Schulte Roth & Zabel regularly conducts studies on private equity buyer acquisitions of U.S. public companies with enterprise values in the $100 million to $500 million range (“middle market” deals) and greater than $500 million (“large market” deals) to monitor market practice and deal trends reflected by these transactions. During the period from January 2010 to Dec. 31, 2012, there were a total of 40 middle market deals and 50 large market deals that met these parameters.
Key Observations: 2012 Market Practice and Trends
1. Volatility in the number and terms of middle market deals makes it more difficult to identify “market practice” in that segment.
Although the overall number of deals in both the middle and large markets continued to fall in 2012 compared to 2011, the middle market showed more volatility in number of deals per quarter. In 2012, there were no middle market deals in Q1, 5 deals in Q2, 1 deal in Q3 and 3 deals in Q4. In contrast, the number of large market deals in each quarter of 2012 was relatively constant.
As we look forward into 2013, it is interesting to note that while the number of large market deals so far in the first quarter (3) is consistent with recent history (2010 (3), 2011 (4) and 2012 (3)), the size of the deals in Q1 2013 to date is significantly larger, as 2 of the deals signed so far this year have price tags over $20 billion. It will be interesting to see if this is the beginning of a trend. (See charts 1 and 2.)
2. Overall, middle market deals took significantly longer to get signed than large market deals.
In 2012, middle market deals took nearly 15% longer than large market deals to get signed from the start of the target’s process. The difference is even more striking when comparing the time span between the signing of the confidentiality agreement and the signing of the definitive agreement. Middle market deals in 2012 took approximately 52% longer than large market deals during the same period to get signed from the buyer’s execution of a confidentiality agreement; for middle market deals, the process took an average of 6.3 months, compared to just 4.2 months for large market deals. (See charts 3 and 4.)
3. “Go-shop” provisions were used more frequently in large market deals, even though, overall, the percentages of middle market and large market deals in which a pre-signing market check was used are comparable.
In 2012, “go-shop” provisions were included in 33% of the middle market deals and 54% of the large market deals. Over that same period, 44% of middle market deals involved a pre-signing market check compared to 46% of large market deals. When we looked at middle market and large market deals that did not include a pre-signing market check, only 20% of the middle market deals included a “go-shop” provision, whereas 85% of the large market did so. It is difficult to speculate as to why market practice was so different on this issue — it may be because of a perception that larger deals attract more attention, and, therefore, have a higher likelihood of shareholder litigation (although research has shown that middle market deals are subject to the same frequency of shareholder litigation as large market deals).
4. While it is virtually the rule (92% of the time in 2012) in large market deals that the target will have a limited specific performance  right against the buyer, the full specific performance remedy is still used quite often (44% of the time in 2012) in middle market deals.
Limited specific performance is almost universal in large market deals. In contrast, in about half of the middle market deals, the target had a full specific performance right providing the target with a much stronger remedy against the buyer than in the large market deals, and in the remaining middle market deals, the target generally had a limited specific performance right. In short, on average, the target is likely to have a much stronger remedy against the buyer in middle market deals than large market deals. (See chart 5.)
5. While the frequency with which middle market deals use reverse termination fees (“RTFs”) has converged on large market practice, the size of RTFs has not.
In large market deals, the use of RTFs to fix a buyer’s monetary exposure in the event a target terminates the agreement for a buyer’s financing failure is universal. Middle market deals are starting to catch up to this trend. From 2010 to 2012, the number of middle market deals where the buyer was obligated to pay a RTF under certain circumstances increased from 50% in 2010 to 60% in 2011 and 89% in 2012.
As the use of RTFs in middle market deals has increased, their size (as a percentage of target equity value) has decreased. While RTFs in middle market deals were higher than in large market deals in 2010, they have since fallen below those of large market deals. The mean size of RTFs in middle market deals decreased from a high of 7.5% in 2010 to 5.2% in 2012, whereas the mean size of RTFs for large market deals barely changed from 6.19% to 6.14% over the same period. (See chart 6.)
6. Large market deals are much more likely than middle market deals to limit damages for buyer’s willful breach to the amount of the RTF.
In large market deals, market practice is to limit damages for buyer’s willful breach to the amount of the RTF. Approximately 75% of the large market deals limited damages for buyer’s willful breach to the amount of the RTF compared to approximately 40% of middle market deals. Only 12% of large market deals left the buyer’s exposure for willful breach uncapped, as compared to 37.5% of middle market deals.
The full publication is available here.
 Generally defined as a right to force the buyer to consummate the closing of the transaction subject to satisfaction of the buyer’s closing conditions and a requirement that the buyer’s debt financing be available.