We recently sat down with Martin Woll, AXA US Head of Institutional Savings, to discuss Mergers & Acquisitions through the lens of the oft-overlooked escrow.
Q: The Escrow Shield Plus product represents AXA’s first foray into the M&A space. So why escrow of all things?
MW: That’s a good question, and it answers itself. In the thousands of private target M&A transactions executed in the U.S. each year, escrow and the general indemnification of capital have not received deserving attention. If there were a book called 100 Steps to a Merger, it would say choosing the escrow funding option is step #101 for the deal parties and their attorneys. This is in spite of escrow holding an average of 10-20% of what is often millions or billions of dollars of capital involved in the deal.
So, along with our partner SRS Acquiom, who has analyzed thousands of private target transactions, we realized an opportunity to deliver both economic and non-economic value to the closing/post-closing process via escrow. That is the genesis of the idea for Escrow Shield Plus. And given the AXA Equitable ability to manage capital with specific maturities, it was actually more natural a move than you would think.
Q: So what are the key tenets of M&A escrow and how can they add value?
MW: The three hallmarks of any escrow are:
- The safety and security of funds.
- On-demand liquidity as deal terms dictate.
- Maximizing yield without the risk, as it pertains to high dollar M&A transactions
The first two are self-explanatory, but the opportunity to offer deal parties enhanced yields is a somewhat new line of thinking.
Q: Speaking to principal security, are there inherent risks to traditional M&A Escrow investment options? What are the traditional options?
MW: It is difficult to assess risk in a general sense because that can shift rapidly as it did in 2008. But here’s what we do know: The 75% of strategic and financial buyers who use on-balance demand deposit accounts at banks are only protected under an FDIC guarantee up to $250,000.
Perhaps more interesting is the other 25% of off-balance escrow investments in money market accounts. In 2016, reforms were made to rule 2a-7 and Basel III, which were meant to protect investors. Instead, they have actually created an environment that some consider counterintuitive to the principals of escrow. With a Floating NAV[Net Asset Value], $1 in no longer means $1 out, and that may prove tough for deal parties to chew on. In addition, the potential for redemption gates and fees should be considered.
Q: How does liquidity play into this?
MW: All deals are structured differently. Whether there are working capital adjustments, tiers or other features, capital needs to be liquid at specific times for the deal parties. For agreed upon claims and breaches that may not be as expected, funds need to be able to be dispersed in a timely fashion.
Q: Lastly, why should deal parties start thinking more about returns on a vehicle like escrow?
MW: The escrow decision is made at the end of a long and exhausting transaction. That’s why I think, over time, it has become immaterial. Also, based on conversations with our clients in addition to market research, there was a sense of complacency and aversion to shifting any step of the closing/post-closing process.
But it is important to go back to the overall goals of any M&A transaction. There are strategic and financial objectives, but the overarching concept is to create value for shareholders. Cash is a scare resource. Unearthing new ways to generate more cash is important for the newly structured organization to attract top talent, cover administrative fees and much more.
Finally, in the low rate environment of the past 8-9 years, returns on non-core revenue investments could go unnoticed. Not anymore. With multiple hikes planned in 2017, a lack of yield will become more prominent and more noticeable for institutional cash managers.
So, in effect, deal parties should seek out an escrow solution that offers an opportunity for enhanced yields while also providing capital security.
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Please note: All Staticical data has been aggregated by AXA Equitable and SRS Acquiom of the Escrow Shield Plus business.
Guarantees of principal protection are based on claims-paying ability of AXA Equitable Life Insurance Company. Liquidity limitations can apply if early termination is requested. A Market Value Adjustment applies for voluntary early terminations of the contract. See contract for details. Crediting rate may change in limited defined circumstances. Click here on the prospectus for more details. Escrow Shield Plus is a funding agreement issued by AXA Equitable Life Insurance Company (NY, NY).Securities offered through Acquiom Financial LLC, an affiliate broker-dealer of SRS Acquiom LLC and member FINRA/SIPC. Escrow Shield Plus is not available in all states. Acquiom Financial does not make recommendations, provide investment advice, or determine suitability of any security for any particular person or entity. AXA Equitable and Acquiom Financial LLC are not affiliated companies.