2016 Deal Terms Study Full (4-19-16) - Kruse Acquisitionskruseacquisitions.com/.../2016-SRS-Acquiom-MA-Deal-Terms-Study.pdf · 2016 SRS Acquiom M&A Deal Terms Study ... • Entity

March 2016Please direct inquiries to: [email protected]

© 2016 SRS Acquiom Inc. All rights reserved.

An analysis of deal terms in private-target M&A transactions that closed in 2012–2015

2016 SRS AcquiomM&A Deal Terms Study

© 2016 SRS Acquiom Inc. All rights reserved. Page 2

About SRS Acquiom

We provide products and services that improve and simplify the M&A process, delivered by professionals who care about the success of your deal.

“SRS Acquiom has been flexible and responsive to our many needs. They get the job done and have exceeded our tough standards.”

- Peggy TirrellAssistant General Counsel, EMC Corporation

Shareholder RepresentationExpert representation to protect shareholder interests post-closing

• Post-closing M&A administration• Dispute resolution and litigation • Entity wind-down management

Escrow SolutionsFlexible, innovative M&A escrow investment solutions

Payments AdministrationFast and simple M&A payments administration saves parties time and money

• Acquiom ClearinghouseTM

online payments platform• Acquiom Employee

Compensation Payments

• Administrative ease• Principal protection• Opportunity for higher yields

The Global Leader for M&A Exits• Engaged on over 1,100 deals valued at $185 Billion• Representing 96,000 shareholders in 97 countries• $26 Billion in payments administered


> This study analyzes 735 private-target acquisitions ($137 billion) that closed in 2012 through 2015 in which SRS Acquiom provided professional and financial services. The vast majority of these deals are not required to be publicly reported. Data is presented on a calendar-year basis and is tied to the deal closing date. Medians are presented rather than averages to eliminate distortion from outliers. Data on deals that closed in 2012–2013 may differ from data on such deals published in prior studies because we have restated it to include deals in which we have been engaged since publication. Sample sizes are larger in more recent years as a result of our growth.

> Unique Data Points:- Transaction values as multiples of equity capital invested- Years from founding to exit- Management carveout frequency and size- Termination fees- Correlations among deal terms such as:

- Buyer type (public, private, financial, foreign)- Transaction values- Multiples of return- Number of equity investment rounds- Indemnification terms

About this Study and the Data


Representative Deals


> Key Findings ......................................................... 6 > Financial Provisions ............................................ 8

Transaction Values ....................................................... 9 Buyer Types .................................................................. 9 Transaction Values as Multiples of Return

on Equity Capital Invested .................................... 10 Exit Timing .................................................................. 11 Closing Consideration Trends ..................................... 12 Management Carveouts .............................................. 14 Treatment of Options (Non-Life Sciences) ................. 16 Post-Closing Purchase Price Adjustments ................. 17 Earn-outs (Non-Life Sciences) .................................... 22

> Pervasive Qualifiers ........................................... 26

Definition of Material Adverse Effect ........................... 27 Knowledge Standards ................................................. 32

> Seller’s Representations, Warranties, and Covenants ................................................... 33 “No Undisclosed Liabilities” Representation ............... 35 “Compliance with Laws” Representation .................... 36 “10b-5” and “Full Disclosure” Representations ........... 36 “No Other Representations” and

“Non-Reliance” Reps ............................................ 38 Covenants ................................................................... 39

> Closing Conditions ............................................ 42 Accuracy of Seller’s Representations ......................... 43 “Material Adverse Change” Condition ......................... 47

No Legal Proceedings Challenging the Transaction ........................................................... 48

Legal Opinions (Non-Tax) ........................................... 49 Appraisal Rights .......................................................... 50

> Indemnification ................................................... 52

Stand-Alone Indemnities ............................................. 53 “Sandbagging” ............................................................ 54 Types of Losses Covered ........................................... 55 Materiality Scrape ....................................................... 56 Reductions Against Buyer’s Indemnification

Claims ................................................................... 58 Survival/Time to Assert Claims ................................... 59 Baskets ....................................................................... 64 Caps ............................................................................ 70 Escrows/Holdbacks ..................................................... 75 Indemnification as Exclusive Remedy ........................ 79

> Dispute Resolution ............................................ 80 Waivers ....................................................................... 81 Alternative Dispute Resolution .................................... 82

> Termination Fees ............................................... 84 > Correlations ........................................................ 86

> Glossary .............................................................. 96

Table of Contents


> Financial terms:- The median time from founding to exit increased to 9 years in 2015 (slide 11). This compares to a

median of 8 years in 2013 and 7 years in 2012.

- The median amount of equity capital invested* remained largely flat at $24 million in 2015 ($23 million in 2013); however, the median number of equity financing rounds at exit decreased from 3 to 2 over the same period (slide 11).

- The median management carveout in 2015 increased to 10.0% of transaction value (slide 14). 65% of 2015 deals in which transaction value didn’t exceed equity capital invested had a management carveout, down from 89% of such deals in 2013 (slide 15).

> Indemnification terms:- The median general survival period for representations and warranties is 18 months, consistent

with past years (slide 59). However, Cigna v. Audax, decided in Delaware in late 2014, may be causing parties to forego indefinite survival for certain representations and warranties (slide 62). Its effect on caps is less pronounced (slide 73).

- Deductible basket sizes are trending larger: the median was 0.71% of transaction value in 2015, having risen from 0.61% in 2013 (slide 65). The median basket size across all baskets in 2015 was 0.56% (slide 66).

- The median general escrow size has remained at 10.0% of transaction value since 2013 (slide 76). However, deals valued at $50 million or less tend to have larger escrows as a percentage of transaction value than deals exceeding $50 million (slide 94).

Key Findings (1 of 2)

* Provided by S&P Capital IQ™ and other databases.


> Closing conditions:- The timing of the “bring down” of Seller’s representations and warranties, as a condition to

closing, has gradually eased for Sellers since 2013 (slide 43).

- The need to obtain a legal opinion from Seller’s counsel as a condition to closing has declined dramatically to 15% of deals in 2015, from 68% in 2011 (slide 49).

- Satisfaction of the “Appraisal Rights” closing condition has shifted largely toward requiring only a minimum percentage of shareholders to vote for the deal—from 16% of deals in 2013 to 40% of deals in 2015 (slide 50).

> Dispute resolution:- Conflict waivers allowing the Seller’s law firm to represent the Seller’s former shareholders post-

closing are now included in over half of deals (slide 81).

- Over a quarter of deals in 2015 shifted arbitration rules away from JAMS and AAA to other forums(slide 83).

Key Findings (2 of 2)


Financial Terms and Provisions


$25MM or less23%

>$25MM to $50MM

19%

>$50MM to $100MM

20%

>$100MM to $250MM

22%

>$250MM to $750MM

13%

More than $750MM

2%

Subset: 2012–2015 deals

U.S. Public55%

U.S. Private22%

U.S. Financial

11%

Foreign (public or private)

12%

Transaction values Buyer types

* “Transaction values” includes escrowed amounts but does not include potential earnout consideration.

Transaction Values* and Buyer Types


2015 Deals

* Transaction values include escrowed amounts but do not include potential earnout consideration.** Provided by S&P Capital IQ™ and other databases.

0

3

6

9

12

15

18

21

24

27

30

Mul

tiple

s of

retu

rn o

n eq

uity

cap

ital i

nves

ted

Deal by deal

Transaction Values* as Multiples of Equity Capital Invested**

Median return: 3.9x

Average return: 6.9x


2015 Deals

* Provided by S&P Capital IQ™ and other databases.

