MERGERS & ACQUISITIONS (M&A) INSURANCE
Insurance, whether we like it or not, is part of the de-risking process of a business or a transaction. Just like all other insurance products, M&A (aka. Transactional Liability) insurance is a second line of defence used to transfer residual risk of a specific M&A transaction. Any M&A transaction will be exposed to a wide range of risks and claims as shown in Graph 1 below.
To Buy or Not to Buy
To determine whether or not M&A insurance is worth it, Buyer and/or Seller should:
(a) perform a detailed cost/benefit analysis on whether insurance is needed to protect the Purchase/Sale of a business; and
(b) aim to purchase a structured insurance policy (instead of ‘off-the-shelf’) in the event the cost/benefit analysis yields a net insurance benefit. Either Buyer or Seller can purchase the structured M&A insurance policy (cost can also be split amongst them).
Structured M&A insurance, unlike off-the-shelf M&A insurance, would provide protection against the majority, if not all, of post-closing claims and at a much higher probability of payout.
Benefits to Seller
* Distribution of Sale Proceeds: immediate liquidity at Closing for Seller --> shown in Graph 2.
* Expedite Sale and/or increase Purchase Price --> eliminating obstacles to completion of Sale + offering greater indemnity to Buyer.
* Minimize or eliminate any contingent liabilities.
* Protect passive Sellers who have not controlled the disclosure process.
Graph 2. Source: Gary P. Blitz and Daniel Schoenberg, Aon Risk Solutions, 2016. A deal valued at $500 million: Seller can receive an additional $48.5 million on closing with the use of M&A insurance. This is an example only and each deal has different requirements.
Benefits to Buyer
* Protect the deal and key relationships with stakeholders at Target company beyond Representations & Warranties (R&W).
* Ensure certainty of the Purchase Price + avoid unanticipated future expenditures.
* Extend duration of R&W --> Term of the insurance can be much longer than the term of the escrow --> protection against post escrow expiry claims (as shown in the Table below).
* Making collection easier in the event of a claim --> having a large and established insurance company as a counter-party (vs. Seller).