A new Chubb whitepaper, "Emerging Risk Considerations in Global M&A Transactions," cited cyber security, transactional risks, and multinational expansions as the three key financial exposures inherent in merger and acquisition transactions and offered suggestions on how to mitigate them.
"The M&A environment is evolving at a rapid pace and, as a result, private equity dealmakers are constantly facing growing financial exposures, including cyber security, transactional risks, and multinational expansions," said Seth Gillston, Chubb's mergers and acquisitions and private equity practice leader. "While one size does not fit all, the use of a specialized risk transfer mechanism to deal with these and other risks is essential to ensuring transactions proceed with greater clarity and confidence."
Mr. Gillston coauthored the whitepaper with Steven Goldman and Michael Tanenbaum, both executive vice presidents of Chubb's financial lines division.
Cyber Security Risks
According to Osterman Research, 2016 was the worst year on record for cyber attacks, with nearly half of all businesses surveyed held captive by ransomware incidents alone.
"Forensic analysis of a target acquisition's cyber risk may no longer provide a credible assessment in determining a company's exposure after a deal closes," said Mr. Tanenbaum. "One way to mitigate the risk is to seek cyber insurance coverage from a carrier, such as Chubb, that specializes in M&A transactions, and also offers loss mitigation services as part of their cyber program. Working with a knowledgeable broker is also crucial in identifying the right solutions and partners to help customize these types of risk transfer strategies."
Transactional Risks
Purchase and sale agreements contain a significant number of representations and warranties made by the parties involved. According to Chubb, it is imperative that the parties consider the best way to protect themselves against financial losses that may be incurred as a result of certain breaches of representations and warranties contained in the agreement. In order to effectively address this risk and streamline the process, a representations and warranties insurance policy should be considered.
"This risk transfer strategy helps protect buyers and sellers against financial exposures related to the underlying transaction," said Mr. Goldman. "The representations and warranties insurance policy is a great alternative risk management tool compared to escrow accounts or other traditional indemnification structures, because of its flexibility. Such a policy also streamlines the negotiation process and reduces deal friction that is often inherent in transactions."
Multinational Expansion Risks
Companies that operate across international boundaries already face a set of special challenges and opportunities. In today's highly uncertain geopolitical climate, transactional activities involving multinational entities are subject to rapidly evolving regulatory, legal, and compliance issues.
"From a due diligence standpoint, sifting through a multinational company's insurance portfolio to address the risk of unforeseen liabilities and insurance coverage gaps can be very difficult," said Mr. Gillston. "Using a controlled master policy as a risk transfer strategy can help companies involved in a transaction reduce exposures by pairing a master policy, issued in the U.S., with locally issued coverage. This provides consistency across operations, and can help solve for inadequacies of an entity's insurance portfolio."
Learn more: Chubb Whitepaper.