0%

25%

50%

75%

100%

0%

2%

4%

6%

8%

10%

12%

0 2 4 6 8 10 12 14 16 18 20 22 24

Cum

ulat

ive

% o

f dea

l set

(gra

y)

% o

f dea

l set

(bl

ue)

Years from founding to exit

Cumulative % of deal set % of deal set

Exit Timing

Years to exit Equity financing rounds at exit Equity capital invested*

Median: 9Average: 10

Median:2Average: 3

Median: $24MMAverage: $38MM


Consideration type

85%79% 79%

75%

2%6% 5%

4%

13% 15% 16% 21%

2012 2013 2014 2015

All cash All stock Cash/stock combo

Closing Consideration Trends


85%79%

79%75%

0.22%

0.66%

0.85%0.81%

0.00%

0.25%

0.50%

0.75%

1.00%

0%

25%

50%

75%

100%

2012 2013 2014 2015

All-cash deals Long-term Real Rate (average)

85%79% 79%

75%

2,966

3,541

4,375

4,946

0

1,000

2,000

3,000

4,000

5,000

6,000

0%

25%

50%

75%

100%

2012 2013 2014 2015

All-cash deals Nasdaq (IXIC) average closing price

All-cash deals vs. long-term interest rates* All-cash deals vs. Nasdaq average closing price

* The Long-term Real Rate (Average) is the unweighted average of bid real yields on all outstanding TIPS with remaining maturities of more than 10 years and is intended as a proxy for long-term real rates. Data provided by US Treasury.

Closing Consideration Trends


27%

21% 21% 21%

17% 18%

0%

10%

20%

30%

40%

2010 2011 2012 2013 2014 2015

A “management carveout” in this study is a portion of deal proceeds guaranteed to Seller’s management when management would otherwise receive little or nothing for their equity ownership due to liquidation preferences. Transaction bonuses, which often differ materially from management carveouts in size and timing of adoption, are not included below.

10.0% 10.0%9.2%

8.3%

6.8%

10.0%

0%

2%

4%

6%

8%

10%

12%

14%

2010 2011 2012 2013 2014 2015

Deals including a management carveout Median size as a percentage of transaction value*

* Measures size of carveout only, disregarding consideration received by Seller management in respect of equity ownership (if any). “Transaction value” includes escrowed amounts but does not include potential earnout consideration.

Management Carveouts: Frequency and Size


65%

34%

0%

89%

41%

0%

<1x 1–3x >3x

Dea

ls in

clud

ing

a m

anag

emen

t car

veou

t

Transaction value as return on equity capital invested***

2015 2013

Deals including a management carveout Carveout sizes* as % of transaction value** (2015)

* Measures size of carveout only, disregarding consideration received by Seller management in respect of equity ownership. ** “Transaction value” includes escrowed amounts but does not include potential earnout consideration. *** Equity capital data provided by S&P Capital IQ™ and other databases.

Management Carveouts: Frequency and Size

0%

5%

10%

15%

20%

25%

0 1 2 3

Car

veou

t siz

e

Transaction value as return on equity capital invested***

Each point is a deal

A “management carveout” in this study is a portion of deal proceeds guaranteed to Seller’s management when management would otherwise receive little or nothing for their equity ownership due to liquidation preferences. Transaction bonuses, which often differ materially from management carveouts in size and timing of adoption, are not included below.


37%44%

37%45%

71%66% 66%

54%

0%

25%

50%

75%

100%

2012 2013 2014 2015

Full acceleration of vestingOptionholders contribute to escrow

Subset: Non-life sciences deals*

27% 28%23% 26%

73% 72% 78% 74%

2012 2013 2014 2015

Options assumed Options not assumed

Contribution and acceleration** Assumption of options by Buyer

* For a detailed analysis of SRS Acquiom's life sciences deals, please see the 2015 SRS Acquiom Life Sciences M&A Update.** Excludes deals where option-holders received no consideration.

Treatment of Options: Contribution, Acceleration and Assumption


Example adjustment provision

“The ‘Adjustment Amount’ (which may be a positive or negative number) will be equal to the amount determined by subtracting the Closing Working Capital from the Initial Working Capital. If the Adjustment Amount is positive, the Adjustment Amount shall be paid by wire transfer by Seller to an account specified by Buyer. If the Adjustment Amount is negative, the difference between the Closing Working Capital and the Initial Working Capital shall be paid by wire transfer by Buyer to an account specified by Seller.”

“‘Working Capital’ as of a given date shall mean the amount calculated by subtracting the current liabilities of Seller as of that date from the current assets of Seller as of that date. The Working Capital of Seller as of the date of the Balance Sheet (the ‘Initial Working Capital’) shall be deemed Two Million Dollars ($2,000,000).”

Post-Closing Purchase Price Adjustments


59%64%

72%66%

15%15% 9% 15%

0%

25%

50%

75%

100%

2012 2013 2014 2015

Included in indemnification section of agreementIncluded in consideration mechanics section of agreement

79%

52%

63%

25%

9%

1%

78%

43%

53%

36%

9%

0%

Working capital

Cash

Debt

Other**

Net assets (liabilities)

Earnings

2015 2014

Adjustment provision included Adjustment metrics*

* 73% of post-closing purchase price adjustments in 2015 deals were based on more than one metric.** Does not include post-closing adjustments for transaction expenses.

Post-Closing Purchase Price Adjustments


“’Adjusted Working Capital’ means current assets minus current liabilities; provided, however, that ‘Adjusted Working Capital’ excludes from current assets all [deferred] tax assets and excludes from current liabilities all [deferred] tax liabilities.”

Subset: 2015 deals with a Working Capital adjustment

Yes55%

No45%

Tax exclusion example Adjustment excludes tax-related items

Post-Closing Purchase Price Adjustments: Working Capital Excludes Tax-Related Items


Subset: Deals with post-closing purchase price adjustments

* “Other” methodology most commonly used was GAAP as modified by the principles and changes set forth on a schedule.

20%

71%

6%3%

14%

66%

9% 11%

19%

70%

7%3%

GAAP GAAP consistent with past practices

Other* Silent

2013 2014 2015

Post-Closing Purchase Price Adjustments:Methodology for Preparation of Closing Balance Sheet


Separate escrow

27%

Payment not from

indemnity escrow*

7%

Payment from

indemnity escrow

93%

No separate escrow

73%

Subset: 2015 deals with post-closing purchase price adjustments

No87%

Yes13%

Adjustment only if threshold exceeded Source of payment if buyer-favorable adjustment

* Generally, payment out-of-pocket from securityholders.

Post-Closing Purchase Price Adjustments:Thresholds and Separate Escrows


13% 12%

19%

14%

0%

5%

10%

15%

20%

25%

2012 2013 2014 2015

70%

35%

13%

62%

22%

22%

67%

27%

27%

Revenue

Earnings/EBITDA

Other***

2015 2014 2013

Earnout included Earnout metrics**

* For a more detailed analysis of SRS Acquiom's life sciences deals, please see the 2015 SRS Acquiom Life Sciences M&A Update.** Earnouts can include more than one metric, such as revenue and earnings.*** Examples: unit sales, product launches, divestiture of assets.

