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Be Ready For The Risks And Rewards In Mergers & Acquisitions

Posted by Jeffrey Forbes on Jul 13, 2017 9:00:00 AM

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Mergers and acquisitions happen with increasing frequency at all levels of the United States’ economy.  They now form an important part of the growth strategy of many companies.  They do not, however, come without significant risks attached and businesses seeking to grow their mergers or acquisitions should keep an eye on those risks as they move forward. 

What is Representation and Warranties Insurance?

Many insurance companies offer specific insurance policies to cover the risks involved in acquisitions for both the buyer and seller.  Known as Representation and Warranties insurance, these policies can help cover for issues such as successor liability and credit risks in distressed transactions, but mostly these deals aim to cover for losses caused by misrepresentations made during the acquisition process.

In April 2017, AIG issued a study noting an approximate 50% rise in frequency in claims made against Representation and Warranties policies. 

  • The rise means that approximately one in every five R&W policies will have a claim made against it. 
  • Some of these claims can take years to arise, with only about half of all claims filed in the first twelve months after the issuance of a policy. 
  • More than half the claims involved a payout of at least one million dollars.

What Would Be Covered?

These misrepresentations can involve a host of different areas, but the most common for claims involve those made in financial statements, taxation areas, issues with intellectual property, and contracts.  Compliance issues can also lead to third-party claims under a representation and warranties policy.  Representation and warranties can be purchased by both the seller and the buyer during an acquisition, though the protections and due diligence involved can look quite different depending on who is buying the policy.

Mergers And Acquisitions Present Other Risks

The decisions involved in purchasing or selling a company can lead to complicated directors and officers liability lawsuits if shareholders or other interested parties are unhappy with the acquisition.  Acquisitions will impact the level of a firm’s operational and financial risks and adjust their risk management strategies accordingly.  They also present challenges to a firm’s culture and human resources, as the merging of different departments can lead to a loss of key employees.

Less Obvious Risks In Acquisitions

In the modern era, acquisitions also present unique cybersecurity risks.  An acquisition will involve acquiring another company’s technology as well; this can present problems if that technology has holes as well as creating issues around system and file access and data transfers. Companies going through the acquisition process need firm controls in place to mitigate these new cyber-risks. 

Be Aware Of How To Best Manage The Risks

Mergers and acquisitions present a great opportunity for many companies to both grow and better position themselves for the future; they also pose great challenges for companies of all sizes and a lot of opportunity for loss.  Companies need to manage their risks and deeply consider their insurance purchases when going through the acquisition process.

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