Tuesday, July 23, 2019
Here's another in a line of useful cartoons on merger agreement provisions - this time on carveouts for Consequential Damages. The cartoon also takes the opportunity to describe the "buyer power ratio" recently developed by the ABA Business Law Section and SRS Acquiom. You're likely already familiar with the Deal Points Study that comes out every two years. These studies are generally the gold standard for deal types trying to find out "what's market" with respect to escrows, caps, baskets, and many other moving parts in the merger agreement. The buyer power ratio tries to get a little more granular with its analysis. Basically, if one starts from the position that results of bilateral negotiations are indeterminate, then "what's market" is really just a guess and that being a "good negotiator" (whatever that is) is more important than anything else, hence the salience of the Deal Points studies. They give people an anchor. Buyer Power starts from the proposition that when you have a whale buying a minnow, the whale is likely going to be able to demand better terms. Why? You can guess, the whale is evaluating several possible strategic minnow targets and will select the one that makes sense on the best terms. Unless its a market disrupter, sellers looking for an exit, on average, are going to the need the buyer more often than the buyer needs the particular seller. In any event, the buyer power ratio uses a combination of transaction size and market cap of the buyer to gauge the relative negotiating leverage of the parties. Seen through that lens, what's market looks a little different depending on who is the buyer.