''The prevalence of earn-outs at NASDAQ OMX Stockholm''

Abstract

In order to stay competitive in today’s global world, a common strategy for companies is to actively seek mergers and acquisitions. The increased use of mergers and acquisitions gave rise to deal saving devices, such as the earn-out. The earn-out is a contractual agreement on an additional payment that depends on deal specific terms. Through the introduction of the International Financial Reporting Standard in 2005 for all publicly traded companies within the European Union, the earn-out has been regulated in the International Financial Reporting Standard 3 Business Combinations. As the field of mergers and acquisitions is diverse and tainted by many challenges, this would logically impose difficulties on the reporting of the earn-out. This study aimed to first map the prevalence of the earn-out and accordingly to evaluate the initial provision with the actual earn-out payment. By reading the financial reports between 2005 and 2010 from 133 companies registered at the NASDAQ OMX Stockholm, this study attempts to answer these aims. One of the conclusions was that 47 % of the companies registered at NASDAQ OMX Stockholm Large and Mid Cap have reported the use of at least one earn-out. Furthermore, the distribution of the use of earn-outs was more prevalent in some sectors than others. Other findings in this study include that the earn-out constitutes a significant part of the total purchase price, the earn-out often leads to a payment and the reporting of the earn-out has been inconsistent. The initial provision of the earn-out was furthermore found to be rather accurate, and in some cases even identical, with the actual payment.