A recent dealmaker study provides ample fodder for M&A predictions for the year ahead. The 2021 M&A Deal Terms Study from SRS Acquiom, covering 1,400 deals with a private target that closed from 2016 to 2020, points to several noteworthy figures to use as jumping points. Equity components of deals? Rising and set to continue. The rate of PE dispositions? Holding steady, perhaps not for long. A look at the data shows why.
Larger equity components in merger consideration could be here to stay. The SRS Acquiom survey finds that buyers were more likely to include equity as a component of deal consideration. More than a fifth of deals included a buyer equity component last year, compared to 15 percent in 2019 and 13 percent in 2018. Median equity invested was $26 million, while the average was $54 million.
This echoes an earlier report from BDO focused exclusively on financial sponsors, and could be a sign of deals to come. Remember, companies told EY’s Global Corporate Divestment Study that staged exits of carveouts were preferable in the current environment. Add that to corporate wariness that divestitures might not fetch the desired valuation, and an equity component can be seen as a way to participate in future gains.
It is also worth noting, though, that the rising equity components in deals could also reflect difficulty raising sufficient debt as discussed previously.
How else to bridge the bid-ask gap in uncertain times? Rising use of earnouts shows the way. Nearly a fifth of mergers included an earnout mechanism compared to 15 percent in 2019, the new data show. The size of those contingent payments is equally significant. Last year, sellers could earn a median of 39 percent of deal value via earnout, up from 18 percent the previous year. That’s the highest figure since 2017’s 43 percent of deal value. For acquirers with a more constrained view on capital structure, the earnout could continue to prove the avenue of choice.
A second implication of the report is that private equity portfolios are deep. Acquirers exited investment a median of 6 years after initial acquisition in 2020, just as they did the previous year, according to the study. This could be further proof that the hype surrounding admittedly larger secondary deal flow and fundraisings has yet to give funds more than a marginal lift to exit opportunities.
If unprecedented uncertainty did little to motivate dispositions, the year ahead will likely look different. Financial sponsors composed a larger share of M&A in the blockbuster first quarter of this year than in the prior period, filling portfolios further. As equity markets vacillate from all-time highs to inflation-related jitters, dealmakers are likely to consider exits more seriously this year.
A couple of other takeaways from the report:
- Financial buyers paid less on average for acquisitions than public rivals, offering an average of $150 million to targets compared to the $202 million paid by public companies. Private firms lagged behind at a $127 million average. Is that a sign of valuation discipline or financing constraints for sponsors?
- In a sign that deal execution risk remained high, termination fees rebounded in both frequency and amount. Last year, sellers paid a termination fee in 15 percent of surveyed deals, compared to 2 percent for buyers and 82 percent of deals that closed with no fee. Both the median and average seller-paid termination fee was 6.6 percent of deal value.