Study Shows Strong Correlation Between “Buyer Power Ratio” and Parties’ Success in Negotiating Favorable Deal Terms — When BPR Increases, Buyers Get Better Terms; When BPR Declines, Sellers Get Better Terms
SILICON VALLEY and DENVER, July 17, 2017- The M&A Committee of the American Bar Association’s Business Law Section and SRS Acquiom today announced the release of their first joint deal points study. The Joint Study is titled “Impact of ‘Buyer Power Ratio’ on Selected M&A Deal Terms.”
The Joint Study surveys M&A transactions involving publicly traded buyers and privately held target companies, and aims to address the same question other published deal points studies seek to address – “what’s market?” But it takes a new approach to answering this question.
The Joint Study differs from other deal points studies by recognizing that M&A transactions involving privately held target companies do not comprise a single, unitary market. Rather, according to the Joint Study, market practice can vary widely based on an important new metric. That metric — the ratio of the size of the buyer to the size of the transaction – is called the “Buyer Power Ratio” or “BPR.” For example, an M&A transaction in which the size of the buyer, measured by its market capitalization, is 20 times the amount of the purchase price payable for the target company would have a BPR of 20.
The Joint Study utilizes, for its sample set of M&A agreements, SRS Acquiom’s sizable database of acquisition agreements in which that firm served as shareholders’ representative. Specifically, the survey sample consists of agreements in the SRS Acquiom database for M&A transactions completed between January 1, 2012, and December 31, 2016 (a total of more than 450 agreements). The Joint Study focuses on ten key provisions of these agreements — ten different “deal points” — that are negotiated by buyers and sellers of privately held target companies in M&A transactions. For every agreement in the Joint Study survey sample, each of these ten deal points was reviewed, analyzed and then characterized as either “buyer-favorable” or “seller-favorable.” Those results were correlated with the BPRs of the related M&A transactions.
The Joint Study shows that, for the ten deal points analyzed, buyers generally get more favorable terms as the Buyer Power Ratio increases. Conversely, sellers typically get more favorable deal terms as the Buyer Power Ratio falls.
The Founder and Chair of the Joint Study, Rick Climan, an M&A partner at Hogan Lovells US LLP and former Chair of the ABA Business Law Section’s M&A Committee, contends that this result is not surprising. “It stands to reason that a large buyer acquiring a relatively small company will typically enjoy greater negotiating leverage, and will typically be able to extract more favorable deal terms, than a smaller buyer buying a relatively large company. Market practice reflects this,” Climan remarked. “In trying to determine market practice, it normally wouldn’t make sense for the parties to a proposed M&A transaction with a BPR of 500 to look, for comparison purposes, at the terms of other M&A transactions with BPRs under 100. That’s essentially a different market. In most cases, parties negotiating an M&A transaction are best guided by the terms of similar M&A transactions with BPRs in the same general range as the BPR for their own proposed transaction.”
An example of how changes in BPR can signal major changes in the way deal terms are negotiated and resolved can be found in the Joint Study’s analysis of the so-called “10b-5” and “full disclosure” representations. These are broad representations that, when included in acquisition agreements, are favorable to buyers and commensurately unfavorable to sellers. According to the Joint Study, a 10b-5 or full disclosure representation appeared in the acquisition agreement for only 35% of the M&A transactions surveyed with BPRs under 10. However, such a representation was included in 75% of the surveyed transactions with BPRs above 400. In other words, for this deal point, increases in BPR were linked with dramatic increases in the frequency of buyer-favorable outcomes.
Unlike the Joint Study, which surveys acquisition agreements in SRS Acquiom’s proprietary database, some deal points studies limit their survey samples to publicly available acquisition agreements filed with the SEC. These studies, while providing useful information regarding the particular transactions they survey, tend not to capture deals with high BPRs. This is because M&A deals with high BPRs normally won’t be material enough to the buyer to require publicly filing the acquisition agreement under applicable SEC regulations.
Paul Koenig, CEO of SRS Acquiom, who, along with Climan, Chaired the Joint Study, observed, “Deal points studies serve as an important tool in the practitioner’s tool belt because they provide essential data on what is ‘market’ for particular issues. But, using this data can be perilous if it does not reliably indicate the expected outcome for the particular proposed deal that is currently on the table. By using SRS Acquiom’s robust deal database, our new joint study was able to capture precedent deals with high BPRs as well as deals with lower BPRs. It provides a more representative sample of precedent deals.”
Dr. Glenn Kramer, Chief Data Scientist at SRS Acquiom, who oversaw the analysis of the Joint Study data, noted, “Our analysis reveals that the positive correlation between BPR and buyer-favorable negotiation outcomes is unmistakable and extremely strong. BPR appears to have strong predictive power over a wide range of values.”
The current Chair of the M&A Committee, Scott Whittaker of Stone Pigman Walther Wittmann L.L.C., said, “This study is a valuable supplement to the many other deal points studies prepared by the M&A Committee over the years. It breaks new ground. While BPR is not the only factor relevant to a buyer’s negotiating leverage in an M&A transaction, this new metric will clearly provide significant assistance to M&A lawyers and other dealmakers seeking to better understand market practice.”
Climan agreed. “Buyer Power Ratio is a powerful new tool for dealmakers. As more M&A practitioners get familiar with it, I think it’s bound to influence the way future deal negotiations play out.” He added, “I’ve always believed that M&A deal negotiators should rely more on reasoned analysis and pure logic, and perhaps less on isolated deal precedents, in staking out their negotiating positions on key issues. But to the extent they find it useful to consult statistics on market practice, they are better off using the Buyer Power Ratio to help them zero in on the precedents that matter the most. That’s what makes this new study important.”
The Joint Study and its appendices (including descriptions of the methodology used in preparing the Joint Study and various important caveats) are available for download at https://www.srsacquiom.com/resources/impact-of-buyer-power/.
The Chairs of the Joint Study were advised in their efforts by the members of the Joint Study Advisory Group, Wilson Chu of McDermott Will & Emery and Jessica Pearlman of K&L Gates. The Joint Study Chairs plan to expand and update the Joint Study periodically by adding new deal points to the ones currently featured, and by adding M&A transactions completed after 2016 to the survey sample.
About the M&A Committee
The Mergers & Acquisitions Committee is a committee of the American Bar Association’s Business Law Section, with approximately 5,000 members around the world. Rick Climan, the Founding Chair of the Joint Study, is a former Chair of the M&A Committee; Scott Whittaker is the current Chair. We welcome new members. To join the M&A Committee, please visit the website for the American Bar Association’s Business Law Section, and follow the instructions there.
About SRS Acquiom
SRS Acquiom provides a comprehensive platform to manage escrows, payments, risk, documents, and claims on M&A transactions. Our team of experts works at the pace you do to deliver the solutions you need, when you need them. Our results are enabled by tailored service, technology, and data not available anywhere else. With more than 1,600 deals valued at over $256 billion, we’ve made a business out of constant innovation with a singular purpose: helping deal parties and their advisors gain the freedom to do more.
SRS Acquiom | Elevate Your Gain
FOR EXTERNAL INQUIRIES, PLEASE CONTACT:
+1 847 9214099
+1 202 637 6826