We conducted our survey as follows:
- We reviewed the treatment of certain key deal terms in all private equity buyer/public company target cash merger transactions involving consideration of at least $500 million in enterprise value  entered into during 2010 and 2011, which totaled 37 transactions.
- We then compared the treatment of such deal terms in the 20 transactions entered into between Jan. 1, 2010 and Dec. 31, 2010, which we refer to as the “2010 Transactions,” with the treatment of the same key deal terms in the 17 transactions entered into between Jan. 1, 2011 and Dec. 31, 2011, which we refer to as the “2011 Transactions.”
As widely reported, 2011 was a tumultuous year characterized by economic uncertainty. The European sovereign debt crisis and the downgrade to the U.S. credit rating caused significant volatility in the U.S. debt and equity markets. The large private equity buyer/public company segment of the U.S. M&A market was not immune to these factors. Deal activity was down overall relative to 2010 and the deals that were completed in 2011 took longer to complete.
Market Activity and Deal Process Observations:
- Fewer deals were done in 2011. Deal activity in the segment surveyed in our study decreased 15% in 2011 compared to 2010. This decline in 2011 was driven by the 37.5% drop in deals in the fourth quarter of 2011 compared to the same period in 2010.
- The technology and healthcare sectors are hot. The technology and healthcare sectors were the most active in 2010 and 2011, representing 29.7% and 21.6%, respectively, of all transactions during the 2-year period. The prevalence of technology-related transaction remained consistent representing 30% of 2010 Transactions and 29% of 2011 Transactions. Healthcare transactions became more prominent in 2011, representing 35% of 2011 Transactions compared to 10% of 2010 Transactions.
- Deals are taking longer to get signed up. For 2011 Transactions, the mean time from the start of the target’s process to signing a definitive agreement was 9.3 months compared to 8.5 months for 2010 Transactions, an increase of approximately of 3 weeks. Similarly, for 2011 Transactions, the mean time from the buyer signing a confidentiality agreement with the target to signing a definitive agreement was 4.1 months, an increase of approximately 2.5 weeks.
- More targets are engaging in pre-signing market checks  — leading to fewer “go-shop” provisions. Pre-signing market checks were more common in 2011 Transactions than in 2010 Transactions. Targets undertook pre-signing market checks in 65% of the 2011 Transactions compared to only 45% of the 2010 Transactions. Not surprisingly, “go-shop” provisions were used significantly less in 2011 than 2010 (29% of the 2011 Transactions vs. 60% of the 2010 Transactions). The increase in pre-signing market checks may also explain why 2011 Transactions took longer to sign, as noted above.
- Tender offers are becoming more prevalent and have shown to be demonstrably faster. The two-step tender offer/back-end merger structure was used slightly more frequently in 2011 Transactions than in 2010 Transactions (18% of the 2011 Transactions vs. 15% of the 2010 Transactions). The mean number of days from signing a definitive agreement to closing the transaction (measured by the closing of the short-form merger in tender offer transactions) was 44 days for tender offers vs. 94 days for one-step mergers.
- Limited specific performance rights for the target are becoming almost universal. The limited specific performance remedy (where the target’s ability to force the buyer to close is dependent on the buyer’s debt financing being available at closing) is being used almost exclusively. 88% of the 2011 Transactions provided the target with a limited specific performance right against the buyer, 6% had no specific performance right and 6% provided the target with a full specific performance right (where the target’s ability to force the buyer to close was not dependent on the buyer’s debt financing being available at closing).
“Market Practice” Remains Unchanged
- As expected, we continue to observe a “market practice” based on the treatment/inclusion of a number of the key deal terms. For example:
- None of the 37 transactions included a traditional “force the vote” provision or provided the buyer with a closing condition regarding appraisal rights.
- None of the transactions structured as single-step mergers provided the buyer with a financing closing condition.
- Approximately 95% of the transactions:
- Provided the buyer with matching rights and “last look” matching rights; and
- Included a “tail provision” that applied in the event the merger agreement was terminated under certain circumstances.
- Approximately 85% of the transactions:
- Were structured as one-step mergers;
- Permitted the target board to make a change in recommendation other than specifically in connection with a superior proposal;
- Gave the target company a limited specific performance right that was only available if (i) the buyer’s closing conditions to the merger agreement were satisfied; and (ii) the buyer’s debt financing was available; and
- Contained “marketing period” provisions.
- While “go-shop” provisions are not standard, they continue to be widely used — although the use of “go-shops” declined significantly in 2011 as the use of pre-signing market checks increased. Of the 37 transactions, approximately 34% included a “go-shop” provision. Although this percentage represents a 50% decline year-over-year, this decline can likely be explained by the 44% increase in the use of pre-signing market checks year-over-year. Comparing “apples to apples,” the use of “go-shops” for transactions without a pre-signing market check remained relatively constant — appearing in 67% of the 2011 Transactions compared to 64% of the 2010 Transactions.
- Transactions involving “go shop” provisions had higher deal premia based on the target’s stock price 30 days prior to announcement, but the difference in deal premia may be narrowing. When deal premia are calculated comparing the stock price 30 days prior to the announcement of the applicable transaction to the price paid by the acquiror, the 17 deals that contained “go-shop” provisions had a mean deal premium of 33.6%, with a median of 33.7%; whereas the other 20 transactions without this provision had a mean premium of 27.5%, with a median of 20.3%.
The full study is available here.
 The equity values of the 37 transactions ranged from $154 million to $5.0 billion (calculated based on outstanding stock, excluding options, warrants and other securities convertible into or exercisable for common stock).
 For purposes of this Deal Study, we characterized a deal as involving a “pre-signing market check” if the “background of the merger” discussion in the applicable proxy statement or Schedule 14D-9 disclosed that (i) the target solicited interest from at least 25 possible bidders pursuant to an active process prior to execution of the applicable merger agreement; (ii) the target was in discussion with 5 or more possible bidders without engaging in a broader solicitation of interest; or (iii) the target issued a public announcement to the effect that it was exploring “strategic alternatives.” We did not count the Apollo/CKE merger as having a pre-signing market check because this transaction was the result of a topping bid made during the “go-shop” period of the merger agreement between Thomas H. Lee Partners and CKE.