Using valuation adjustment mechanisms in M&A deals

Valuation adjustment mechanisms, or VAM agreements, have been employed in mergers and acquisition deals. VAM agreements were first used in private equity and venture capital, and have been most commonly used in M&A transactions with large premiums.

VAM agreements are principally used in these translations because of the asymmetrical state of information. Specifically, when making a proposal to a target company, the investor usually fail to fully understand the financier’s situation due to this asymmetry, even where the investor has engaged professional services to conduct due diligence into the company.

In their investment agreement, an investor will set out the value adjustment triggering conditions in order to protect their interests. Once these conditions are met, both the investor and the financier exercise their rights to adjust value based on mutual agreement to pay the damages, either to the investor due to high valuation or to financiers due to low valuation.