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Mergers and Acquisitions growth market sparks demand for specialised insurance

28 May 2012 Aon South Africa
Alicia Goosen, Business Unit Head: Financial Services at Aon South Africa

Alicia Goosen, Business Unit Head: Financial Services at Aon South Africa

The improving South African economy is paving the way for a potential increase in the number of mergers and acquisitions. In response to this, the need for specialised mergers and acquisitions insurance has been thrown into sharp relief by the flurry of

The company’s comments come against the background of figures which show mergers and acquisitions (M&A), including Private Equity activity in SA surged since 2010. In addition, M&A deals involving foreign investment into South African companies is growing significantly as foreign investors find South Africa attractive because the country is seen as a springboard into Africa, which has significant growth opportunities.

“M&A activity started picking up in the early part of 2010 and this trend continued throughout 2011. The increase was more pronounced in cross-border deals in South Africa, inward investment and general corporate restructurings. Many of the recent transactions (particularly in the resources sector) involved Chinese, Indian and Japanese parties. The emerging markets are witnessing heightened deal activity particularly in the BRIC nations, and these trends seem set to continue,” says Alicia Goosen, Business Unit Head: Financial Services at Aon South Africa.

Anticipating a continuation of the trend, Aon expects increased demand for Warranty and 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. In essence W&I transfers the risks from the buyer and seller in an M&A scenario to an insurer, thus facilitating a more streamlined process. 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 liabilities,” explains Alicia.

 

“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 conclusion. 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 offers significant benefits in providing cost effective solutions to a range of transaction hurdles set out below.

  • 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” identified risks.
  • Covering legal costs incurred in the defense of a warranty claim -- cover can be arranged for the full sale price.

“In the current economic climate insurance rates have continued to “soften” and insurers are more receptive to the risks attached to M&A covers. 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 W&I cover is only one product in an array of M&A insurance related protection,” says Alicia.

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 defense costs incurred in litigation up to an agreed limit;
  • Aborted bid costs cover indemnifies companies for losses they 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. The same transactional liabilities could also apply to Private Equity deals, and in some cases Public Private Partnership transactions as well.

These amendments highlight the onerous duties of those executives, directors and officers who are tasked with the actual execution of multimillion ZAR/USD deals and heightens the awareness of personal liability should these duties not be enacted with utmost care. Clearly this will only increase the necessity for an insurance solution, and Aon South Africa are positioned to offer these solutions.

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