It is six years ago that German company Grohe bought a Chinese rival, Joyou, in a bid to grow market share and cut plagiarism in Asia. But it was Japanese conglomerate Lixil, which subsequently bought Grohe, that suffered the fallout from Joyou’s 2015 scandal-ridden collapse, pushing Lixil into multi-million-dollar losses.
This sorry tale exemplifies the corporate world’s need for mergers and acquisitions (M&A) insurance, a sector that has developed a new level of sophistication since the 2011 Grohe-Joyou deal. Today, where cross-border M&A activity is growing – deal value at the end of the second quarter of 2017 was up year on year by 49 per cent, according to the Baker McKenzie Cross-border M&A Index – an increasing number of both buyers and sellers are realising the benefits.
“It’s effectively a deal facilitation tool,” says Rowan Bamford, global head of M&A and tax at Ironshore, one of the world’s leading providers of M&A insurance. “Whether it’s securing finance from a lender requiring security, sweetening an auction bid or providing a buyer with the confidence to proceed knowing there won’t be shocks in the future, M&A insurance can help bring deals to a successful conclusion.”
Ironshore is able to offer security in an insecure world
Ironshore’s M&A and tax team has global reach; with dedicated underwriters in nine countries, it has unrivalled levels of technical and commercial expertise. With the backing of owner Liberty Mutual, one of the largest insurance companies, Ironshore is able to offer security in an insecure world.
“We can offer an integrated approach because of our cross-border expertise,” says Mr Bamford. “So, if a Japanese company wanted to buy a Scottish distillery, but on US terms, Ironshore would be able to oblige.”
Equally, Ironshore’s expertise can be useful in domestic deals, where differing legal and regulatory regimes vary and can create levels of complexity. The use of insurance can help eliminate these concerns through the transfer of risk from the deal parties to the insurer.
M&A insurance is a tool for both buyers and sellers. Take the example of an Asian state sovereign wealth fund looking to buy a commercial property in London from a fund that was about to be wound up.
“The buyer was concerned with the tax residency of the target and worried they would not be able to recover under an indemnity after the fund wind up. The fund was also concerned that should it give an indemnity to the buyer, it would not be able to wind up and return funds to investors immediately,” says Mr Bamford.
It could have resulted in an impasse or at least protracted negotiations while both sides sought to satisfy their concerns. Instead Ironshore was able to provide insurance, aided by their specialist tax team and Mandarin language capability, giving both sides the confidence to proceed.
M&A insurance is also useful in a sellers’ market; if bidding for a company, it can help sweeten a deal. “If a buyer can sort out insurance in the background, it can make a bid much more attractive,” says Mr Bamford. “It allows the seller to walk away with the proceeds immediately, without having to establish an escrow account or retain a contingent liability on its balance sheet and potentially having to wait several years before finally releasing sale proceeds.”
That kind of offer creates a serious competitive advantage, particularly in deals where an individual entrepreneur may be looking to retire or a private equity firm wants to return funds to its investors in line with internal rate of return targets.
“Not all insurers can issue policies in all countries,” Mr Bamford points out. “If you are operating in an international marketplace, you want to partner with someone delivering a product that can go anywhere. Ironshore’s flexibility means we can service anyone from Japan to Mexico; with up to $150-million capacity on any one risk, we can handle most limit requirements without clients having the complications associated with syndication.”
Tax indemnity is a growing element of Ironshore’s work, insuring a deal against tax liabilities that, in a global marketplace, could come from anywhere in the world.
“We are often called in when an issue has already been identified,” says Mr Bamford. “Our ability to quickly understand the risk in-house and in many cases cover the liability, means deal negotiators need not engage in lengthy technical negotiations impacting pricing that may derail a deal.”
People who used this product five to ten years ago still may need convincing. But Mr Bamford believes the increasing sophistication of the sector will prove attractive in the future; much has changed since the incarnations of M&A insurance back in the 1990s, when price and ease of use were barriers.
“Our global team of 40 underwriters is composed of experienced lawyers, accountants, tax specialists – it makes decision-making quicker and as a result provides greater certainty for clients at an early stage,” says Mr Bamford. “In Nordic countries and Australia, most private equity deals use M&A insurance.”
But it can even provide attractions beyond the deal itself. “We recently insured a provider of tech software for use in the automotive industry,” he says. “The buyer intended to integrate the management team of its new purchase into the wider group, but did not want to be in a position where it had to sue its own employees to recover monies under an indemnity.”
Instead Ironshore provided a policy to cover potential liabilities, which protected the buyer’s relationship with its new management team. “It ensured they were 100 per cent focused on running the business going forward,” adds Mr Bamford.
As the market has developed, pricing has dropped, making it something of a no-brainer for many deals. “The cost of the product is almost cheaper than the cost of holding funds in an escrow account paying little or no interest,” says Mr Bamford. “The opportunity cost of being able to distribute funds earlier is attractive in itself and when you overlay the risk transfer element and the covenant strength of Lloyd’s security, more often than not the use of insurance makes sense.”
The information contained herein is for general informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any product or service.
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