European M&A shifts in buyers' favor: survey

By Quentin Webb

LONDON (Reuters) - The balance of power in European mergers and acquisitions (M&A) has shifted toward buyers, with deals containing more legal safeguards against a purchase turning sour, a survey released Tuesday showed.

The survey, by lawyers and accountants CMS, found more deals now contain "earn-out" or "material adverse change" clauses to protect buyers, and they often get longer to assess if a business is all it was promised to be.

"It shows a significant shift in risk allocation to sellers, after 10 years of sellers having it all their own way," said Martin Mendelssohn, a partner at CMS Cameron McKenna in London, one of CMS's nine member firms.

"I think this is going to continue, and is symptomatic of the fact there are far more bilateral deals now, rather than ones that are subject to auction processes," he said.

The survey found 17 percent of deals in the fourth quarter of 2008 contained earn-outs, which vary purchase prices depending on a target business's future performance. That compared to 9 percent in the first half of 2008.

MAC clauses, which give buyers an escape route if something causes the target's value to drop materially, were included in 21 percent of deals in the second half of 2008, against 11 percent in the first half.

MAC clauses are still far more popular in the United States, where they figure in more than three-quarters of deals, to help overcome greater worries about anti-cartel clearance and other hurdles.

Mendelssohn said the shift was good news for so-called trade buyers looking to acquire rivals, who had often been outbid in the boom years by financial investors in rapid, hotly contested auctions.

The proportion of deals where buyers had more than two years to claim if they found warranties about a target were unfounded also rose over 2008.

The survey covered 494 European M&A deals from 2007 and 2008 that CMS worked on. Almost all were worth less than $500 million and most below $100 million, Mendelssohn said.

(Editing by Rupert Winchester)