By, Richard E. Climan, Esq. - Partner at Hogan Lovells and Paul Koenig - Attorney, Entrepreneur and Co-founder of SRS Acquiom
This study provides an analysis of a newly developed metric, referred to as “Buyer Power Ratio” or BPR. The BPR of a transaction is determined by dividing the buyer’s market cap by the applicable purchase price.
This study demonstrates that the BPR for a particular transaction generally correlates with the level of the buyer’s negotiating strength in that transaction, as measured by the buyer’s ability to obtain buyer-favorable deal terms.
For example, a large buyer with a $100 billion market cap buying a relatively small company for $50 million (BPR=2,000) would ordinarily be expected to have a higher degree of negotiating leverage than a smaller buyer with a $500 million market cap buying a company for $250 million (BPR=2).
This study shows, for discrete deal points, the correlation between BPR and a buyer-favorable resolution of that deal point.
For comparison purposes, this study also shows, for each deal point featured, the relevant statistics presented in the studies prepared by the ABA’s M&A committee in 2013 and 2015, for which the sample set consists exclusively of deals with agreement filed with the SEC.
The average BPR for transactions surveyed by the M&A committee is significantly lower than the average BPR for transactions in this study. This is unsurprising given that transactions with high BPRs are unlikely to be sufficiently material to the buyer to require the filing of information on the transaction with the SEC.
Some examples of deal points analyzed include 10b-5 representations, “sandbagging” provisions, and “consequential” damages exclusions.
With respect to 10b-5 representations, for the study period (2012-2016), in transactions where BPR was greater than 200, 72% of the transactions included a buyer-friendly 10b-5 representation. The ABA data revealed buyer-friendly 10b-5 representations in only 31% of transactions.
For the study period, in transactions where BPR was greater than 200, 64% of the transactions included a buyer-friendly “sandbagging” indemnity provision. Conversely, the ABA data showed a buyer-friendly provision in only 38% of transactions analyzed.
A buyer-friendly “consequential” damages provision—one where such damages were not excluded—was found in 79% of the transactions with a BPR over 200 during the study period. This is compared to only 48% of transactions including such a provision in the ABA data collected.