Mergers and Acquisitions growth market sparks demand for specialised insurance

The need for specialised mergers and acquisitions insurance has been thrown into sharp relief by the flurry of such transactions of late says insurance brokers and risk solutions providers, Aon South Africa.

The company’s comments come against the background of figures which show Mergers & Acquisitions (M&A) activity in SA surged 133% last year as growing consumer purchasing power made local companies attractive.

According to independent Mergers & Acquisitions intelligence services provider, Mergermarket, total transactions of this nature in SA last year were some $15,7b, the strongest showing since the economic meltdown in 2008.

Large cap deals were particularly strong, amounting to $11,5bn or 423% up from 2009. This year the most prominent acquisition is the Massmart-Walmart deal.

Anticipating a continuation of the trend , Aon’s Alicia Goosen expects increased demand for Warranty & Indemnity insurance (W&I) which can be put into place at any point of the deal process, including after completion, although it’s normally placed at the signing of the transaction.

Such covers can assist in eliminating or mitigating exposures resulting from any unidentified and unanticipated inaccuracies in such warranties and should be seriously considered she says.

“Basically Warranties & Indemnity Insurance transfers the risks from the buyer and seller in an M&A scenario to the insurer, in the process facilitating a more streamlined transaction.

“These risks include, amongst others, breach of intellectual property representation, for example breach of copyrights, patents, trademarks and trade secrets, breach of financial statement representation, environmental liabilities, political risks and fiduciary and benefits liabilities.

“Cover helps protect the insured from financial loss caused by a breach of representation or warranty to which the policy applies. It thus eliminates many of the concerns arising from the transfer of representations and warranties that buyers and sellers encounter in the preamble to an M&A and which, in many instances, are the very reason why a deal does not reach finality.

“Absence of such cover could potentially impact the buyer or the seller of a business by exposing them to liabilities from the breach of various warranties.

Appropriate cover of this nature therefore offers significant benefits in providing cost effective solutions to a range of transaction hurdles including:

• Protecting the seller and the buyer for a breach of the sellers’ warranties (or tax indemnity) given in a sale agreement.
• Use as a strategic tool by sellers to protect their divestments and enhance their rate of return.
• Use by buyers to protect their investment and increase their financial protection.
• As a strategic tool to make a bid more competitive in an auction process.
• Ring fencing known risks.
• Covering costs incurred in the defence of a warranty claim -- cover can be arranged for the full sale price.

“In the current economic climate insurance rates have decreased by some 50% in the past 24 months or so and insurers are prepared to be flexible on M&A covers, particularly in distressed sale situations where more innovative structures may be needed.

“Also, large insurers have specialist teams dedicated to the correct review and analysis of M&A transactions and the ultimate task of providing tailored solutions specific to the individual deal and its role players.

“However keep in mind that Warranties and Indemnity cover is only one product in an array of M&A insurance related protection. Other more common types of covers available are:

• Tax insurance where the success of a corporate transaction can hinge on a specific tax outcome whether it relates to a past or future restructuring
• Claim or Litigation buyout which covers the costs of court judgment or an approved settlement and defence costs incurred in litigation up to an agreed limit.

• Failed Bid Insurance geared to cover the losses that companies may sustain due to a Merger or Acquisition not reaching completion. This could be as a result of a number of factors including one of the parties pulling out or legislative difficulties.

“With the new Companies Act already in force, it’s interesting to see that much attention has been paid to the processes involved in Mergers and Acquisitions as well as specific references to the duties, responsibility and accountability of the Directors and Officers involved in these transactions.

“These amendments highlight the onerous duties of those individuals tasked with the actual execution of what, in many instances, equates to multi million Rand deals and brings to the fore the risk of personal liability should these duties not be enacted with utmost care. Clearly this will only increase the current necessity for an insurance solution.”