Despite heightened political uncertainty, global M&A continues at pace with M&A insurance increasingly helping to clinch deals.
The prospect of a trade dispute and ongoing Brexit uncertainty may yet dampen business confidence, but so far this year the global mergers and acquisitions (M&A) market has been resilient. Companies continue to see growth opportunities in overseas markets with ongoing interest in cross-border M&A.
Worldwide merger and acquisition activity hit new highs in the first half of 2018, with the value of deals reaching $2.5trn, up 64% compared to the same period in 2017, according to data from Reuters. The US market has been particularly active, accounting for $1trn, up 82%, followed by Europe, where deal volumes doubled to $767bn.
Cross-border deals are also strong, accounting for 46% of global M&A activity at the start of 2018, continuing a long-term trend of increasing cross border deal volumes and value. Activity has been particularly strong between the US and Europe, reaching a 10 year high last year, according to Reuters.
Cross-border transactions are, however, fraught with complexity, and present a very different set of risks to domestic transactions. Buyers are often driven by the desire to enter a new market, yet they will probably know less about the intended target company and jurisdiction than they otherwise might.
Acquirers are far less likely to be familiar with the regulatory, tax and legal framework in a cross-border deal. For example, a US company would find employment and environmental laws and practices in Europe very different to those of their home market. Business culture, language and local practices can also be a challenge. Another area of growing concern is tax, with many countries putting corporations’ tax arrangements under greater scrutiny. EU countries are currently hot on tax audits, which is probably why breaches of tax covenants are currently the number one cause of M&A insurance claims in the region.
Political uncertainties can also come into play for cross border M&A, even in mature markets like Europe. Britain’s vote to leave the European Union has created much uncertainty around the future trading and regulatory relationship between the UK and the EU. As a result, M&A activity slowed in the UK last year, although UK companies are taking a more international view and are targeting foreign companies. Some 63% of M&A transactions by UK companies in the first half were cross-border, according to analysis by Cass Business School.
At Miller we have seen a big uptick in M&A business, especially from US companies targeting acquisitions in the UK, continental Europe and Canada. In fact, we have already completed double the value of deals in the first six months of this year as the whole of 2017.
M&A insurance is increasingly used as a deal facilitator in both cross-border and domestic transactions, especially in the mid-market. Both buyers and sellers use insurance to remove obstacles to a deal, to make their proposition more attractive, or to achieve a clean exit.
Essentially, M&A insurance can be used to protect buyers and/or sellers against potential breaches of warranties and representations. Typically this would be related to regulatory or tax liabilities, although M&A insurance can be used to address a wide range of concerns. M&A insurance can also be combined with other insurance coverages to address specific risks, such as environmental and data breach liabilities.
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The use of M&A insurance has been growing in recent years, as M&A lawyers have become familiar with the product and have seen that it works. Analysis by insurer AIG shows that one in five M&A policies results in a claim notification, with larger and more complex deals more likely to lead to a claim and a larger payout.
AIG’s study found that even the most thorough due diligence process can fail to uncover potential sources of dispute and litigation. Breaches regarding financial statements, tax and compliance with laws, are the most common causes of a claim, but employee, litigation and environmental related breaches can and do create losses.
With one in five policies resulting in a claim, M&A insurance is clearly worth considering, especially for cross-border deals where uncertainty is highest. The M&A insurance market is also very competitive, and an influx of insurers into the market has resulted in broader cover and attractive pricing, as well as higher limits on offer.
Insurers and specialist brokers like Miller see a wide range of deals across a number of regions. For cross-border transactions, clients gain advantage of working with an insurer and broker that is familiar with the target company’s home jurisdiction, as well as independent advice on the structuring of a deal. A trend in recent years has seen insurers recruit specialist M&A lawyers.
M&A insurance is a complex and bespoke product. However, Miller can assist intermediaries and provide the expertise and guidance required, as well as facilitate access to specialist insurers in the London market.