Monday, 28 July 2014

Brian JM Quinn, Albert Choi and advise on earnouts and purchase price adjustments

Dear all,

I though that I this time write a few words about blogger Brian JM Quinn who might be better known as the "M&A professor". He has a blog on M&A related issues and in this case M&A issues only, while we focus also on IP and technology issues as you have possibly seen so slightly narrower focus. 

Well few words about Brian, he works at Boston College Law School in 2008. He teaches Corporations, Corporations Lab, Mergers & Acquisitions, Mergers & Acquisitions Lab, as well as Deals: The Economic Structure of Transactions. He constantly writes about M&A related themes and if you are not following him yet, it might be worth considering. In his latest blog he is referring to Albert Choi's recent study on facilitation of Mergers and Acquisitions with Earnouts and Purchase Price Adjustments (June 30, 2014) which was published in Virginia Law and Economics Research Papers (Available at SSRN: http://ssrn.com/abstract=2460777 or http://dx.doi.org/10.2139/ssrn.2460777).

Choi's paper examines how post-closing contingent payment (PCP) mechanisms (such as earnouts and purchase price adjustments) can facilitate mergers and acquisitions transactions. By relying on verifiable information that is obtained after closing, PCPs can mitigate the problems of asymmetric information over valuation and, in contrast to the conventional understanding, this benefit applies to both earnouts and purchase price adjustments. When both the acquirer and the target are aware that there is a positive (but uncertain) surplus from the transaction, PCPs function more as an imperfect verification, rather than a signaling, mechanism and a pooling equilibrium is possible, in which all parties adopt a PCP. 

According to the summary: "When the parties are uncertain as to whether a positive surplus exists, on the other hand, PCPs function as a separating device, in which the seller with a positive surplus successfully signals its valuation with a PCP. The paper also addresses the problems of post-closing incentives to maximize (or minimize) the PCP payments. When such a moral hazard is a concern, the paper shows that (1) the PCPs will be structured so as to minimize the deadweight loss and a separating equilibrium is more likely to result; and (2) when the deadweight loss is sufficiently large, the parties will forego using a PCP mechanism altogether."

I strongly recomment you to follow M&A Professor and also read Choi's paper and personally I found this argumentation very convincing. Let me know if you disagree!

Regards,

Jan