MANAGING RISKS 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?

Bertram: Executing an M&A transaction can allow a party the opportunity to acquire a desired asset or market position faster, and often more effectively, than if they had done so organically. However, M&A is not a risk-free strategy and a buyer that has not conducted sufficient due diligence on a target will often not only acquire the target business or assets, but also unintended and potentially very damaging liabilities. Such unforeseen liabilities, if not properly mitigated, can undermine the commercial rationale underpinning the deal. A prudent buyer should, therefore, combine thorough due diligence together with a well drafted and negotiated sale agreement containing appropriate warranties and indemnities to mitigate these risks. In addition to business risk addressed by the warranties and indemnities, counterparty credit risk can also be an issue. This may mean that, 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 fund that has returned the proceeds of sale to its investors. W&I insurance can assist in mitigating both business risk and counterparty risk.

Oct-Dec 2014 Issue

AIG Australia