Disputes between buyers and sellers in merger and acquisition (M&A) deals are rising globally, including over price as changing economic conditions spur buyers to take a second look at deals, a report by Berkeley Research Group suggests.
New deal structures, including special purpose acquisition companies (SPACs), and the rise of private equity firms in the market are also fueling disputes.
“The M&A market is clearly booming and with that volume of deals there comes a certain volume of disputes,” Mustafa Hadi, BRG managing director, told CFO Dive. “But the picture is a bit more nuanced than just [rising volume].”
More than two-thirds of lawyers, advisors and others surveyed for the report say they’re seeing more disputes and more than 90% say disputes over price re-negotiations are happening often.
Disputes over price might be expected given global macroeconomic conditions. Among other things, central banks are pulling back on cheap-money policies to tamp down inflation while the pandemic is still lingering.
Unlike during the dot.com boom 25 years ago, when underlying economic conditions were generally good, today’s M&A surge has been fueled in large part by cheap money.
“That sort of thing has got to stop at some point,” said Hadi. “So, valuations will be affected.”
That could mean buyer’s remorse is fueling some of the uptick in buyers wanting to renegotiate price.
“When valuations are rising and prices are rising, nobody cares too much, but when the market turns, that’s when things get rocky and people start to look around for somebody to blame,” he said.
Disputes are generally caused by contractual matters that are internal to the deal, but changing economic conditions appears to be playing a part, especially in the hospitality sector, which was among the hardest hit by Covid.
“[Hospitality] is not a sector we’ve historically seen as high up as it is at this time,” he said. “[There’s a] sense that it’s connected to the effect of Covid.”
It’s possible price disputes in the sector are rising among deals that were begun at the outset of the pandemic, which suggests buyers are rethinking the deal’s initial valuation now that the pandemic is lingering.
“A lot of these deals may have been negotiated based on different expectations,” he said. “The company you’re buying is suddenly looking a lot less attractive and the economics are not what you expected.”
Buyers could be running into trouble, too, and seeking lower prices because they’re not as strong financially as they were at the beginning of the pandemic.
“Whether they have the funds to complete deals they’re signed up to is also an issue we’ve seen,” he said. “So, it could be on the buyer's end as well as the seller's end.”
PE firms, SPACs
Among other trends fueling disputes is the rise of deals involving private equity firms. Given their experience in deal making and the duties they owe to their investors, their growing presence is changing the landscape.
One issue is the tendency of PE firms to insist on deals without providing warranties or indemnification packages, forcing buyers to buy third-party rep and warranty insurance, but the market is strained right now and providers are limiting the deals they’re willing to back.
“It’s not new, but private equity generally refuses to provide warranties and indemnities,” Ed Poulton, an attorney with Baker McKenzie, said in the report.
Another trend is the growing interest in SPACs. Although new SPACs and investor interest is lower than what it was earlier in the year, in part because of concerns over the treatment of warrants and forward-looking statements raised by the Securities and Exchange Commission, globally there remains a lot of interest in the deals.
Regulators in Singapore, Amsterdam and other countries are tweaking rules to allow the formation of blank-check companies to attract investor capital for deployment in a merger, which could lead to SPACs outside the U.S.
The U.K. has already paved the way for SPACs. The first one to be listed on the London stock exchange is Hambro Perks, which will focus on tech company mergers.
With this interest in SPACs, disputes between investors and sponsors can be expected to increase.
Common SPAC disputes, according to the report, involve shareholder allegations of fraud and misrepresentations in proxy statements and breach of fiduciary duty. In some cases investors who oppose a merger are even suing to stop it.