Whether it’s global trade disruption, fluctuating capital markets, or interest and inflation jitters, for dealmakers, market volatility is no longer the exception. For the last five years, it’s been the norm.  

For the New Zealand M&A market, deals are still happening, but they’re taking longer and being approached with more caution. Both buyers and sellers want downside protection, and we’re seeing that play out in how deals are priced, risk is shared, and timelines are managed.

Volatility is driving a more deliberate, disciplined approach to deal structuring. In this environment structure really matters and the most successful deals are the ones where parties plan for unpredictability.

Changing deal dynamics

With challenging economic conditions, we are seeing more sellers come to market out of necessity, whether they are private equity funds nearing the end of their lifecycle, distressed assets, or divestments by trade-sellers of non-core holdings for strategic reasons. 

While capital is available, against this backdrop, buyers are wary. There's a heightened emphasis on financial due diligence with some buyers waiting for forecasts to stabilise before committing to a deal - this has led to lengthier negotiations and a greater need for creative structuring. 

On the flip side, this environment presents a potential opportunity for high-quality businesses to come to market. With prime assets in short supply, well-capitalised buyers are actively seeking attractive opportunities to deploy their capital into. As a result, we are seeing more processes initiated by interested buyers approaching potential targets to test shareholders’ appetite for a transaction. 

Strategic use of pricing mechanisms 

In periods of heightened volatility, in which buyers and sellers tend to have differing views on value, parties can deploy various pricing tools (often in combination) to allocate risk and get the deal done. 

Earn-outs

Earn-outs are often seen as a way to bridge a value gap between buyers and sellers, particularly when there are differing views on a target company’s potential future performance. They allow a portion of the consideration to be tied to future results rather than uncertain forecasts. For example, an earn-out was deployed when Rangatira (a private equity firm) purchased a 35% interest in Tuatara Brewing Company from The Malthouse in 2013. Rangatira valued the stake at $3.5 million, while The Malthouse valued the stake at $4.5 million. To bridge this value gap, the parties agreed to an upfront purchase price of $3.5 million, with $1 million in additional consideration if certain performance milestones were met (or if the business was on-sold for a value greater than or equal to The Malthouse’s proposed valuation).

Although on the face of it a helpful mechanic, earn-outs often come with limitations. For example, they often restrict a buyer from making material changes to the target’s business during the post-closing earn-out period, potentially hindering integration and post-acquisition strategy.

Earn-outs are also fertile ground for disputes. In the Tuatara acquisition, a dispute arose in relation to the interpretation of the earn-out mechanism, which (it was argued) produced a result which was inconsistent with the original intentions of the parties. The case highlights how seemingly minor drafting imprecisions can lead to disputes with costly consequences.

As a result of the limitations and potential for disputes, earn-outs are less common than one might expect in a volatile environment. Even when they appear in initial deal terms, they are often negotiated out, with the parties ultimately aligning on deal value once they have completed due diligence and sufficiently scrutinised the valuation model. 

Completion Accounts or Locked Box

There is always a strategic choice between using completion accounts or a locked box pricing mechanism. 

Completion accounts remain the dominant pricing mechanism in New Zealand – as is also the case in Australia, the US and Asia. By adjusting for things like net debt, working capital and capex as at closing, the seller bears the risk of a significant change in a target’s financial position between signing and closing. 

Where sellers have greater bargaining power (eg in a competitive auction process), a locked-box structure is often deployed. This structure essentially fixes the price upfront by reference to a pre-signing set of accounts and is often coupled with an interest ticker (to compensate the seller for the time value of money / any expected value gains in the period to closing) along with a no leakage undertaking (restricting the seller from extracting value from the business during the period to closing). This approach shifts the risk of changes in the target’s financial position during the pre-closing period to the buyer. For some time, locked box structures have been the default position in the United Kingdom and Europe and gained traction in New Zealand during COVID (2020/2021) when the market was hot and seller-friendly.

Locked box and completion account mechanisms can also be adapted so that the risk up to closing is shared between the buyer and seller. For example, “caps” and “collars” can be added to completion accounts adjustments (eg the buyer only bears the risk of material changes in financial position up to a cap) or a hybrid locked-box completion accounts mechanism could be used by allowing for certain specific adjustments or by using reference accounts prepared during the pre-completion period (ie the seller bears risk up to new accounts, after which the box is locked, and the buyer bears risk through to closing).

MAC clauses aren’t a silver bullet

Material Adverse Change (MAC) clauses are intended to give buyers the right to walk away if a significant adverse event occurs between signing and closing. However, they’re not a silver bullet. MAC clauses are often heavily negotiated and watered down to cover a very narrow set of events. Courts also typically interpret them narrowly, placing a high burden of proof on the terminating party. That said, MAC clauses can be a powerful tool to kick-start renegotiations when external factors drastically change a deal’s economics.

Two notable examples from COVID-19 highlight how buyers have used the MAC clause to revisit deal terms. In 2020, Asia Pacific Village Group Limited (APVG) tried to walk away from its agreement to acquire Metlifecare citing the impact of COVID-19. Metlifecare disputed the claim and took the matter to the New Zealand High Court. Shortly after, APVG returned with a lower offer, which Metlifecare accepted. Similarly, in Europe, LVMH sought to invoke a MAC clause to back out of its acquisition of Tiffany. Before the court could rule, both parties settled, lowering the deal price.

Parties want shorter timelines and less conditionality

With market conditions changing rapidly, both sides are focused on shortening the time between signing and closing to minimise exposure, and sellers are placing a premium on deal certainty. In an auction context, buyers who can avoid regulatory approvals, such as Overseas Investment Office (OIO) or Commerce Commission clearance, have a comparative advantage, although OIO has become less of a concern since the change to its application processing timeframes introduced last year. Further OIO reforms announced by the government at the start of this year will further help overseas buyers avoid the perceived disadvantage.

Warranties and insurance solutions to externalise risk

Warranty & indemnity (W&I) insurance is an important tool for managing risk, allowing broad warranty cover for buyers and a clean exit for sellers. But W&I insurers require thorough due diligence and disclosure, adding time and complexity. Deals where W&I is contemplated from the outset tend to run more smoothly: due diligence can be structured to meet insurer expectations and timelines are easier to manage. 

In New Zealand it is common for warranties to be repeated on closing without bringdown disclosure by the seller or associated termination rights for the buyer. However, where the buyer’s sole recourse is to W&I, managing this period can be challenging given traditional insurance solutions typically do not cover new issues that arise (and that the buyer becomes aware of) during the sign-to-close period. New breach cover, offered by W&I insurers, can help bridge this gap, but take-up remains limited in New Zealand, due to the high cost, the need to renew at regular intervals (with such renewal being at insurer’s discretion and often only available for a period as short as six weeks) and gaps in coverage.

Outlook: Structuring matters more than ever

Volatility is sharpening the focus on deal structuring. Buyers want flexibility, downside protection, and clear post-completion recourse. Sellers want certainty, speed, and clean exits. Navigating that tension requires strategic thinking from the outset and deal terms that clearly allocate risk to cater for volatility. Choosing the right pricing mechanism and deal structure requires a careful read of deal dynamics and negotiating leverage. There is no one-size-fits-all.

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Special thanks to Rosie Dossor for her assistance in writing this article.