MANAGING TRANSACTIONAL RISK
R&C: In your experience, are acquirers paying more attention to identifying and assessing risks during the deal process? What are the benefits of allocating more time and resources to this process?
Doran: From an underwriter’s perspective, we see a broad range of approaches to due diligence, depending on the nature, scale, sector and location of the target business. A thorough due diligence exercise increases the acquirer’s visibility as to the target business and enables the acquirer to address identified actual or potential risks through the transaction structure itself, whether through valuation adjustment or contractual risk allocation, for example, purchase price, escrow or indemnity. If warranty and indemnity (W&I) insurance is being considered as part of the risk allocation discussion, then the quality and thoroughness of due diligence conduct is a key consideration to underwriters when evaluating the risk.
Heinz: Acquirers are always intent on obtaining an accurate risk assessment of their targets and determining, as best they can prior to closing, how to mitigate past exposures and to manage ongoing business risks. We can place insurance around both unknown risks and more identified or heightened exposures, for example, uncertain tax positions or exposure to existing litigation, but we have never seen an acquirer purchase a bad business because it can obtain an insurance solution to cover a small percentage of a very large risk.
Jul-Sep 2017 Issue
Ambridge Europe Limited
Aon Transaction Solutions
Simpson Thacher & Bartlett LLP
Tokio Marine HCC