Shareholder Representative Services manages the final steps of M&A transactions for dozens of clients, including Kleiner Perkins, Sequoia Capital, and Oak Investment Partners. It doesn’t squander an opportunity to use its perch to draw conclusions about the industry, either. Last April, for example, SRS looked at 128 M&A deals that it has managed to their end since 2007 and discovered that a full 56 percent of buyers isolate problems with a deal after it closes, claims that take eight months to resolve on average.
Now SRS has a new report out based on 196 transactions that it has closed, this time with less surprising findings. Among them are that buyers are predominately purchasing mature companies that have raised numerous rounds of financing and are profitable. The reason: “You had a backlog of acquisitions due to a closure of the IPO market and buyers being risk averse to doing a lot of M&A,” says SRS cofounder Mark Vogel. “When the market reopened, the VCs had already put more money in, the companies had grown, and they had more revenue.”
Another finding was that a full 86 percent of deals were all-cash transactions – again, unsurprising given that buyers in many cases have large cash reserves, that interest rates have been at all-time lows, and, as Vogel observes, that buyers “have lots of offshore cash and don’t want to pay the repatriation taxes to the U.S. They’d rather use it.”
More interesting – to me, at least – was the increasing use of management carve-out plans. Vogel says they were part of 33 percent of all of SRS’s transactions last year and 25 percent of them so far this year. (Apparently, with so many follow-on financings, diluted management teams have needed some added incentive to meet buyers’ milestones.)
The average earnout period also increased meaningfully, to 43 months this year up from 35 months last year. When I ask Vogel why that is, he attributes it to the growing number of large, life sciences deals that SRS has been seeing and that take a long time to close, including because getting FDA approval is such a lengthy process for drug developers. The earnouts can be huge in some cases, too. “We’re regularly seeing deals [that pay] $75 million to $100 million [up front] with $300 million up to $1 billion that’s paid out later. Acquirers provide a very big carrot for that regulatory approval,” says Vogel.
As for whether VCs push off their most complicated deals to SRS, which seems likely and would skew the firm’s results, Vogel pooh-poohs the suggestion. “We don’t know what we don’t see,” he says. “But our escrow study found that 56 percent of deals had some sort of claim. If VCs were giving us all their problem deals alone, you’d expect that [figure] to be much higher.”
For more on the study, click here.