The article provides an overview of the factors that have left “a marked depression in deal flow and capital raising in the energy sector” instead of a widely anticipated spate of consolidation, including the “twin vices of deflation and the violent price swings,” debt-laden capital structures and change of control puts.
The article then discusses the evolution of deal terms in the upstream space and how potential buyers and sellers, aided by a narrowing bid-ask spread, are actively exploring ways to bridge any remaining valuation gap and allocate risk to get deals done, such as purchase price adjustments and earn-out regimes.
As the authors write, however, “while these techniques offer a potential means to narrow valuation gaps, business principals should be mindful that such provisions materially increase the ex-ante probability of a dispute.” What’s more, they add, “while the present environment offers promise for ample opportunities for prospective buyers to bargain hunt, those same buyers should be cognizant of potential pitfalls associated with acquisitions in these uncertain times,” and if a seller ends up entering bankruptcy, asset acquisitions may be subject to attack as a fraudulent conveyance and therefore buyers should be conscious of the marketing process to assess risks.