ADVOCATUS RESEARCH

Purchase Price Mechanisms: Locked Box vs Completion Accounts

During recent months, a myriad of different factors have greatly improved the outlook for would-be US acquirers of European target companies. With the dollar recently achieving parity against the euro for the first time in twenty years, US buyers have benefitted from greater acquisition power, meaning foreign targets have been available to purchase at a relative discount. The outlook for US buyers has been further buoyed by the valuation gap which persists between US and European-listed stock indices, which reached its highest level in over a decade during 2023. This trend has been particularly notable when comparing the US and the UK; by March 2023, companies on the MSCI UK Index were trading at a record 40% discount compared to the US, based on a 12-month forward earnings-based valuation.

Notwithstanding these tailwinds, the many challenges associated with conducting transatlantic M&A remain. Many of these challenges for US buyers are regulatory in nature, such as ensuring that any transaction fully complies with European antitrust and foreign direct investment rules to name just two examples. Alongside navigating regulatory divergence, potential buyers must also be acutely aware of the deal term preferences that exist in foreign jurisdictions. Once again, these differences are particularly notable when comparing the US and UK markets, with the former generally regarded as buyer-friendly in contrast with the more seller-friendly perception of the UK. Owing to the valuation gap contemplated above, UK-bound M&A activity will likely be on the rise in the short-term, meaning the deal term preferences of US buyers are likely to collide with UK sellers’ conventional expectations. Without appreciating these nuances, dealmakers on both sides of the table risk entering M&A negotiations at a disadvantage, unable to establish common ground and agree terms with their transatlantic counterparties. In this multi-part series, the foremost areas of deal terms divergence between the US and the UK will be considered, alongside providing practical guidance for buyers and sellers on how these gaps may be bridged. We begin our series by discussing purchase price mechanisms, which have represented an area of historic divergence between these two jurisdictions.

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