Analysis of mergers and acquisitions deals with the use of earnouts

Abstract

The study identifies target-specific characteristics, which affect the choice of earnout as a method of payment to finance M&A transaction. The emphasis is made on studying the target’s cash flow volatility effect on this choice. The results of the empirical study with the use of logistic regression analysis show that earnouts are more likely to be used in acquisitions of targets that have highly volatile cash flows, private status, operations in industry which is different from acquirer’s, big share of intangible assets and cash and cash equivalents in total assets and low level of ROA.