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Auctions carry regulatory risk and uncertainty in M&A scenarios: commercial lawyer


May 27, 2011   by Canadian Underwriter


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Insurers being sold through an auction channel, rather than through a traditional acquisition deal, face greater regulatory risk and uncertainty of the transaction being completed, said Brian Rose, senior partner with Stikeman Elliott’s corporate commercial section.
Rose spoke as a panel member during a session on mergers and acquisition trends in the Canadian marketplace at the Canadian Insurance Financial Forum in Toronto on May 26.
When asked about the roles auctions play in the M&A market, Rose noted that while they do create price tension, which is a positive for the seller, they also create regulatory risk.
In a hypothetical sale, Rose said a buyer might put forward a price of $190 million. When the buyer goes to the Office of the Superintendent of Financial Institutions (OSFI) for regulatory approval, the chances are OSFI will value the insurer being sold at a higher value.
“More and more, we are starting to find that buyers are looking for a condition out, because if the regulatory regime values that company at a higher price than they do, then they don’t necessarily want to complete the deal,” Rose told delegates.
“So what do you do [as a seller] when you’ve gone through an auction and the deal falls through? Now you are left with shopped goods and that can affect your reputation risk.”
By negotiating a deal, the parties have talked to the regulators throughout the process, and the purchasing party is well aware of the regulatory risk.
“You may feel that you’ve left value on the table in doing the deal, but the reality is, you have far more certainty of being able to complete the transaction,” he said.
“[The uncertainty inherent in auctions] is a real challenge, and it’s becoming a greater challenge. As we look at the M&A landscape over the coming years, it could prove to be quite significant.”


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