Earnouts (Non-Life Sciences*)

Earnouts are much more common in SRS Acquiom's life sciences deals than other types of deals> 71% of biopharmaceutical deals in 2012–2015

> 68% of medical device deals in 2012–2015

> 15% of all other deals in 2012–2015


33%

46%

25%

53%

0%

10%

20%

30%

40%

50%

60%

70%

2012 2013 2014 2015

26%

47%

5%

0%

21%

0%

22%

33%

33%

8%

3%

0%

1 year or less

>1 to 2 years

>2 to 3 years

>3 to 4 years

>4 to 5 years

>5 years

2015 2014

Median earnout potential as % of closing payment** Earnout length*** (2015 median: 24 months)

* For a more detailed analysis of SRS Acquiom's life sciences deals, please see the 2015 SRS Acquiom Life Sciences M&A Update.** Calculated as the sum of potential earnout payments over the amount paid at closing (including escrowed amounts).*** Measured by the date the latest earnout period ends.

Earnouts (Non-Life Sciences*)


Subset: 2015 deals with earnouts, excluding life sciences deals

0%

Included5%

Included24%

Not included100%

Not included95%

Not included76%

Express yes76%

Express no6%

Silent18%

Covenant to run business in accordance with Seller's past

practices

Covenant to run business to maximize earn-out payments

Earn-out accelerates (fully or partially) on change in control

of earn-out assets**

Buyer can offset indemnity claims against future earn-out

payments

* For a more detailed analysis of SRS Acquiom's life sciences deals, please see the 2015 SRS Acquiom Life Sciences M&A Update.** Generally subject to exceptions, such as if the subsequent buyer assumes the earnout obligations.

Earnouts (Non-Life Sciences*): Covenants, Acceleration and Offsets


Subset: Deals with earnouts, excluding life sciences deals

“Earnout is not a security” provision included Disclaimer of fiduciary relationship

* For a more detailed analysis of SRS Acquiom's life sciences deals, please see the 2015 SRS Acquiom Life Sciences M&A Update.

Earnouts (Non-Life Sciences*): Additional Provisions

Included18%

Not included

82%

Example provision intended to ensure earnout is not treated as a security

“The right of Seller to a portion of the Earnout Amount, if any, shall not be represented by a certificate or other instrument, shall not represent an ownership interest in Buyer or the Business and shall not entitle Seller to any rights common to any holder of any equity security of Buyer.”

Example disclaimer of fiduciary relationship“Nothing in this Agreement creates a fiduciary duty on the part of Buyer to Seller in respect of the Earnout.”

11% 7% 11%

27%

0%

25%

50%

75%

100%

2012 2013 2014 2015


Pervasive Qualifiers


“’Material Adverse Effect’ means any result, occurrence, fact, change, event or effect that has a materially adverse effect on the business, assets, liabilities, prospects, capitalization, condition (financial or other), or results of operations of Seller.”

Subset: Deals with MAE defined*

24%

15%11% 11% 13%

17%

76% 85% 89% 89% 87% 83%

2010 2011 2012 2013 2014 2015

Included Not included

Example term Use of “prospects”

* “Material Adverse Effect” or “Material Adverse Change” was defined in 95% of deals.

Definition of Material Adverse Effect: “Prospects” Included


“‘Material Adverse Effect’ means any result, occurrence, fact, change, event or effect that has, or could reasonably be expected to have, a materially adverse effect on the business, assets, liabilities, capitalization, condition (financial or other), results of operations or prospects of Seller.”

87% of 2015 deals had forward-looking language*

Subset: 2015 deals with an MAE definition that included forward-looking language

"Could be"20%

"Would be"67%

Other**13%

Example term Forward-looking MAE details

* Includes deals where the MAE definition did not include forward-looking language, but forward-looking language was predominantly used in conjunction with the use of the defined term in the body of the agreement.** Definitions in the “Other” category used a combination of “could” and “would” or some other forward-looking standard.

Definition of Material Adverse Effect: Forward-Looking Language


“‘Material Adverse Effect’ means any change . . . except to the extent resulting from (A) changes in general local, domestic, foreign, or international economic conditions, (B) changes affecting generally the industries or markets in which Company operates, (C) acts of war, sabotage or terrorism, military actions or the escalation thereof, (D) any changes in applicable laws or accounting rules or principles, including changes in GAAP, (E) any other action required by this Agreement, or (F) the announcement of the Transactions.”

Subset: 2015 deals with MAE defined

Definition includes carveouts

94%

No carveouts

6%

Example term Deals with carveouts

Definition of Material Adverse Effect: Carveouts


Carveout frequency

Subset: MAE definition has carveouts

60%67%

85% 87%

97%

48%

88% 86%

54%

68%

79% 79%

95%

66%

86% 85%

56%

78%83% 85%

96%

64%

89% 87%

Actions required by agreement

Announcement of deal

Changes in accounting standards

Changes in law Economic conditions

Financial market downturn

Industry conditions

War or terrorism

2013 2014 2015

Definition of Material Adverse Effect: Carveouts


“‘Material Adverse Effect’ means any change . . . except to the extent resulting from (A) changes in general local, domestic, foreign, or international economic conditions, (B) changes affecting generally the industries or markets in which Company operates, (C) acts of war, sabotage or terrorism, military actions or the escalation thereof, (D) any changes in applicable laws or accounting rules or principles, including changes in GAAP, (E) any other action required by this Agreement, or (F) the announcement of the Transactions (provided that such event, change, or action does not affect Seller in a substantially disproportionate manner).”

Subset: 2015 deals with an MAE definition with carveouts

At least one carveout

qualified by disproportionate

effect95%

No carveouts qualified by

disproportionate effect5%

Example term Disproportionate effect details

Definition of Material Adverse Effect: Carveouts Qualified by Disproportionate Effect


Actual knowledge

“‘Knowledge’ means the actual knowledge of the directors and officers of Seller.”

Constructive knowledge

“‘Knowledge’ means the actual knowledge of the directors and officers of Seller and the knowledge that such directors and officers would have after reasonable or due inquiry.”

89%

33%

17%

14%

6%

0%

Reasonable or due inquiry

Reasonable or due inquiry of knowledgeable personsRole-based constructive

knowledgeOther form of constructive

knowledgeOther form of reasonable or

due inquiry"Constructive knowledge" not

defined (silent)

Formulations Knowledge definition details (2015 deals)

* 42% of 2015 deals include more than one constructive knowledge element, e.g., a due inquiry requirement as well as role-based deemed knowledge.

Knowledge Standards

Actual15%

Constructive81%

Not defined4%

Subset: Constructive*


Seller’s Representations, Warranties and Covenants


Buyer-favorable formulation

“Seller has no liability except for liabilities reflected or reserved against in the Balance Sheet or the Interim Balance Sheet and current liabilities incurred in Seller’s ordinary course of business since the date of the Interim Balance Sheet.”

Seller-favorable formulation

“Seller has no liability of the nature required to be disclosed in a balance sheet prepared in accordance with GAAP [or which could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect], except for liabilities reflected or reserved against in the Balance Sheet or the Interim Balance Sheet and current liabilities incurred in Seller’s ordinary course of business since the date of the Interim Balance Sheet.”

61% 68%57%

66%

39% 32% 43% 34%

2012 2013 2014 2015

Buyer Seller

Examples Party favored by definition

* 96% of 2015 deals included this rep.

“No Undisclosed Liabilities” Representation*

5%6%

5%

2013 2014 2015

Representation is knowledge-qualified


“Compliance with laws” representation details (2015 deals)

Example representation: “To the Seller’s knowledge, the Business has been and is being conducted in compliance with all applicable laws.”

7%

95%

27%

83%

Complete rep is knowledge qualified

Covers past and present compliance

Includes notice of investigation Includes notice of violation

* 100% of 2015 deals included this rep.

