By Jay Rittberg
The rapid increase in the use of representations & warranties and other transactional insurance products over the past few years has given M&A insurers like AIG a unique view into a broad cross section of private M&A deals. Below are a few trends in 2015 that we think are impacting how buyers and sellers address risk in transactions.
Shopping, Shopping, Shopping– Strategic and private equity buyers hold near record levels of cash, allowing many sellers to have the flexibility to shop around before choosing a buyer. Throughout 2014, and continuing into 2015, we have seen multiple bidders compete aggressively for attractive businesses. The frothy environment has caused highly competitive pricing (10x EBITDA multiples, or higher in many industries in which we are unaccustomed to seeing such high pricing) and deal terms, including limited or no post-closing recourse against sellers. With sellers providing such minimal indemnification to buyers, buyers are turning to the insurance markets to receive protection for unknown matters that could arise from the deal.
The Race to Sign- Sellers choosing between multiple bidders are pushing the pace of auction processes. The time frames that buyers are able to spend in due diligence learning about a target business have been reduced by sellers with leverage in auctions. Many sellers demand speed in execution of deal documentation and certainty around signing and closing. Insurance is often incorporated into deals to reduce deal friction between parties and help facilitate a faster signing.
Protecting Future Partners – On many transactions, we see sellers such as management or sponsors who roll over a stake in the business remaining involved with the transferred business after the closing. In the event that a post-closing indemnification claim comes up after closing, the relationship between buyers and left over sellers can become tenuous. One way to protect against such an awkward situation is for buyers to offer protection to such sellers by agreeing to not pursue indemnification or other recourse available under a traditional sale agreement and instead rely on insurance in the event that a seller provided inaccurate information in the sale process.
The Flexible Strategic Buyer– With strategic acquirors competing with each other and private equity for acquisitions, traditional risk management guidelines are being bent or broken. Companies that in the past have forced sellers to live with buyer –friendly deal terms, including large escrows and indemnity packages, are becoming more accommodating to sellers. Large companies no longer have to win deals by simply paying more than other bidders. Now, acting with more flexibility, they can utilize insurance to satisfy risk management guidelines or board mandates rather than seeking customary protection from sellers.
Understanding these trends and how transactional insurance can be utilized to address them can help buyers and sellers obtain better results on their deals.
Jay Rittberg is Senior Vice-President and Americas M&A Manger at AIG.