For the second year, JP Morgan has issued its Merger and Acquisition (M&A) Holdback Escrow Report, which is designed to give the M&A community a deeper understanding of the dynamics of holdback escrows and their value as a risk mitigation tool. A third of the deals analysed had claims filed, and 78% had pay outs, which speaks to the value of a holdback escrow as a hedge against deal risks.
With a holdback escrow, a percentage of the value of the M&A deal is placed in an escrow account and held until the terms of the escrow agreement have been satisfied. The agreement enables the buyer to make claims against the account and retrieve funds in the event that the seller fails to meet specific terms of the sale and purchase agreement.
The 2010 M&A Holdback report looks at a variety of factors, including the percentage of escrows that have claims filed against the account; the types of claims; the average life span of the escrows, etc. Also in the report is a summary of benefits that both buyers and sellers have experienced when including holdback escrows in their deal structures.
Key findings in the report include:
- The average expected duration of holdback escrow accounts is 19 months.
- Of the deals analysed, 30% had claims filed against the escrow. Six percent of these had multiple claims. On average, 78% of amounts claimed from escrow accounts were ultimately paid out.
- Purchase price adjustments and working capital adjustments were the most common claim reasons, followed by representations and warranties.
- Escrow fees were split between counterparties 80% of the time, indicating that both buyers and sellers value holdback escrows.
The report findings are based on analysis of a sample of active and terminated escrow transactions originated in the US with JP Morgan from June 2008 to December 2009 in which JP Morgan Escrow Services acted as escrow agent for the buyer and the seller.
“As a leading provider of escrow services, JP Morgan has the unique ability to provide the deal community with information not available from other sources,” said Rocky Motwani, managing director and head of JP Morgan’s escrow business. “Our second annual report delivers compelling insights that demonstrate the importance of holdback escrows. It also provides a base of information that helps us guide our clients as they consider their escrow needs.”
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