Part 3 of 3: Why Traditional Escrow Investments May No Longer Work for M&A
For almost 50 years, acquirers in M&A transactions have used, almost exclusively, just two types of investments for M&A escrows – bank deposit accounts and institutional money market funds. The need for principal protection and immediate liquidity largely drove decision making. Also, no other suitable options existed. These investment options appear to have done an average job meeting the basic needs of merger parties. Consequently, indemnification escrow investment selection is often relegated to the last minute in the acquisition process and usually not given much thought.
However, new banking and SEC regulations are negatively impacting these two commonly used investment options and complicating matters for buyers and sellers. Now, waiting until the last minute may result in unnecessary stress on the deal team at the worst possible time, right before closing. Here’s why.
Attracting about 75% of indemnification escrow deposits1, deposit accounts are by far the most common investment choice and are generally perceived as a safe investment. They are, however, subject to FDIC limits, currently $250,000 per beneficial holder. This represents a significant shortfall in principal protection as many holders’ share of the escrow is well above that limit. Additionally, because of higher collateralization and capital requirements for M&A escrow deposits embedded in recent banking reforms, a number of large banks may be turning away these deposits or may charge higher fees to take them.2 Taken together, these factors are making deposit accounts increasingly less attractive to M&A deal parties.
Unfortunately, the second most common escrow investment, institutional money market mutual funds, may not work as alternative to bank deposits in the future. Historically, the net asset value (NAV) for money funds was set to $1.00, which assured deal parties that the amount deposited would never decrease. However, under the new regulations, the NAV will be allowed to float as underlying assets are marked to market. Also, money funds will now have the ability to charge liquidation fees and impose redemption gates to avoid a “run on the fund”. These features degrade both core features of M&A escrow – principal protection and immediate liquidity.
A potential alternative called Escrow Shield Plus is an escrow investment option specifically designed for M&A to avert the problems with bank deposit accounts and institutional money market funds. This innovative option provides deal parties with the economic benefits of a professionally managed account, including the opportunity for higher returns, along with a 100% principal guarantee,3 and immediate liquidity when needed.4
What has worked for 50 years may not work anymore. Take time to understand the impacts of new regulations on the traditional choices, particularly on principal protection and liquidity. Learn about other options that not only address those issues, but that also might provide a higher return on the deposit. Doing this work upfront might help avoid unnecessary stress during the deal process and improve the overall deal economics for all parties.
- View the first article in the series, “Regulatory Changes Reshape the Liquidity Landscape“
- View the second article in the series, “Re-engineering Escrow Returns“
- Read the SRS Acquiom white paper, “New Regulations Will Shake Up M&A Escrow Landscape.”
1 Based on transactions in which SRS Acquiom has served as shareholder representative or escrow administrator.
2 The Wall Street Journal, “Big Banks to America’s Firms: We Don’t Want Your Cash”, December 7, 2014.
3 Guarantees are based on claims paying ability of AXA Equitable. See About AXA Equitable for information on credit ratings. For detailed product information, see FAQ and prospectus.
4 For more information on Escrow Shield Plus℠, please see our prospectus. Securities offered through Acquiom Financial LLC, an affiliate broker-dealer of SRS Acquiom LLC and member FINRA / SIPC. Escrow Shield Plus not available in all states. Acquiom Financial does not make recommendations, provide investment advice, or determine the suitability of any security for any particular person or entity.