No financing, no problem, at least according to a study by a committee of the American Bar Association.
The committee examined the acquisition agreements for 79 take-privates from the last two years—44 in 2005 and 35 in 2006. According to the study, in more than 75 percent of the 2006 deals the buyer didn’t have “availability of financing” as a condition to close the deal. That was up from 52 percent among 2005 deals under consideration. That said, 86 percent of deals studied did include commitment letters.
Those kinds of agreements are probably relics in today’s depressed lending climate. The ABA committee study didn’t include deals from the first half of 2007, when credit terms got even looser. Nonetheless, it’s probably safe to say that the days when an agreement could get signed without the certainty of financing are long gone. Indeed, in the last month, lenders who committed to underwrite LBOs have started backing away from some of those deals.
The study contained a few other notable findings. Go-shop clauses, which allow the seller to seek out higher bids for a specified amount of time, have gotten much more popular. Among the deals studied from 2005, only 2 percent had go-shop clauses. By 2006, 29 percent of deals examined contained go-shop clauses. Moreover, 45 percent of go-shop clauses also contained lower break-up fees during the go-shop period.
Looking at all the deals, the report also compiled a list of the most popular carveouts for material adverse change clauses. Among the events that won’t let buyers off the hook for a signed deal include: a change in law (58 percent); change in accounting (66 percent); war/terrorism (53 percent); and failure to meet analyst projections (38 percent). Of course, those all trailed behind the two most common carveouts: downturns in the general economy (77 percent) or in the target company’s industry (95 percent).