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Mergers and acquisitions: a more seller-friendly market

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Despite the pandemic and the war in Ukraine, the M&A market remains very bullish. With their high levels of liquidity, buyers have until now been in a strong negotiating position. This trend now seems to be slowing down. Experts at AURIS finance, a mergers and acquisitions consultancy, explain why.

A market returning to normal

Is the M&A market returning to normal? This is one of the conclusions of the law firm CMS, which has just published the 14th edition of its “CMS European M&A Study 2022”. The study analyses the legal terms of 500 transactions completed (or in progress) in Europe in 2021. The law firm notes a “rebalancing in favour of sellers”. It would appear that contract clauses, although still very cautious, are now a little more favourable to the sellers. For example, PPAs (purchase price allocations) have returned to pre-pandemic levels: the proportion of transactions with PPAs is now 47%, in line with the average observed between 2010 and 2020, which was 45%. In addition, the use of earn-out mechanisms has increased by 5%, from 21% in 2020 to 26% in 2021. These mechanisms allow the price paid for a company to be measured over a longer period than just the reference years affected by the pandemic. This is a way of focusing on the company’s performance over a long period of time, which is undoubtedly more accurate than only taking into account the Covid years.

Buyers remain cautious

According to CMS, these two contractual developments “indicate that the pre-pandemic situation is returning”. While buyers are as cautious as ever, there has been a real loosening of clauses in favour of sellers. Nevertheless, contract terms still remain favourable to buyers. For example, warranty periods are getting longer and are set to exceed 24 months in more than 25% of transactions in 2021. Unlike in previous years, the size of the transaction does not appear to affect the length of warranty periods. Another notable feature of the study is that the overall deductible thresholds are falling in 67% of the transactions studied.

Sellers are in high demand

Buyers – investment funds and companies – now have high levels of liquidity. This is largely due to the pandemic, which has prompted companies to build up precautionary reserves. They have high levels of cash and need to respond to increasing orders. Against this backdrop, they are often competing with investment funds to acquire targets that will enable them to increase their production capacity and attract new talent. At the same time, the number of companies for sale is shrinking. This phenomenon is particularly noticeable in certain sectors, such as IT, as Carlos Bedran, consultant at AURIS Finance, explains.

Get the support you need

In a dynamic but cautious market, buyers are paying close attention to contractual clauses. Whether you are buying or selling, drafting a sale or purchase agreement is a key stage in an M&A transaction. AURIS Finance’s experts, with their sector-specific expertise, are at your side for all your transaction needs.

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