would be expected to be measured in years not months). MACs were further weakened by sellers through negotiation of a lengthening list of carveouts from MAC definitions, putting an increasingly heavy burden on buyers to show that a MAC had occurred.
(c) No financing out - with lenders vying for business (and private equity buyers striving to level the playing field with strategic buyers), cash purchasers were either able to arrange financing or willing to assume the financing risk.
(d) Willingness of buyers to assume other deal risks - e.g., agreement by buyers to "hell or high water" covenants under which they agreed to take any necessary actions (such as divestitures of businesses) to obtain antirust or other regulatory approval.
(a) With worsened business prospects at target companies and tighter or non-existent acquisition financing, buyers made a rapid switch from bidding up prices and bidding down buyer deal protections, to insisting on more balanced terms in new deals and closely examining legal strategies to renegotiate and in some cases terminate already signed deals.
(b) What was "market" in M&A deal terms became in many instances impossible to determine, as both buyers and sellers focused closely on deal-specific risks and circumstances.
(c) To a marked degree, well-established deal provisions - embodied in hundreds of agreements - failed to work, sometimes to the surprise of buyers, sometimes to the surprise of sellers.
(a) Nonetheless, in a late 2008 study, Dealogic reported that while declines were less striking than in the US, total deal values had fallen 73% in Latin America, 53% in Africa and the Middle East, and 36% in Asia.
(b) On the other hand, three large 2008 year-end deals were all non-US centric:
(i) The sale of Cadbury PLC of Schweppes Australia to Asahi Breweries.
(ii) SINA Corp.'s $1.27 billion acquisition of Focus Media Holdings Ltd.
(iii) Asset purchase agreement between Companhia Vale do Rio Doce and Cementos Argos S.A.