[Harvard Law School] 2011 Private Equity Buyer/Public Target M&A Deal Study

We conducted our survey, in part, to observe any notable trends or themes based on our review of the 25 transactions. Please note, however, that in our experience, particularly in terms of deal-making post-2008 credit crisis, these deals are often sui generis due to a number of factors, including the marketability/prospects of the target, the regulatory profile of the transaction, whether the agreement is the product of dedicated one-on-one negotiations, a formal auction or somewhere in between, the state of credit markets and the recent historical track record of the buyer. Accordingly, undue weight should not be placed on this study — it is intended to help identify “market practice” for individual deal terms and assist on negotiations, but does not purport to establish what is appropriate for any given transaction.

 

Our key observations are as follows:

As expected, we observed a “market practice” based on the treatment/inclusion of a number of the key deal terms. For example:

  • None of the deals included a traditional “force the vote” provision or provided the buyer with a closing condition regarding appraisal rights.
  • None of the deals structured as single-step mergers provided the buyer with a financing closing condition.
  • Approximately 90% of the deals:
    • Permitted the target board to make a change in recommendation other than specifically in connection with a superior proposal;
    • Provided the buyer with matching rights and “last look” matching rights;
    • Included a “tail provision” that applied in the event the merger agreement was terminated under certain circumstances; and
    • Had “marketing period” provisions.
  • 80% of the deals were structured as one-step mergers.
  • Approximately 75% of the deals gave the target company a limited specific performance right that was only available if (i) the buyer’s closing conditions to the merger agreement were satisfied and (ii) the buyer’s debt financing was available.

The size of the break-up fee payable by the target company (as a percentage of target’s equity value) did not decrease significantly as the size of the deal tripled or quadrupled. We had expected to find that as the size of the deal increased, the break-up fee (as a percentage of equity value) payable by the target company would decrease significantly.

The range of the reverse termination fee (“RTF”) payable by a buyer (as a percentage of target’s equity value) varied dramatically. We had expected to find a tighter range in the RTFs payable by buyers — instead the range varied dramatically in certain instances (e.g., 5.51% to 38% in the event of a willful breach (the highest was the GTCR/ Protection One deal)).

While “go-shop” provisions are not “market practice,” they are widely used and not exceptions to the rule. Of the 25 deals, approximately 50% included a “go-shop” provision.

While there have recently been innovations in deal terms in strategic acquisitions of U.S. public companies, these innovations have not spread to transactions involving private equity buyers. In general, the deal terms we reviewed were either customary or variations of customary provisions. Other than the dual-track one-step merger/ two-step tender/offer back-end merger approach used in 3G Capital/Burger King and Apax/Epicor (described on page 1), we did not see any terms that, in our view, represented a significant departure from market practice. For example, a hybrid of the “go-shop” and ”no-shop” provisions was used in a few recent transactions involving non-financial buyers (e.g., Nicor/AGL Resources and AES Corp./DPL Inc.), however, such a provision was not included in any of the 25 deals we reviewed. Similarly, a fallaway provision to the “last look” matching right (discussed on page 5) was included in Leonard Green & Partners/Prospect Medical, but not in any of the 25 deals we reviewed, excluding the amended merger agreement in the TPG/J.Crew transaction (which is disregarded for purposes of our survey because of the potential impact the related deal litigation may have had on one or more deal terms).

The complete study is available for download here.

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