“Compliance with Laws” Representation*


“10b–5” representation

“No representation or warranty or other statement made by Seller in this Agreement, the Disclosure Letter, any supplement to the Disclosure Letter, the certificates delivered pursuant to Section 2.7(a) or otherwise in connection with the Contemplated Transactions contains any untrue statement or omits to state a material fact necessary to make any of them, in light of the circumstances in which it was made, not misleading.”

“Full disclosure” representation

“Seller does not have Knowledge of any fact that has specific application to Seller (other than general economic or industry conditions) and that may materially adversely affect the assets, business, prospects, financial condition or results of operations of Seller that has not been set forth in this Agreement or the Disclosure Letter.”

"10b-5" rep only*41%

Both "10b-5" and "full disclosure"

reps*3%

Neither rep55%

"Full disclosure"

rep only1%

Example formulations Inclusion of reps (2015 deals)

* Does not include reps that apply only to the shareholder information statement (and not the acquisition agreement).

“10b–5” and “Full Disclosure” Representations


Knowledge qualified

18%

Not knowledge qualified

82%

Subset: Deals in 2012–2015

Only "full disclosure" rep

knowledge qualified

28%

Only "10b-5" rep

knowledge qualified

3%

Both reps knowledge

qualified10%

Neither rep knowledge

qualified59%

Subset: “10b–5” rep only Subset: both “10b–5” and “full disclosure” reps

“10b–5” and “Full Disclosure” Representations:Knowledge Qualifiers


No other representations

“Buyer acknowledges that Seller has not made and is not making any representations or warranties whatsoever regarding the subject matter of this Agreement, express or implied, except as provided in this Article III.”

Non-reliance

“Buyer is not relying and has not relied on any representations or warranties whatsoever regarding the subject matter of this Agreement, express or implied, except for the representations and warranties provided in this Article III.”

"No other reps" only

26%

"Non-reliance"

only4%

Both31%

Neither39%

Examples Inclusion of reps (2015 deals)

“No Other Representations” and “Non-Reliance” Reps


Express duty to notify Buyer73%

No express duty to notify

Buyer24%

Seller permitted to

update Buyer3%

Subset: 2015 deals

Express duty to notify Buyer66%

No express duty to notify

Buyer34%

Breaches of representations and warranties Breaches of covenants

* Sample excludes “sign-and-close” deals.

Covenants: Seller’s Duty to Notify Buyer of Pre-Closing Breaches*


Example No-Shop/No-Talk covenant

“Between the date of this Agreement and the Closing Date, Seller shall not . . . (i) solicit, initiate, consider, encourage or accept any proposal or offer that constitutes an Acquisition Proposal or (ii) participate in any discussion, conversation, negotiation or other communication regarding, or furnish to any other Person any information with respect to, or otherwise cooperate in any way, assist or participate in, facilitate or encourage the submission of, any proposal that constitutes, or could reasonably be expected to lead to, an Acquisition Proposal.”

Example fiduciary exception to the No-Shop/No-Talk covenant

“Notwithstanding the foregoing . . . the Seller Board may withhold, withdraw, amend or modify its recommendation to the Selling Shareholders if it determines in good faith by resolution duly adopted, after consultation with outside legal counsel, that it is required to do so in order to comply with its fiduciary duties to the Selling Shareholders under applicable law.”

Covenants: No-Shop/No-Talk


No-Shop/No-Talk covenant inclusion** (2015 deals)

* Sample excludes “sign-and-close” deals.** Fiduciary exception subset excludes stock-purchase deals.

Covenant not included

10%

Covenant includes fiduciary exception

6%

No fiduciary exception

94%

Covenant included

90%

Covenants: No-Shop/No-Talk*


Closing Conditions*

* This section’s analyses exclude “sign-and-close” deals.


At signing only

“Each of the representations and warranties made by Seller in this Agreement shall have been accurate in all respects as of the date made.”

At closing only

“Each of the representations and warranties made by Seller in this Agreement shall have been accurate in all respects as of the Closing Date as if made on the Closing Date.”

At signing and closing

“Each of the representations and warranties made by Seller in this Agreement shall have been accurate in all respects as of the date made and as of the Closing Date as if made on the Closing Date.”

1%

16%

83%

1%

23%

76%

0%

25%

75%

At signing only At closing only Both

2013 2014 2015

Timing formulations Accuracy: Timing

Accuracy of Seller’s Representations (Timing):When Must They Be Accurate?


Accurate “in all respects”

“Each of the representations and warranties made by Seller in this Agreement shall have been accurate in all respects as of the Closing Date as if made on the Closing Date.”

Accurate “in all material respects”

“Each of the representations and warranties made by Seller in this Agreement shall have been accurate in all material respects as of the Closing Date as if made on the Closing Date.”

MAE qualification

“Each of the representations and warranties made by Seller in this Agreement shall be accurate in all respects as of the Closing Date as if made on the Closing Date, except for inaccuracies of representations or warranties the circumstances giving rise to which, individually or in the aggregate, do not have and could not reasonably be expected to have a Material Adverse Effect.”

28% 31%

63%64%

9% 5%

At signing At closing

MAE "In all material respects" "In all respects"

Accuracy formulations Accuracy: Materiality (2015 deals)

Accuracy of Seller’s Representations (Materiality):How Accurate Must They Be?


“The representations and warranties set forth in Section 3.3 (Capitalization) shall be accurate in all respects as of the Closing Date as if made on the Closing Date. Each of the other representations and warranties made by Seller in this Agreement shall be accurate as of the Closing Date as if made on the Closing Date, except for inaccuracies of representations or warranties the circumstances giving rise to which, individually or in the aggregate, do not have and could not reasonably be expected to have a Material Adverse Effect.”

Subset: Deals with MAE qualifiers in the “accuracy of reps” condition

82%

70%

62%

54%

75% 73%

At signing At closing

2013 2014 2015

Example capitalization carveout Carveout applies

Accuracy of Seller’s Representations (Materiality):MAE Qualifier with Capitalization Representation Carveout


“Each of the representations and warranties made by Seller in this Agreement shall be accurate in all respects as of the Closing Date as if made on the Closing Date, except for inaccuracies of representations or warranties the circumstances giving rise to which, individually or in the aggregate, do not have and could not reasonably be expected to have a Material Adverse Effect (it being understood that, for purposes of determining the accuracy of such representations and warranties, all materiality, “Material Adverse Effect” and similar qualifications contained in such representations and warranties shall be disregarded).”

Subset: Deals with materiality or MAE qualifiers in the “accuracy of reps” condition

85% 85%

72%67%

87% 85%

Included as of signing Included as of closing

2013 2014 2015

Example materiality scrape Frequency

Accuracy of Seller’s Representations (Materiality): Materiality Scrape


“Stand-alone” MAC

“Since the date of this Agreement, there has not been any Seller Material Adverse Change.”

“Back-door” MAC

The Agreement includes an “Absence of Changes” representation:

> “Section 3.6 Absence of Changes. (i) Since the Balance Sheet Date, there has not been any Seller Material Adverse Change.”

and includes a condition “bringing down” the accuracy of Seller’s representations and warranties:

> “The representations and warranties made by Seller in this Agreement shall be true and correct in all respects when made and at the Closing Date as if made on the Closing Date.”

Stand-alone

condition only35%

Back-door condition

only10%

Both52%

Neither3%

Condition MAC condition details (2015 deals)

“Material Adverse Change” Condition


“There will not be pending [or threatened] any action, suit, or similar legal proceeding brought by any Governmental Entity [or any Person] challenging or seeking to restrain or prohibit the consummation of the transactions contemplated herein.”

