Contact: Scott Denne
If the tech M&A boom ends tomorrow, at least the lawyers will stay busy. Earnouts hit $3.6bn on 92 deals so far this year, compared with $2.77bn on 126 acquisitions through all of last year. In some ways that’s to be expected – deal values are up this year, so earnout values are following. Indeed, similar to the way blockbuster telecom transactions are driving up overall deal values, the $1bn performance incentive on Altice’s $23.4bn takeout of wireless carrier SFR accounts for one-quarter of all the 2014 earnout value.
What’s different this year is that earnouts are far more common on larger purchases. In acquisitions with an upfront payment of $50m or more, we see 29 deals with earnouts, already surpassing the full-year totals for each of the past two years, and well above the pace of 2011, when 39 transactions of $50m or more contained an earnout.
Also, the size of a typical earnout shrank dramatically this year to just 18% of the upfront deal value, down from 38%, 29% and 24% in each of the previous three years. The increased use of earnouts suggests that more buyers and sellers are far apart on price. The shrinking proportions of earnouts, however, shows that while buyers would like to use more performance-based incentives to defray M&A costs, it’s a seller’s market right now.
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