MANAGING RISK AND CREATING VALUE IN M&A AND PRIVATE EQUITY DEALS
RC: Could you highlight some of the key risks associated with executing mergers and acquisitions in today’s market?
Edwards: Entering into an M&A transaction is a common strategy for buyers looking to gain access to a desired asset or market position faster, and often more effectively, than if it had done so organically. But M&A is not a risk-free strategy. A buyer that has not conducted sufficient due diligence on a target risks acquiring unknown and potentially costly liabilities. Such unforeseen liabilities, if not properly mitigated, can undermine the buyer’s entire rationale for executing a deal. A prudent buyer, therefore, combines comprehensive due diligence with a well-negotiated sale agreement containing appropriate warranties and indemnities to mitigate such business risk. However, counterparty credit risk can still be an issue; that is, in the absence of warranty and indemnity (W&I) insurance, following a transaction a buyer cannot recover amounts it is owed for claims made under warranties or indemnities in the sale agreement. This may be because a seller has become insolvent or because it is a private equity (PE) fund that has distributed the proceeds of sale to its investors. The benefit of W&I insurance is that it can assist in mitigating both business risk and counterparty risk.
RC: How important is it for buyers to fully understand the legal issues associated with the target, including its regulatory compliance program and any potential liabilities?
Jul-Sep 2015 Issue
AIG