Five-year-old Shareholder Representative Services, a corporate monitoring service for sellers, has witnessed enough M&A transactions that it can begin to make some observations about how they are likely to go.
For instance, 56 percent will have some kind of claim arise after the closing of the deal, and 4 percent will end up in litigation or in arbitration, said Paul Koenig, a managing director at the firm. And 23 percent of the claims that are brought by buyers come in the last week of the escrow period, right before the seller would be able to claim the buyer’s holdback.
SRS announced in July that it had completed its 200th transaction, and while only 43 of its deals have reached their escrow release dates, it was able to include 128 acquisitions in its claims study, said Koenig, an M&A attorney by training who teamed with serial entrepreneur Mark Vogel to start the firm.
“Almost every deal that we work on is a portfolio company of an institutional shareholder,” either private equity or venture capital, Koenig said. These shareholders hire SRS to monitor their deals post-closing. For a sponsor that may have dozens of portfolio companies and hundreds of prospective deals in the pipeline, keeping up with an exit that closed a year ago or more “is not an efficient use of the shareholder’s time,” he said.
Substantial time and money can be involved, he said. Two-thirds of deals have escrow periods longer than 12 months, and nearly three in five have escrows that are more than 10 percent of the deal’s value.
Four categories of claims—capitalization, customer contracts, financial statements and undisclosed liabilities—accounted for more than half of claims, the study found, and although some reduction in the claim amount occurred in four cases out of five, indemnification claims took an average of eight months to resolve.
“Earn-outs can be fraught with problems,” Koenig said. For instance, a payoff can depend on the acquired business hitting certain sales targets, but what if the buyer decides to use the product as a loss leader, or to bundle it with other products and services?
As the deal market improves, SRS is seeing its business grow rapidly, Koenig said. After 200 deals in its first five years, the firm is on track for 150 closings in 2011 alone, he said.
And while the firm represents sellers post-closing, it does not get involved in the transactions per se, he said. “We’re not negotiating the deal itself. That’s the bankers’ job, the buyers’ job.”
CORRECTION: Paul Koenig and Mark Vogel are the founders of Shareholder Representative Services. A version of this story originally posted on August 1, 2011, transposed the first names of the men.