While M&A escrows have typically been a backburner issue in the midst of a transaction, in the wake of recent regulatory reform, dealmakers are increasingly taking active control of these investments. Historically, many dealmakers placed escrows in money market funds instead of bank accounts to diversify counterparty risk. However, new regulations make many of those products significantly less suitable for M&A escrows. Dealmakers that do not want the money placed in a bank account must now seek out new investment alternatives for transactions.
M&A escrows are formed to hold a portion of the agreed upon acquisition price to provide protection against certain potential losses. For example, if the selling company misrepresented a fact about its business or failed to perform a required task prior to closing, the buyer can make a claim against the escrow account rather than having to file a lawsuit against the former shareholders to be made whole. A typical M&A escrow duration is 12–24 months, with possible extensions if indemnification claims are made under the merger agreement. When it comes to M&A escrows, dealmakers have focused on investment vehicles that ensure liquidity, protect principal and gain some level of return. These objectives have guided most escrow dollars into money market deposit accounts and money market funds because they generally satisfied the first two objectives. Yield in money markets has been virtually nonexistent in recent history, but merger parties have accepted it, given a lack of alternatives. As noted above, many merger parties purposefully chose funds over deposits to diversify counterparty risk and, in their assessment, maximize protection against loss.