Certainty Paramount in Recent M&A Activity
Paul, Weiss has released a survey of the principal terms of selected U.S. strategic mergers announced in the wake of the credit crisis. In the twelve months ended July 31, 2009, the aggregate volume of u.s. public M&A fell 61% from the same period in 2007, to approximately $432.5 billion, with private equity activity declining 98%, to $10.7 billion. Pending transactions were tested by financing failures, underperformance and litigation, and negotiating parties were forced to reconsider transaction terms in the context of general economic uncertainty.
The study, which reviewed the top 25 strategic transactions announced in each of the 12-month periods from August 1, 2007 to July 31, 2008 and August 1, 2008 to July 31, 2009, noted the following key characteristics of the selected transactions:
Certainty was paramount. Among many of the transactions surveyed as deal makers sought to define their respective rights and obligations as specifically as possible in the face of various contingencies. The effort to achieve certainty can be seen in, among other things, the use of reverse termination fees to address the failure of a financing commitment.
Strategic transactions borrowed pages from the private equity playbook. Some of the surveyed transactions included terms that historically were more typically associated with private equity transactions, including financing outs and reverse termination fees. However, none of the surveyed transactions included “go-shop” provisions.
In large transactions, cash remained king even as credit tightened. Despite an expectation that the credit crisis would cause acquirors to favor using stock as consideration, cash-only transactions dominated the survey.
Fixed exchange ratios continued to dominate stock transactions. In transactions in which stock was all or part of the consideration, the parties almost uniformly opted for fixed, rather than floating, exchange ratios.
A small number of completed transactions resulted from a hostile approach. Only four transactions of the 50 surveyed were initially rejected by the target’s board of directors after the offers had been made public.
Tender offer activity increased. Tender offers nearly doubled as a percentage of the surveyed transactions over the two-year period of the survey.
Broken transactions were infrequent. As of July 31, 2009, all but four of the survey transactions had been completed, an impressive result considering the spate of private equity transactions terminated during the survey period.
Mergers-of-equals were absent. None of the surveyed transactions were labeled as “mergers-of-equals” by the transacting parties, and none contained all of the traditional attributes of such transactions (such as a “no-premium” offer price for the target’s shares).
The full report is available for free download here.
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