Example formulation 2015 Deals

“No Legal Proceedings” Condition

Not included

29%

Governmental legal

proceedings only32%

Any legal proceeding

68%

Condition included

71%

Not included

18%

Governmentallegal

proceedingsonly34%

Any legal proceeding

64%

Condition included

82%

2014 Deals


Opinion required as a condition to closing

* Includes opinions delivered pursuant to both stand-alone and “closing deliverables” conditions.** Does not account for opinions that may have been required or delivered outside of the express terms of the agreement.

68%

49%

38%

30%

16%

32% 51% 62% 70% 84%

2011 2012 2013 2014 2015

Yes* No**

Legal Opinions (Non-Tax) from Seller’s Counsel


62%58%

49%

60%

38% 42% 51% 40%

2012 2013 2014 2015

Yes* No

Subset: Mergers

Appraisal rights "not available" to

percentage of shareholders

26%

Appraisal rights "not exercised" by percentage of

shareholders15%

Appraisal rights "neither available to nor exercised by" percentage of

shareholders19%

Minimum shareholder

approval only*40%

Appraisal rights condition included Drafting details (2015 deals including condition)

* Includes deals without an express appraisal rights condition but with a condition specifying a minimum percentage of shareholder votes (on a fully-diluted basis) approving the merger, effectively waiving appraisal rights.

Appraisal Rights Condition


Appraisal rights "not available" to percentage of shareholders

Appraisal rights "not exercised" by percentage of shareholders

Appraisal rights "neither available to nor exercised by"

percentage of shareholders

Minimum shareholder approval only*

Condition threshold details

Subset: Mergers since 2012 with an appraisal rights condition

15%

30%

33%

11%

51%

53%

48%

38%

24%

14%

15%

29%

10%

3%

5%

22%

Up to 3% >3% to 8% >8% to 10% More than 10%

* These deals did not include an express appraisal rights condition, but did include a condition specifying a minimum percentage of shareholder votes (on a fully diluted basis) approving the merger, effectively waiving appraisal rights.

Appraisal Rights Condition: Thresholds


Indemnification


Frequency (2015 deals)

* Line items for which indemnification is expressly provided beyond the standard line-item indemnities for Seller’s breaches of (i) representations and warranties and (ii) covenants.

78%72%

69%43%

35%33%33%

15%13%

9%7%

5%4%

3%2%

1%0%0%

TaxesPayments to dissenting shareholders

Accuracy of closing certificatesTransaction expenses

LitigationFraud and willful misrepresentation

Purchase price adjustmentsIntellectual property matters

Fees and costsEmployee compensation

Excess parachute payments under 280GCapitalization

AuthorityEnvironmental

Employee benefits/ERISARegulatory matters

Third-party consentsUndisclosed contracts

Stand-Alone Indemnities*


Pro-sandbagging

“The right to indemnification, reimbursement or other remedies based upon any such representation or warranty will not be affected by any Knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of such representation warranty…”

Anti-sandbagging

“No party shall be liable under this Article for any Losses resulting from or relating to any inaccuracy in or breach of any representation or warranty in this Agreement if the party seeking indemnification for such Losses had Knowledge of such breach before Closing.”

34%

45% 47% 45%2%

1%1% 3%

64% 54% 52% 52%

2012 2013 2014 2015

Pro-sandbagging provision includedAnti-sandbagging provision includedSilent

Examples Year-over-year trend

* For purposes of this Study, “pro-sandbagging” excludes clauses that state, for example, that Seller’s representations and warranties merely “survive Buyer’s investigation” unless they include an express statement that Buyer’s knowledge acquired outside of any investigation made pursuant to the agreement impacts Buyer’s post-closing indemnification rights.

“Sandbagging”


Subset: 2015 deals

4%2% 7%

18%

69%

16%

32% 12%

27%

82%

61%70%

Punitive damages Incidental damages Consequential damages Diminution in value

Expressly included Expressly excluded Silent

Types of Losses Covered


Materiality qualifications in representations and warranties disregarded for all indemnification purposes (determining breaches and calculating losses)

“For purposes of this Article X (Indemnification), the representations and warranties of Seller shall not be deemed qualified by any references to materiality or to Material Adverse Effect.”

Materiality qualifications in representations and warranties disregarded for calculation of losses only

“For the sole purpose of determining Losses (and not for determining whether any breach of any representation or warranty has occurred), the representations and warranties of Seller shall not be deemed qualified by any references to materiality or to Material Adverse Effect.”

“Materiality Scrape” Example Definitions


2015 Deals

“Materiality Scrape” Inclusion

Materiality qualifiers notdisregarded

16%

For determining breach only23%

For determining damages only58%

For determining breach and damages19%

Materiality qualifiers

disregarded84%

2014 Deals

Materiality qualifiers notdisregarded

17%

For determining breach only20%

For determining damages only55%

For determining breach and damages25%

Materiality qualifiers

disregarded83%


Provision included

* Includes agreements requiring the Buyer to seek payments under applicable insurance policies.

76%

23%

31%

83%

34% 36%

81%

24%

43%

Reduction for insurance proceeds Reduction for tax benefits Buyer required to mitigate losses*

2013 2014 2015

Reductions Against Buyer’s Indemnification Claims


“Section 10.1 Survival. All representations, warranties and covenants in this Agreement and the Disclosure Schedules and any other certificate or document delivered pursuant to this Agreement will survive the Closing for a period of 12 months.”

“Section 10.5 Time Limitations. If the Closing occurs, Seller will have no liability (for indemnification or otherwise) with respect to any representation or warranty unless on or before the 12-month anniversary of the Closing Buyer notifies Sellers of a Claim specifying the factual basis of such Claim in reasonable detail to the extent then known by Buyer.”

2%

29%

12%

45%

1%

7%

3%

1%

28%

15%

45%

1%

8%

2%

Less than 12 months

12 months

>12 to <18 months

18 months

>18 to <24 months

24 months

>24 months

2015 2014

Example survival provisions Survival frequency* (2015 median: 18 months)

General Survival Period/Time to Assert Claims


Carveout frequency (2015 deals)

* Matters subject to carveouts survive longer than the general survival period.

87%83%

82%78%

77%56%

52%39%

36%31%

21%17%

6%3%

2%1%1%

0%

Due authorityCapitalization

TaxesOwnership of shares

Due organizationFraud

Broker/finder feesIntellectual property

No conflictsIntentional misrepresentation

Employee benefits/ERISATitle to/sufficiency of assets

EnvironmentalUndisclosed liabilities

Related-party transactionsAccounts receivable

Product liabilitiesSolvency

Survival/Time to Assert Claims: Carveouts to General Survival Period*


Statute of limitations***

50%

Reps survive

"indefinitely"19%

Silent/unspecified1%

1 year or less2%

>1 to 2 years3%

>2 to 3 years1%

>3 to 4 years6%

>4 years18%

Subset: 2015 deals that include the specified carveout. Years below denote additional survival time after expiration of the general survival period.

Statute of limitations***

77%

Reps survive

"indefinitely"2%


1 year or less2%

>1 to 2 years2%

>3 to 4 years4%

>4 years10%

Group of “Fundamental Representations”* Tax representations**

* For example: due organization, due authority, capitalization, etc. (other than taxes, intellectual property and fraud).** Usually including a tail period, e.g. 60 days.

2nd-Level Survival: “Fundamental” and Tax Reps


Survival of “fundamental” reps when carved out from the general survival period (mergers only)

In late 2014, the Delaware Court of Chancery held that a merger agreement provision allowing a Buyer to claw back consideration from stockholders for breaches of certain representations and warranties (1) up to the purchase price and (2) “indefinitely” after closing violated Delaware law (see Cigna Health and Life Insurance Co. v. Audax Health Solutions Inc., C.A. No. 9405 (Del. Ch. Nov. 26, 2014)). This chart shows a decline in the proportion of mergers* with indefinite second-level survival periods in 2015.

