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The importance of risk and insurance in M&A transactions

Insurance and risk should be considered at an early stage when companies negotiate mergers and acquisitions (M&A) to protect themselves from nasty shocks. That was one of the key messages as Airmic and Aon launched their guide to mergers and acquisitions at the association’s annual conference in Harrogate.

The document, Risk and Insurance in Mergers and Acquisitions, sets out what is involved in mergers and acquisitions. It gives advice on risk managing them and the role insurance can play. It takes the reader through the stages of insurance and risk due diligence. These include:

  • identifying and addressing the target’s pre-closing liabilities that will be acquired;
  • managing future risks by determining the optimum future structure and costs of the post-closing risk and insurance programme;
  • highlighting changes in the risk and insurance budget where the cost of insuring or funding risks can be significant and changes may need to be considered within financial due diligence;
  • identifying areas where insurance can provide transaction solutions;
  • minimising any integration costs of the post-completion programmes.

“In the UK, a contract to buy or sell a business is based on the principle of caveat emptor, known as ‘buyer beware’. This means it is the buyer’s responsibility to be comfortable with what they are buying. Thus, the deal negotiations and information gathering part of the M&A process are very important to both buyer and seller, and can help to avoid future value reductions in the acquired business,” said the report.

“The importance of risk and insurance within many transactions continues to be underestimated,” said John Donald, Director of M&A Solutions for Aon. “An analysis of insurance risk and due diligence can help identify important risk information which could materially affect the negotiations.”

The document highlights ways that transaction coverage, for example Warranty and Indemnity insurance, can protect companies from the financial pitfalls of M&A activity.

“For years we have said that members need to be involved in M&A activity at an early stage. This excellent guide goes into the subject thoroughly and in detail and will help them through the process,” said Airmic R&D manager Georgina Wainwright.