JP Morgan Treasury Services, a provider of cash management, trade finance, treasury solutions and escrow services, has released the 2011 M&A Holdback Escrow Report. The report, now in its third year, helps the merger and acquisition (M&A) community better understand the dynamics of holdback escrows and their value as a risk mitigation tool. The study uses JP Morgan proprietary data. Findings are based on analysis of a sample of active escrow transactions originated in the US with JP Morgan in 2010, and terminated deals covering a slightly broader time period in which JP Morgan Escrow Services acted as escrow agent for the buyer and the seller.
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 purchase agreement.
The 2011 M&A Holdback report reviewed JP Morgan escrow transactions with publicly available acquisition data and looks at a variety of factors, including the percentage of escrows that have claims filed against the account; the types of claims; the average size and life span of the escrows and more. A comparison of data offers the added advantage of seeing how deal terms are trending in the M&A context. Highlights from the study include:
- Twenty-eight percent of terminated deals had at least one claim.
- The average size of the claim requested by the buyer was for 61% of the escrow.
- Buyers were able to recover an average of 74% of the amount originally claimed for, or 45% of the total escrow deposit.
A new area of analysis in this year’s report reveals behavioural differences between financial buyers versus strategic buyers using holdback escrow accounts when executing M&A transactions:
- Transactions involving financial buyers had shorter expected durations than those that involved strategic buyers (16 months versus 20 months respectively).
- Financial buyers never paid for the entire escrow fee compared to 21% of strategic buyers paying the full cost.
The report also highlights benefits that both sides to M&A transactions have experienced when including holdback escrows in their deal structures. Buyers in particular benefitted from:
- Protection from false representations and warranties and/or the dishonouring of covenants by the seller.
- Mitigation from volatility risk of purchase price adjustments that can occur during periods of economic volatility.
- Minimised risk of post-closing target company devaluation.
- Guarantees sellers pay the agreed-upon share of advisors’ fees.
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