Finite survival period**

72%

Finite survival period**

83%

Reps survive "indefinitely"

28%

Reps survive "indefinitely"

17%

2012–2014 (Pre-Audax) 2015 (Post-Audax)

* Asset- and stock-purchase agreements are not subject to the same requirement.** A survival period denominated in years or tied to a statute of limitations.

2nd-Level Survival: “Fundamental” Reps after Cigna v. Audax


Statute of limitations**

8%Reps

survive "indefinitely"

3%


1 year or less51%

>1 to 2 years27%

>2 to 3 years3%

>3 to 4 years6%

>4 years1%

Subset: 2015 deals that include the specified carveout. Years below denote additional survival time after expiration of the general survival period.

Statute of limitations**

24%

Carveouts survive

"indefinitely"40%


>3 to 4 years1%

>4 years11%

Intellectual property representations Fraud/intentional misrepresentation*

* No fraud/intentional misrepresentation carveouts survived for “1 year or less”, for “>1 to 2 years”, or for “>2 to 3 years”.** Usually including a tail period, e.g. 60 days.

2nd-Level Survival: IP Reps and Fraud


Deductible

“Securityholders shall not be required to indemnify Buyer for Losses until the aggregate amount of all such Losses exceeds $300,000 (the ‘Deductible’) in which event Securityholders shall be responsible only for Losses exceeding the Deductible.”

First dollar

“Securityholders shall not be required to indemnify Buyer for Losses until the aggregate amount of all such Losses exceeds $500,000 (the ‘Threshold’) in which event the Securityholders shall be responsible for the amount of all Losses, regardless of the Threshold.”

Combination

“Securityholders shall not be required to indemnify Buyer for Losses until the aggregate amount of all such Losses exceeds $500,000 (the ‘Threshold’) in which event the Securityholders shall be responsible only for Losses in excess of $300,000 (the ‘Deductible’).”

Basket formulations Basket frequency

Baskets: Definitions

1% 3% 2% 2%

40% 38% 41%30%

56% 56% 55%64%

3% 3% 2% 4%

2012 2013 2014 2015

No basket Deductible First dollar Combination


39%

49%

11%

1%

47%

44%

8%

1%

49%

40%

7%

4%

0.5% or less

>0.5% to 1%

>1% to 2%

>2%

2015 2014 2013

Subset: Deals with deductible and first-dollar baskets

0.61% 0.61%0.65%

0.71%

0.50% 0.50% 0.50%0.54%

0.00%

0.25%

0.50%

0.75%

1.00%

2012 2013 2014 2015

Median deductible Median first dollar

Basket sizes Median basket size, year-over-year

Baskets as a Percentage of Transaction Value


Subset: 2015 deals with baskets

Basket type Average Median Minimum Maximum

Deductible 0.74% 0.71% 0.07% 2.30%

First dollar 0.64% 0.54% 0.04% 2.00%

All baskets (other than

combination*)0.67% 0.56% 0.04% 2.30%

* Because combination baskets set different amounts for the threshold and deductible.

Baskets as a Percentage of Transaction Value


Coverage details

Subset: Deals with baskets

100%

22%

29%

100%

20%

25%

100%

20%

26%

Breaches of Seller's representations and warranties

Breach of Seller's covenants

Other indemnity claims

2015 2014 2013

* Carveouts to general basket coverage are discussed on the next slide.

Baskets: General Coverage*


Carveout frequency

Subset: 2015 deals with baskets

81%80%

78%74%74%

73%53%

43%30%

27%17%

15%3%

2%2%

1%0%0%

FraudDue authorityCapitalization

Due organizationOwnership of shares

TaxesBroker/finder fees

Intentional misrepresentationNo conflicts

Intellectual propertyEmployee benefits/ERISA

Title to/sufficiency of assetsEnvironmental

Related-party transactionsUndisclosed liabilities

Product liabilitiesAccounts receivable

Solvency

Baskets: Carveouts


“Securityholders shall not be required to indemnify Buyer for any individual item where the Loss relating to such claim (or series of claims arising from the same or substantially similar facts or circumstances) is less than $25,000.”

21%

29% 29%

0%

10%

20%

30%

40%

50%

2013 2014 2015

Claim threshold formulation Threshold included, year-over-year

Baskets: Eligible Claim Threshold


Subset: 2015 deals

8%

4%

10%

29%

19% 19%

0%3%

5%

1% 2%

14%

3%

10%

22%21%

16%

5%2%

4%1%

3%

11%

7%9%

23%

19%

13%

6%3%

7%

1% 2%

5% or less >5% to 7% >7% to <10%

10% >10% to <15%

15% >15% to <20%

20% >20% to 50%

>50% to <100%

Purchase price

General cap amount as % of transaction value

2013 2014 2015

* In 2015 deals with escrows/holdbacks, 79% of caps equaled the escrowed amount.

Caps as a Percentage of Transaction Value*

Average Median Minimum Maximum

13.9% 10.5% 0.50% 100%


Frequency (2015 deals)

89%86%

81%76%76%

73%53%

48%38%

34%20%

18%5%

3%2%

1%0%0%

FraudDue authorityCapitalization

Due organizationOwnership of shares

TaxesBroker/finder fees

Intentional misrepresentationIntellectual property

No conflictsEmployee benefits/ERISA

Title to/sufficiency of assetsEnvironmental

Undisclosed liabilitiesRelated-party transactions

Product liabilitiesAccounts receivable

Solvency

Caps: Carveouts


Up to 25%1% >25% to 50%

1%>50% to 75%

1%

>75% to <100%

2%

Purchase price82%

Other**6%


Subset: 2015 deals that include the specified carveout. Percentages below denote the second-level cap as a percentage of transaction value in absolute terms (not above the general cap).

Up to 25%3%

>25% to 50%3%

>50% to 75%1%

>75% to <100%

1%

Purchase price79%

Other**8%


Group of “Fundamental Representations”* Tax representations

* For example: due organization, due authority, capitalization, etc. (other than taxes, intellectual property and fraud).** “Other” includes, for example, offsets against future earnouts above the general cap.

2nd-Level Caps: “Fundamental” and Tax Reps


Second-level caps for “fundamental” reps when carved out from the general cap (mergers only)

In late 2014, the Delaware Court of Chancery held that a merger agreement provision allowing a Buyer to claw back consideration from stockholders for breaches of certain representations and warranties (1) up to the purchase price and (2) “indefinitely” after closing violated Delaware law (see Cigna Health and Life Insurance Co. v. Audax Health Solutions Inc., C.A. No. 9405 (Del. Ch. Nov. 26, 2014)). This chart shows a slight increase in the proportion of mergers* with second-level caps below the purchase price in 2015.

Purchase price or expressly unlimited

94%

Purchase price or expressly unlimited

90%

Less than purchase price

6%

Less than purchase price10%

2012–2014 (Pre-Audax) 2015 (Post-Audax)

* Asset- and stock-purchase agreements are not subject to the same requirement.

2nd-Level Caps: “Fundamental” Reps after Cigna v. Audax


Up to 25%29%

>25% to 50%40%

>50% to 75%4%

>75% to <100%

1%

Purchase price15%

Other**10%


Subset: 2015 deals that include the specified carveout. Percentages below denote the second-level cap as a percentage of transaction value in absolute terms (not above the general cap).

