Most private-target M&A deals have “issues” after the closing, including price adjustments favorable to the buyer. Does this mean the valuations were wrong?

The 2013 SRS M&A Post-Closing Claims Study analyzes post-closing issues and payouts across 420 private-target acquisitions, comprising $66.7 billion in stated deal value. Shareholder Representative Services (SRS) is a post-closing expert for private-company M&As. Overall, the study shows that two-thirds of all deals had issues arise after closing, and one in five deals with claims actually had exposure exceeding half of the escrow.

Other interesting findings: Of the deals analyzed, 8% had at least one claim made in the final week of the escrow period. Final escrow releases were delayed due to claims in 30% of deals. Almost three-quarters (73%) of deals with post-closing purchase price adjustment mechanisms saw adjustments, which were more often buyer-favorable than seller-favorable. Of these adjustments, 27% were ultimately modified from the initial amount claimed.

What do you think? Is there a tendency for sellers to overvalue acquisition targets? Are buyers not doing enough due diligence into value to justify the prices they’re paying? Or is this phenomenon merely a result of the complex negotiation and deal structure process inherent in these deals? Write to the editor here.