No one would blame a management team for breaking out the champagne on the heels of an acquisition. But a new study by Shareholder Representative Services (SRS) – which manages the final steps of M&A transactions for dozens of clients like Kleiner Perkins, Sequoia Capital, and Oak Investment Partners – suggests that most shareholders would be wise to schedule the celebration out a bit.
The reason: after the handshakes and back-slapping, 56 percent of buyers decide that all is not hunky-dory with the deal, and their claims take 8 months on average to resolve.
A lot of money can be held hostage in the meantime — typically 10 and 20 percent of the deal, depending on what turns up in the buyer’s due diligence process. “If there are any special issues that were identified in a particular deal, a seller might say to the buyer, ‘We’ll put an extra 5 percent [of the total acquisition price] in escrow to protect you,” says SRS cofounder Mark Vogel.
Among the reason buyers file so-called indemnity claims? Vogel says that they sometimes stem over disagreements about much working capital a company has at the time of its acquisition. Sometimes, shareholders appear who claim they were left out. And sometimes, customers enter into contract disputes over warranty claims, which complicate matters. Tax liabilities, claims that items were left off financial statements, and other perceived liabilities that weren’t disclosed are also common reasons for buyers to make a claim, says Vogel.
The good news — if you can call it that — is that on average, 86 percent of the escrow is released to shareholders when all is said and done. (The entire amount is released to shareholders 63 percent of the time.) The bad news is that all the back and forth can take what seems like a ridiculously long time. “It’s a process,” says Vogel, who adds that SRS has been involved in deals that have taken a matter of weeks to resolve, as well disputes that have lasted between 24 months and 36 months.
Whether the number of claims – and the time needed to resolve them – is up or down over time isn’t something Vogel can answer just yet. SRS’s conclusions were drawn by looking at 128 M&A deals that it has managed to their end since 2007, but because that’s also the year that SRS was founded, it doesn’t have much historical perspective yet.
What Vogel does say is that no matter how brisk the deal-making these days, buyers aren’t throwing away their right to ask the hard questions about the companies they acquire.
“People learned a lot about this [claims] process during the downturn, when they had more time and resources to devote to it.” They also had more interest in making sure that every nickel was well spent. “But they still care,” he says. “Buyers definitely still care.”
Some other findings from SRS’s survey, which the Silicon Valley-based firm is making widely available on Wednesday (we’ll publish it for you):
* 35% of deals had more than one claim.
* The average number of indemnification claims per deal, including deals with no claims, was 2.2.
* In expired escrow deals where the buyer had made at least one claim, the buyer claimed an average of 51% of the escrow, including any applicable special escrows.
* The average amount of the escrow claimed across all expired escrow deals, including deals with no claims, was 27%.
* 14% of expired escrow deals had claims that accounted for 100% of the escrow. But not all of the amounts claimed were released to buyers.
* For all deals with expired and resolved escrows, an average of 14% of the initial escrow was paid to the buyer.
* 23% of deals had at least one claim made during the final week of the escrow period. When escrow releases were delayed, the delay was significant.
* 34% of deals had at least some portion of their escrows released late due to pending claims.
* In these deals with late escrow releases, an average of 54% of the escrow was held back.
* When an escrow release was delayed, the average delay was nine months. But once the dust settled, shareholders typically received a large portion of the escrow.