>75% to <100%1%

Purchase price34%

Unlimited liability

34%


Other**4%

Intellectual property representations Fraud/intentional misrepresentation*

* Measures liability for shareholders that did not participate in the fraud (liability for participating shareholders was typically unlimited).** “Other” includes, for example, offsets against future earnouts above the general cap.

2nd-Level Caps: IP Reps and Fraud


Subset: 2015 deals with escrows/holdbacks

7% 7%

11%

28%

20% 20%

0%

3% 4%

0%

16%

5%

11%

23% 22%

15%

5%

2% 1% 0%

16%

8%

11%

23%

17%

12%

6%

2%4%

1%

5% or less >5% to 7% >7% to <10%

10% >10% to <15%

15% >15% to 20%

20% >20% to 50%

>50%

Escrow Size as % of Transaction Value

2013 2014 2015

Escrows/Holdbacks as a Percentage of Transaction Value

Average Median Minimum Maximum

11.1% 10.0% 0.50% 63.3%


11.8%

10.0% 10.0% 10.0%

0%

3%

6%

9%

12%

15%

2012 2013 2014 2015

As % of transaction value

Subset: Deals with escrows/holdbacks and/or expense funds

2.3%

1.6%

2.4%

1.8%

0.26% 0.20% 0.25% 0.22%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2012 2013 2014 2015

As % of indemnification escrowAs % of transaction value

Median indemnification escrow/holdback size Median post-closing expense fund size*

* Funds established at closing to fund post-closing expenses.

Escrow/Holdback and Expense Fund Sizes


Escrow period frequency (2015 median: 18 months)

Subset: Deals with escrows/holdbacks

0%

25%

6%

49%

2%

13%

5%1%

23%18%

37%

1%

13%8%

2%

26%

13%

43%

2%

8% 6%

Less than 12 months

12 months >12 to <18 months

18 months >18 to <24 months

24 months >24 months

2013 2014 2015

* Denotes the number of months from closing until the scheduled final escrow release date, disregarding interim releases. The survival period on slide 59 denotes the time available to the parties to make claims for breaches of the agreement, after which indemnification under the agreement will not be available. In most deals these periods are the same, but in some deals the escrow period lasts longer for reasons unique to the deal.

Escrow/Holdback Periods*


Average annual investment yield paid on escrow accounts in 2015*

Subset: Deals with escrows

Escrow Account Investment Yield

* Observed on escrows in deals where SRS Acquiom provides services.** Average observed on the escrow solutions distributed by SRS Acquiom, encompassing SunTrust Bank, Capital One, and AXA Equitable Escrow Shield PlusSM.

0.16%

0.05%0.04% 0.04% 0.03%

0.00%

0.06%

0.12%

0.18%

SRS Acquiom Escrow Solutions**

Wilmington Trust Wells Fargo U.S. Bank JP Morgan


Exclusive remedy

93%

Silent7%

Subset: 2015 deals

92%

87%

42%

8%

3%

3%

Equitable remedies

Fraud

Intentional misrepresentation

"Willful" breach of covenants

Breach of covenants

"Intentional" breach of covenants

Indemnification as exclusive remedy Carveouts to exclusive remedy

Indemnification as Exclusive Remedy for Breach


Dispute Resolution


Included66%

Not included

34%

Legal representation conflict waiver* included Waiver of jury trial (2015 deals)

* A provision allowing Seller’s pre-closing counsel to represent the selling shareholders post-closing in matters relating to the acquisition.

Waivers

23%

42%

57% 59%

0%

50%

100%

2012 2013 2014 2015


31% 30%

24%28%

0%

25%

50%

2012 2013 2014 2015Binding

arbitration87%

Mediation9%

Mediation then binding arbitration

4%

ADR inclusion Type of ADR (subset: general ADR included, 2015)

* Sample includes ADR provisions that apply to all disputes arising out of the agreement, and does not include ADR provisions limited to particular matters such as purchase price adjustments or earnouts.

Alternative Dispute Resolution (“ADR”)*


15%

24% 27%

36% 25%29%

49% 51% 44%

2013 2014 2015

American Arbitration AssociationJudicial Arbitration & Mediation ServicesOther*

Subset: Deals with general ADR included

Determined by arbitrator

13%

Evenly split11%

Expenses apportioned

16%Loser pays

40%

Silent20%

Institution/rules governing arbitration Who pays arbitration expenses? (2015 deals)

* “Other” frequently includes the International Chamber of Commerce and the Delaware Court of Chancery.

Alternative Dispute Resolution (“ADR”)


Termination Fees


Seller4%

Buyer3%

Two-way3%

No fee90%

Subset: All deals from 2012–2015

The median termination fee paid by Buyer is 5.0% (average 5.8%) of transaction value*

The median termination fee paid by Seller is 3.5% (average 3.7%) of transaction value*

Fee paid by... Termination Fees

* “Transaction value” includes escrowed amounts but does not include potential earnout consideration.

Termination Fees


Correlations


Transaction value vs. Equity financing rounds at exit (deals over $600MM hidden)

Data set: All deals closing in 2012–2015

$0

$100

$200

$300

$400

$500

$600

1 2 3 4 5 6 7 8 9 10 11

Tran

sact

ion

valu

e ($

MM

)

Number of equity financing rounds at exit

Correlations: Transaction Value and Equity Financing Rounds

Each point is a deal; Transaction Value linear fit line in blue


Transaction value as a multiple of return vs. Equity financing rounds at exit (deals over 30x return hidden)

Data set: 2015 deals

0

5

10

15

20

25

30

1 2 3 4 5 6 7 8 9 10Tran

sact

ion

valu

e as

mul

tiple

of r

etur

n on

equ

ity

capi

tal i

nves

ted*


* Equity capital investment data provided by S&P Capital IQ™.

Correlations: Multiples of Return and Equity Financing Rounds

Each point is a deal; Transaction Multiple linear fit line in blue


Multiples of return vs. Equity financing rounds at exit vs. Transaction value (deals over 30x return hidden)


0

5

10

15

20

25

30

1 2 3 4 5 6 7 8 9 10Tran

sact

ion

valu

e as

mul

tiple

of r

etur

n on

equ

ity

capi

tal i

nves

ted*



Correlations: Multiples of Return, Equity Financing Rounds and Transaction Value

Each bubble is a deal; bubble size corresponds to transaction value


Multiples of return vs. Equity financing rounds at exit vs. Equity capital invested (deals over 30x return hidden)


0

5

10

15

20

25

30

1 2 3 4 5 6 7 8 9 10Tran

sact

ion

valu

e as

mul

tiple

of r

etur

n on

equ

ity

capi

tal i

nves

ted*



Correlations: Multiples of Return, Equity Financing Rounds and Equity Capital Invested

Each bubble is a deal; bubble size corresponds to equity capital invested


$186.9

$80.8

$142.7 $158.2

$0

$50

$100

$150

$200

$250

$300

$350

$400

Public Private Foreign Financial

Tran

sact

ion

valu

es ($

MM

)

Average transaction value ($MM)

8.9

3.0

4.5

7.7

0

2

4

6

8

10

12

14

16


Tran

sact

ion

valu

e as

mul

tiple

of r

etur

n on

equ

ity c

apita

l inv

este

d*

Average multiple of return

Transaction value* vs. Buyer type (2012–2015 deals) Multiple of return** vs. Buyer type (2015 deals)

* Excludes one multi-billion dollar deal that materially skewed results.** Equity capital investment data provided by S&P Capital IQ™ and other databases.

