Even after selling a portfolio company, venture investors must commonly wait years to determine the actual return from the deal, as most are structured with milestone-based payments. Commonly, those payments don’t kick in until the acquired company wraps up late stage clinical trials or is able to commercialize its products.
Historically, it’s been difficult to track payouts for milestones, or earnouts, as they’re generally not announced. That’s why a new study from Shareholder Representative Services (SRS), a provider of merger legal and accounting services for M&A transactions, is of particular interest, as it sheds light on how milestone agreements typically play out years after an acquisition.
The finding? Not surprisingly, there’s a very broad range of outcomes, with about an equal number of achieved and missed milestone goals. Yet overall, the study’s authors say the results were somewhat better than expected.
“Most readers of this will be pleasantly surprised that earnout payments really are coming in,” says Don Morrissey, head of SRS’s life science practice. “Some people have this negative impressive that earnouts never really do come in.”
The study analyzed 47 life science acquisitions closed between the third quarter of 2008 and the second quarter of 2012, in which SRS served as the shareholder representative. Of those, 39 included milestone payments. That’s a fairly typical breakdown, Morrissey says, as in recent years it’s been increasingly common for life science acquisitions to include a sizeable earnout component.
Overall, acquirers paid $8.6 billion up front and up to $7 billion in milestone-based payments (plus an additional $700 million held in escrow). There was no typical structure for these payments from deal-to-deal, SRS found, except for a slight trend in the medical device sector towards deals with half the acquisition price paid upfront and the other half when milestones were met.
Of milestones due or projected by sellers at closing to have been achieved by now, 36% have been achieved and 30% of dollars have been paid. Coincidentally, the same percentages have been missed and have not been paid. The most common milestone criteria involved gaining regulatory approval and producing annual sales.
Given that many of the companies were recently acquired, and many milestones won’t kick in for years, it will take a few more years for the study’s authors to provide a more comprehensive view of returns over the long term, Morrissey says.The full report is here.
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