Mergers and acquisitions (M&A) can provide a gateway to new opportunities, but they also come with significant risks and uncertainties.
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These risks can be seen in various aspects of the business, including commercial, people, and operations. Managing these risks is a crucial component of any M&A process.

  • Commercial risks include due diligence, warranty and indemnity, and contingent risk
  • People risks involve issues related to company culture, rewards and benefits, and engagement
  • Operational risks focus on feasibility, governance, and implementation.

Insurance due diligence

Insurance due diligence is a sensible approach for the buying business to take. It involves a thorough assessment of the target’s insurance programme and the consequent report can be shared with stakeholders. It is an opportunity to confirm that the target business’ coverage is legally compliant, and fit for purpose in relation to its business activities. It will address what policies can survive completion, and in view of the change in ownership, specifically focus on the ongoing, and runoff D&O. If there are gaps then these can be addressed between the businesses as part of the negotiations so the parties can agree the total cost of risk.

Cyber is an example where we often see inadequate cover. Also underinsurance is a market-wide issue due to inflation; are the sums insured adequately stated? The due diligence will also consider how anticipated future trends may impact the programme and benchmark the target’s claims experience in relation to its peers. This can give a helpful insight into the risk management culture within the business and its management. It can also assist in obtaining a wider warranty and indemnity policy.

Benefits of warranty and indemnity cover

Traditionally, as part of the Sale and Purchase Agreement (SPA), the seller provides warranties or statements about the business, which the buyer relies upon amongst other things, to make an offer. The seller would have a liability cap in the contract should there be a breach of warranty. In the event of a breach of warranty the buyer could potentially sue the seller. Increasingly now we see the seller limit their liability, to say £1, and encourage the buyer to take out a buyside W&I policy. This is often driven by the seller as it provides them with a cleaner exit, i.e. no need to hold back funds in escrow. However, benefits for the buyer include protecting shareholder relationships with management post-merger, i.e. management giving the warranties are likely to now be in the buyers business. If other bidders are not using W&I, you may have the advantage in a competitive process, as it will be attractive to the seller supporting their clean exit. The policy can also cover fraudulent misrepresentation of the seller. It is not however, a substitute for a properly negotiated transaction, where due diligence and disclosure is still key. Indeed, the robustness of the policy is dependent on the quality of the due diligence, hence insurance. Many buyers like the fact that the underwriting process involves a review of all the due diligence, so it’s like an extra pair of eyes.

While W&I protects against the possible unknowns that slip through the DD net, if known exposures relating to tax, for example, surface during due diligence, these can also potentially be covered by contingent risk insurance.

People risk: M&A megatrends and blindspots

There are several galvanising changes that are significantly impacting M&A at a global level. The fourth industrial revolution is upon us and new tech like AI and machine learning are changing the workplace at an exponential rate. Climate change and political instability have forced the migration of populations, creating talent vacuums in certain parts of the world and an abundance in others. In the UK, the skills imbalance is accelerating, and retaining talent is a growing challenge.

Before an M&A, business leaders should check in with HR to ensure the Health and Safety Executive stress management audit is up to date and that there is adequate support in place for employees. If a firm employs more than five people, it has a responsibility to manage the pressures it exposes its employees to. Therefore, it is important to close any gaps; remember that mental health is a protected characteristic under the Equality Act 2010. Any claim brought forward will likely be uncapped in terms of liability, so it is a significant M&A exposure.

Another M&A blindspot is communication and uncertainty from leaders can hold a business back. Messages need to be shared with purpose and authenticity and be personalised to individual employees. Even if leaders are limited in what they can say, they can still be clear on why that is and when they will be able to provide the next update. Post-M&A, leaders need to articulate the new company’s narrative in a way that convinces employees that they no longer come from “A” or “B” but are actually all part of “C”.

A plan to harmonise rewards and compensation must be enacted as soon as possible. Restructuring is difficult, but if this isn’t carried out immediately when will be a good time? It is a priority for employees and, if handled well, can become a compelling reason for the recruitment and retention of talent. An employee value proposition presents an early opportunity post-M&A to cement the new company’s ambition – it is the greatest early advert for what the business can achieve.

What three actions should you take if an M&A is on the horizon?

  • Identify any culture gaps
  • Ensure the business is HSE compliant – any liability would likely be uncapped.
  • Notify insurers as soon as the project has a name – transactional insurance kicks in at signing, not completion. It doesn’t cost anything to obtain quotes.

Want to know more? Listen to George Minoprio and Alistair Dornan’s full Beyond Today session on demand and please contact George or Alistair if you would like to discuss any of the issues raised further.

Disclaimer

The sole purpose of this article is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher Insurance Brokers Limited accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.

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