In overseas mergers & acquisitions transactions, the pricing mechanism is often the core of the negotiation, and it is also one of the transaction elements that need to be confirmed by the financial team, lawyer team, and tax team in the M&A transaction text.
Generally speaking, there are two common M&A pricing mechanisms: Post-closing Price Adjustment Mechanism and LockedBox Mechanism.
1. Post-closing price adjustment mechanism for overseas mergers & acquisitions
The post-closing price adjustment mechanism is a pricing mechanism commonly used in cross-border mergers and acquisitions. In this mechanism, there are two important dates: the signing date of the share purchase agreement ("SPA") and the closing date. The parties to the transaction first determine the enterprise value of the underlying company on the SPA signing date, and then determine the equity value through "actual cash, liabilities and working capital" after closing.
2. Lock-box mechanism for overseas mergers & acquisitions
The lock-box mechanism is another common pricing mechanism in M&A Negotiation overseas. In the lock box mechanism, there are three important dates: lock box date, SPA signing date and delivery date. Specifically, the parties to the transaction determine the fixed equity value of the target company on the date of the SPA. The fixed equity value is calculated from the balance sheet on the lockbox date agreed by both parties ("Lockbox Balance Sheet"), and is fixed on the SPA signing date and will not be adjusted after delivery.
Since there is no post-delivery adjustment in the lock-box mechanism, and the economic risks and interests of the target company are transferred to the buyer on the lock-box date, and the ownership of the shares does not belong to the buyer until the delivery date, the buyer needs to seek value reduction agreement to seek Protect.
Value impairment refers to the value extraction behavior or activity performed by the seller on the target company between the lock box date and the delivery date. The allowable depreciation of value is an item that the seller can extract in value as agreed by both parties on the signing date of the SPA, and the occurrence of an allowable depreciation of value will not result in a reduction in the purchase price or trigger the seller's breach of representations/warranties.
The core of the lock-box mechanism for cross-border mergers and acquisitions is to lock the value of the target company on the lock-box day, and there is no need to adjust the purchase price after delivery.
3. Combination of overseas mergers & acquisitions lock-box mechanism and surplus mechanism
One of the main differences between the lockbox mechanism and the post-delivery price adjustment mechanism is whether there is a post-delivery price adjustment. In M&A transactions using the lock-box mechanism, one of the biggest concerns of the buyer is that the consideration (purchase price) paid by the buyer cannot accurately reflect the value of the target company at the time of delivery. Therefore, in order to appease the buyer's concern, in some transactions both parties Pricing will be based on a combination of lock-box mechanism and surplus mechanism.
Combining the lock-box mechanism with the surplus mechanism, through the surplus mechanism, the seller is required to still bear a certain proportion of operating risks, which can partially reduce the buyer's risk.
In overseas mergers & acquisitions transactions, the buyer and the seller adopt the lock-box mechanism, but it is agreed that the buyer will only pay a certain percentage of the purchase price at the time of delivery, and the remaining part will be paid to the seller after adjustment according to the operating conditions of the target company after the end of the surplus period. In this way, after the seller transfers the risk of the target company to the buyer based on the lock-box mechanism on the lock-box day, the seller can still be required to "take" part of the risk, thus partially solving the buyer's concerns under the lock-box mechanism.
Through a brief introduction and comparison of two common pricing mechanisms in overseas mergers & acquisitions transactions, we can see the advantages and disadvantages of different mechanisms for both parties. Of course, both parties to the transaction should choose an appropriate pricing mechanism based on the nature of the transaction, the needs of both parties, the negotiating position of both parties, and the ease of operation.
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