Shareholders are taking an increasingly dim view of large and complex mergers and acquisitions, so the risk manager’s role is important during the deal
The first quarter of 2018 was a tough period for those engaged in the art of the mergers and acquisitions (M&A) deal.
Large and complex deals led to lower share prices on completion.
Cross-border mergers or any deal that dragged on too long were among the worst performers.
That was according to recent research from Willis Towers Watson, an insurance broker placing due diligence as well as warranty and indemnity protection for M&A risks.
“Fund clients have got a large war chest and they’re still looking at acquisitions. We’re seeing certain industries performing strongly and providing them cover for deals, such as real estate, oil and gas, and renewables in Southern Europe,” said Alex Keville, practice leader M&A, for Willis Towers Watson’s FINEX Global business.
Jon Armstrong, practice leader for M&A due diligence advisory in the broker’s FINEX arm, continued: “My personal feeling is that many of these deals are hugely overpriced, particularly the pharmaceuticals and the technology, media and telecoms sectors.
“For the US and Asia there’s been a recalibration of overpriced assets. European acquisitions have been more muted in recent years, but activity seems to be back to normal after the Brexit vote, and there’s a lot of cash on the balance sheet,” added Armstrong.
Focused on M&A worth more than $100m, share price fell by a global average 0.6% between the start and completion of deal.
Asia-Pacific acquirers recorded the worst regional results with underperformance of 16.8 percentage points, followed by 3.5 points of underperformance by North American acquirers and marginal underperformance by European acquirers of 1.3 points.
Large deals underperformed the index by 4.0 percentage points, but medium-sized deals (under $1bn) bucked the negative trend to outperform the market by 0.4 points.
Cross-border deals underperformed by 3.7 percentage points, and cross regional M&A by some 4.3 percentage points.
In contrast, Willis Towers Watson noted that less complex deals such as domestic and intra-regional were able to outperform their respective indices, both by 0.4 percentage points, respectively.
“Multinational and complex deals take longer to close. The trend is that the longer those larger and more complex deals take, the less value is derived from that,” said Jana Mercereau, head of corporate M&A for Great Britain at Willis Towers Watson.
“There’s fatigue in the market and investor concern,” said Mercereau.
“There’s also regulatory involvement for massive deals, in pharma deals, for example, needing to sell other assets in order to make the acquisition they want,” she added.
Medium-sized deals tend to be proportionally funded more by the acquirer’s own debt or equity, Armstrong noted, giving investors more confidence about the risk being taken, particularly now banks are more comfortable lending.
Many of the smaller deals are also created by the larger ones, Keville noted, as firms divest other assets.
Risk manager role
The role played by the risk manager in M&A depends strongly on whether the deal is to acquire a whole organisation or transfer the ownership of a division or unit of a company.
Armstrong stressed the issue of making sure insurance programmes for the acquired are continued or replaced effectively to allow a smooth transition, without presenting unforeseen pitfalls.
Buying a division might mean extending an existing programme at the acquirer to cover the acquired team. The risk manager should be mindful of claims within the new business, he stressed.
“From a corporate risk manager perspective, buying a company, including its insurance arrangements, or a division to integrate, you need to ask what happens when you get a claim that happened before we bought the business,” said Armstrong.
“There is no typical arrangement,” he warned. “It’s whatever is negotiated in the sale and purchase agreement, which is very dependent on whether you have an aggressive or flexible seller.”
It is important for risk management to be involved during rather than after the deal, he suggested.
“Risk management obviously wants to know before deal closes, to bring the acquisition into risk modelling, to consider efficiencies, how to integrate it, and the effects on insurance premium,” said Armstrong.
Keville noted an example of a warranty and indemnity product for a buyer in a deal with a private equity fund as the seller.
“The buyer needs recourse if the PE seller has zero liability. The deal team and lawyers negotiate that, and a corporate buyer often needs the risk manager to get involved,” he said.
“That is happening more and more in scenarios where the seller looking for clean exit. Risk managers are having to find their feet and we help them get used to this,” Keville added.