Correlations: Transaction Value and Multiples, by Buyer Type

One standard deviation One standard deviation


12.0% 11.6% 12.3%

8.1%

0%

4%

8%

12%

16%

20%


Esc

row

siz

e

Average escrow size


16.916.2

18.2

15.5

0

5

10

15

20

25


Sur

viva

l per

iod

(mon

ths)

Average rep & warranty survival period

Escrow size vs. Buyer type Rep and warranty survival vs. Buyer type

Correlations: Escrow Size and Survival, by Buyer Type

One standard deviation One standard deviation

Average: 11.6%

Average: 16.8


Transaction value vs. Escrow size (deals over $800MM are hidden but factor into trend line)


0%

10%

20%

30%

40%

50%

$0 $100 $200 $300 $400 $500 $600 $700 $800

Esc

row

siz

e

Transaction size ($MM)


Correlations: Transaction Value and Escrow Size

Each point is a deal; linear fit line in blue


Transaction value vs. Escrow size (deals over $200MM are hidden but factor into blue trend line)


0%

10%

20%

30%

40%

50%

$0 $50 $100 $150 $200

Esc

row

siz

e

Transaction size ($MM)


Correlations: Transaction Value and Escrow Size (Detail)

Deals ≤$50MM: Each blue point is a deal, linear fit line in redDeals >$50MM: Each red point is a deal; linear fit line in blue


We found no significant correlations between:

Correlations: Uncorrelated Terms

And...

Transaction value Number of cap carveouts

Transaction value Appraisal rights condition included

Cap as % of transaction value Number of cap carveouts

Basket size as % of transaction value Number of basket carveouts

Basket size as % of transaction value Materiality scrape included for indemnification purposes

General escrow size as % of transaction value Years to exit

General escrow size as % of transaction value Seller industry

General escrow size as % of transaction value Earnout included

General escrow size as % of transaction value Number of special escrows

General rep and warranty survival period Transaction value

General rep and warranty survival period Years to exit

General rep and warranty survival period Seller industry

General rep and warranty survival period Earnout included

General rep and warranty survival period Management carveout included

General rep and warranty survival period Number of survival carveouts

Indemnification as the exclusive remedy for breaches of the Agreement Post-closing purchase price adjustment included

Indemnification as the exclusive remedy for breaches of the Agreement Earnout included


Glossary


> 10b-5Rule 10b-5 is an SEC rule that prohibits any act or omission resulting in fraud or intentional deceit (scienter) and relied upon by the injured party in connection with the purchase or sale of a security. A “10b-5 Representation” is a catch-all representation in the merger agreement modeled from the SEC rule but without the scienter or reliance requirement, expanding buyer’s ability to claim breach of the agreement.

> Appraisal rightsThe statutory right available in most states to a corporation’s minority shareholders who object to a merger to have a fair price of their stock determined in a judicial proceeding and to require the corporation to repurchase their stock at that price. Appraisal rights are usually not available unless the shareholder meets certain requirements, such as voting against the merger or abstaining from voting.

> ArbitrationA method of alternative dispute resolution whereby a dispute, with the consent of the parties, is submitted to a neutral person or group for a decision. Usually includes a full evidentiary hearing and presentations by attorneys for the parties. The merger agreement may provide that the arbitrator’s decision be binding or non-binding.

> BasketThe basket is the threshold claim amount that must be reached before the seller becomes liable for the buyer’s losses; it functions in one of three ways. Under a “deductible” basket, the seller is only liable for damages in excess of the threshold amount. If the agreement includes a “first dollar” basket, the seller is liable for all damages once the threshold amount has been reached. A “combination” basket includes a threshold claim amount that is higher than its deductible amount.

> CapThe maximum recovery a buyer may obtain for indemnification claims. Many agreements include separate caps for different types of breaches.

> Closing dateThe date on which the transaction is consummated, i.e., the date on which the purchase price is paid and the merger occurs.

Glossary #–C


> Consequential damagesDamages that are not a direct result of an act, but a consequence of the initial act. To be awarded consequential damages, it typically must be shown that the damages were a foreseeable result of the initial act.

> CovenantCovenants are actions that must be taken or not taken by the parties. In a merger agreement, covenants may require the parties to take actions both before and after the closing.

> Diminution in valueDamages that result from the loss in value to an asset or enterprise. In the context of a merger, it typically refers to a loss that results from a decrease in value due to a breach of the merger agreement.

> EarnoutA provision stating that the selling shareholders will obtain additional consideration if the seller or surviving company reaches certain milestones. Examples include revenue targets, receipt of regulatory approvals, etc.

> Escrow/holdbackA portion of the merger consideration that is deposited with a neutral third party (in the case of an escrow) or withheld by the buyer (in the case of a holdback) to be applied towards potential future indemnification claims by the buyer. After a specified period of time (the survival period) any consideration remaining in the escrow or holdback account is released to the selling shareholders.

> Incidental damagesDamages that are awarded as compensation for the buyer’s commercially reasonable expenses resulting from a breach by the seller. Examples include the costs of handling, shipping, and replacing faulty inventory, costs associated with restatement of the seller’s financials, and the costs associated with bringing the seller into compliance with applicable regulations.

> IndemnificationWhere one party (typically the seller) to an agreement reimburses the other (typically the buyer) for any losses they incur as a result of the transaction.

Glossary C–I


> Management carveoutA plan put in place to incentivize the seller’s management team or employees to stay with the company until it is sold, often by allocating a portion of the purchase price directly to such employees to be paid before satisfying liquidation-preference overhangs.

> MediationA form of alternative dispute resolution where the parties attempt to negotiate a settlement with the assistance of a neutral third party. Unlike arbitration or litigation, the resulting agreement, or lack thereof, is wholly controlled by the parties.

> Punitive damagesDamages awarded to an injured party that go beyond what is necessary to compensate them for their losses and which are intended to punish the wrongdoing party.

> Representations and warrantiesRepresentations are statements of fact by the seller regarding the condition of its business, covering virtually all aspects of the company. Warranties are the seller’s assurances to the buyer that the representations are true, and that if they are not, the buyer will be entitled to seek legal remedies.

> SandbaggingWhere a party may seek indemnification for the other party’s breach of the merger agreement even if the non-breaching party had knowledge of the breach prior to closing.

> Signing dateThe date on which the merger agreement is signed by the principal parties. Closing typically, but not always, occurs on a later date.

> SurvivalThe time period after closing during which the buyer may make a claim against the seller or selling shareholders for breach of their representations, warranties and covenants. The time period is usually shorter than the applicable statute of limitations.

Glossary M–S


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The information herein may not be stripped of any copyright or trademark information or copied, published or used, in whole or in part, for any otherpurpose than as expressly authorized by SRS Acquiom. In preparing this study, we have relied upon and assumed, without independent verification, theaccuracy and completeness of all information available from public sources or that was provided to us by or on behalf of our clients or that was otherwisereviewed by us. The terms of the agreements surveyed for this Study vary widely and are subject to competing interpretations; therefore the conclusionspresented in this Study are subject to important qualifications that are not expressly articulated. SRS Acquiom makes no representations as to, and noparty shall be entitled to rely upon, the legal, regulatory, or tax implications of the matters referred to herein, and neither SRS Acquiom nor any of itsdirectors, officers, employees or agents shall incur any responsibility or liability whatsoever to any party in respect of the contents of this study or anymatters referred to in, or discussed as a result of, this document.

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2016 Deal Terms Study Full (4-19-16) - Kruse Acquisitionskruseacquisitions.com/.../2016-SRS-Acquiom-MA-Deal-Terms-Study.pdf · 2016 SRS Acquiom M&A Deal Terms Study ... • Entity

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