Report shows private M&A in Australia is increasingly international - Australian practitioners need to think globally according to Australia's first private M&A deal study

Mallesons Stephen Jaques has launched its inaugural DealTrends Report, the first study of its kind in Australia. It provides an analysis of a broad sample of private M&A sale and purchase agreements to provide a picture of what is happening in the Australian market.

Mallesons DealTrends Report is based on agreements for Australian-related private target sale and purchase transactions signed or closed in the last financial year.  The transactions covered a diverse range of industry sectors and deal values.

One significant finding of the report was that 55% of the deals captured involved a cross-border element.  This is expected to rise in 2012.

Mergers & Acquisitions Partner, Ros Anderson said “The ability for negotiators to think globally rather than locally is more important now, than ever. With so many private M&A deals involving a cross-border element, it’s now no longer enough just to know your own market.  Negotiators need to understand market practice abroad if they are to ensure that the transaction is managed efficiently, realising time and cost savings.  If they do, it will lead to a better outcome for those parties involved and that’s good for business.”       

Convergence

Because of the cross-border aspect to deals in 2011, there was a degree of convergence of market practice across jurisdictions. For example:

• 12% of deals had a ‘locked box’ element (where the buyer and seller agree on a fixed purchase price based on an agreed pre-signing balance sheet which is not adjusted). This was rarely seen in Australia a few years ago.
• In deals employing a post-closing price adjustment mechanism, 18% of the agreements in the study required an escrow for the post-closing adjustment. US practice is very similar at 20%.
• Only 16% of post-closing adjustments contained a minimum adjustment threshold to be met before any post-closing adjustment could be required. US practice is similar at 15%.
• There was generally a greater degree of convergence with European practice across a range of key deal issues, such as on the rate of inclusion of certain warranties and conditions precedent. 

Divergence

There were also clear differences in market practice in relation to transaction structure, price mechanisms and risk allocation on key commercial and legal issues. For example:

• US practice differs in terms of typical conditions precedent that must be satisfied for a deal to complete. Only about one third of the deals from this study specified the non-existence of a material adverse change or event as a condition precedent to closing, whereas a similar US study indicates this was almost invariably included at 98%.
• Only one third of this sample contained a specific warranty as to “no undisclosed liabilities”. In contrast, in US practice inclusion of this warranty is nearly three times as common at 97%.
• In this study only 14% of agreements contained an earn-out, a mechanism under which the seller may receive an additional payment for the target depending on whether the target meets certain financial targets within agreed timeframes after closing, but in the US they were twice as common at 29%.
• There were also some surprising differences between Australian and European practice.  For example, while Australian and US practice on including an aggregate cap on liability was all but standard at 95% and 92% respectively, in European practice the level was significantly lower at only 78%.

Outlook

The report also provides an outlook for deal trends in 2012 and 2013. These include;

• Cross-border deals will continue to be a significant proportion of deals in the Australian market. It is therefore likely that Australian practice will continue to come under pressure from overseas parties to fall into line with their practice.
• It is not expected that Australia will necessarily defer to trends in overseas practices in every instance, but rather to continue to adopt and negotiate certain practices on a deal by deal basis.
• Risk management will remain key. Warranty and indemnity insurance will continue to become increasingly common in addressing risk coverage gaps, and not just in Private Equity deals where this tool is already widely used.

“Australia is at the centre of multiple influences including the US and Europe and various Asian jurisdictions and our comparative study shows that despite our global economy, practices still differ materially,” said Anderson.

If you are interested in more information on the findings from the Mallesons DealTrends study, please contact us.