It's not real until it's in your pocket

Happy Monday. Here’s what we’ve got today…

• A look at the rise in earnout usage over the past year

• The deal sheet, plus Bill Ackman’s thoughts on why he was destined from birth to become an activist investor

New data released this week from Bloomberg Law show the use of earnouts, or a contingent consideration in transactions, remains well above historical trends. Both earnout transaction volume and number of deals are peaking, particularly as a percent of total M&A activity.

Earnout Structures

An earnout allows the buyer of the target company to delay a portion of its payment until certain conditions are met at some point after the transaction closes.

For buyers, it’s an opportunity to de-risk the acquisition and lower the up-front purchase price.

Historically, earnouts have been most popular in biotechnology deals where a majority of the target’s value is unlocked (or lost) following clinical trial readouts or an FDA decision. Tying part of a takeover offer to the achievement of such milestones can help mitigate a portion of the binary risk.

Outside of clinical trial outcomes, other external earnout metrics can include successful contract renewals or new product launches, while internal (often financial) metrics may be tied to the achievement of certain EBITDA or revenue thresholds.

Earnouts à la Mode

“I’ve literally seen an earnout involved in every deal I’ve worked on in the last year,” Liam Timoney, a partner in Goodwin’s private equity group, tells Bloomberg Law. “If it’s not been ultimately featured, it’s still definitely been considered, and it’s been part of the negotiation.”

Last year’s earnout incidence is particularly notable given the overall drop in dealmaking. Separate data from SRS Acquiom found that nearly one-third of private equity deals included an earnout through the first three quarters of 2023, up from 21 percent in the same period a year earlier.

Alongside what may be a secular trend, earnouts can be most helpful in sluggish M&A environments. The structure can help bridge the gap when there’s a mismatch in valuation between the buyer’s offer and the seller’s expectations.

With sponsors feeling the pressure on their ability to pay (higher rates), coupled with stubbornly high private markets valuations (or at least sellers who are fine to hold out), earnouts provided some possibility of middle ground.

Similarly, in less competitive processes with fewer parties than in prior years, a seller may find they’re left without the negotiating power to avoid an earnout.

Potential for Litigation

Usage of earnout provisions often means lengthier deal timelines and higher legal bills. Parties need to agree on the amount of the earnout, its criteria, and the specific definitions of particular milestones.

Beyond alignment on details such as accounting methodologies, each side must anticipate subjective areas that may be open to interpretation or manipulation—treatment of extraordinary items or post-close operational changes, for example.

Even absent documentation issues, earnouts can be an unattractive proposition for sellers. On top of the timing delay (and uncertainty) for their proceeds, there’s the consideration that they’ll likely lose much of their ability to influence the future performance of the business.

With so much at play, earnouts are often contested, and related litigation has grown in lockstep with their use. In the first quarter of 2023, more than four times as many dockets mentioning earnouts were filed in the Delaware Chancery Court compared to the same period a year earlier.

Discontent is especially likely for sellers, for whom the perceived loss of headline transaction value can be an emotional hot point. Issues also tend to surface when the seller is within touching distance of objective achievement yet falls just short.

• Diamondback Energy (Nasdaq: FANG) has agreed to acquire Endeavor Energy Partners, a Houston-based oil and gas producer, for $26 billion.

• Grab Holdings (SGX: GRAB) has restarted merger talks with GoTo Group, a rival Southeast Asia ride-hailing company, per Bloomberg.

• Gilead Sciences (Nasdaq: GILD) has agreed to acquire CymaBay Therapeutics (Nasdaq: CBAY), a biotech developing treatments for primary biliary cholangitis, for $4.3 billion.

• Transom Capital Group acquired Webasto Charging Solutions, a provider of EV charging products and services, from Webasto Group, which will retain a minority stake in the business.

• Achmea is considering a sale of its life insurance unit, which could be valued at around €3 billion, per Reuters.

• EQT and TCV, in partnership with founder Denis Ladegaillerie, submitted a €1.46 billion bid to acquire music label Believe.

• L Catterton has partnered with the company's founders on a €1.4 billion take-private offer for Italian luxury fashion brand Tod's.

• Vitol Group has acquired a controlling stake in refiner Saras from Italian billionaire Massimo Moratti for $1.9 billion.

• Terna (BIT: TRN) is preparing to sell its high-voltage power unit, which could be worth around €1.5 billion, per Bloomberg.

• Sony Music Group has agreed to acquire half of Michael Jackson's catalog for more than $600 million, from the estate of the late pop star.

• Avenu Insights & Analytics, a portfolio company of Arlington Capital Partners, has acquired Judicial Innovations, a provider of justice system solutions.

• Comvest Partners invested in ClearOne Advantage, a provider of debt relief services.

• Tandym Group, backed by Mill Rock Capital and ICG, has acquired Kolter Solutions, a consulting, recruitment, and workforce solutions company,

• Endeavour Capital and Greenbelt Capital Partners invested in CTC Global, a developer of high-performance conductors for electric power transmission.

• Notion acquired Skiff, a privacy-focused productivity platform that had received backing from Sequoia Capital.

• Hyundai Motor Co. hired Citi and JP Morgan to advise on an IPO of its Indian operations that could raise around $2.5 billion, per Bloomberg.

Tech, Vertical SaaS, & Misc. Enterprise

• Bugcrowd, a provider of crowdsourced cybersecurity technology, raised $102 million in new funding. General Catalyst led, with participation from Rally Ventures and Costanoa Ventures.

• LeoLabs, a provider of ground-based space mapping data, raised $29 million in new funding from GP Bullhound, Dolby Family Ventures, Insight Partners, and 1941.

• Myrspoven, a Stockholm-based developer of real estate energy management software, raised €5.4 million in new funding led by 4impact Capital, Vantaa Energy, and AMAVI Capital.

Fintech

• Nasdaq Private Market, a provider of trading solutions for private assets, raised $62.4 million in Series B funding led by Nasdaq, with participation from Allen & Company, Citi, Goldman Sachs, BNP Paribas, DRW VC, UBS, and Wells Fargo.

• Cascading AI, a developer of AI-powered loan origination software for banks, raised $3.9 million in pre-seed funding led by Peterson Ventures, with participation from Y Combinator, The Sarah Smith Fund, and Clocktower Technology Ventures.

Healthcare & Life Sciences

• Ilara Health, a provider of point-of-care diagnostic devices to clinics, raised $4.2 million in equity and debt funding. DOB Equity led, with participation from Philips Foundation, and existing backers AAIC Investment, Angaza Capital, Black Pearl Investments, and Perivoli Innovations.

• Tortus, a developer of AI-powered clinical documentation tools, raised $4.2 million in seed funding led by Khosla Ventures, with participation from Entrepreneur First.

Industrials, Greentech, & Other

• Wrapmate, a provider of vinyl vehicle wrapping services, raised $16 million from JettyCove.

• Ares Management raised $1.7 billion for a private credit fund focused on Australia and New Zealand.

• Novo Holdings plans to use its earnings from subsidiary Novo Nordisk’s sales of weight-loss drugs Ozempic and Wegovy to support new life sciences and real assets investments of up to $7 billion per year by 2030, per the FT.

1. Bill Ackman’s latest campaigns.

• New York Magazine sits down with Pershing Square’s Bill Ackman for a feature on his activism beyond public markets. Highlights include Ackman’s thoughts on our individual predetermined fate: “So, my name is Ackman — it’s like Activist Man.” — New York Magazine

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