How M&A insurance can resurrect a dying deal

While many experts are predicting successful mergers and acquisitions (M&A) activity in Canada in 2010, for the deals that fail, there is M&A insurance, an AON background paper observes.
‘Whether the transaction involves two Fortune 500 companies or a private equity firm and a family-owned corporation, deals are often scuttled because the parties cannot resolve financial issues relating to the need and extent of an escrow of the sale proceeds,” says the Aon paper, Protect Your Deals and Yourself with M&A Insurance. “The representations and warranties set out in the transaction documents may not provide the buyer with sufficient comfort to release the entire purchase amount.
“Similarly, there may be outstanding legal, tax, intellectual property and environmental contingencies that make the buyer uncomfortable when the seller is not willing to accept a holdback of funds.”
Aon notes a number of insurance products are available that “can resurrect deals about to fall apart.”
One place it may fall apart is when the buyer insists on a portion of the sale price to be held back (in escrow), in an effort to extract the broadest of warranties from the seller.
Representation and warranty insurance can stand in place of escrow funds, which offers advantages in the following situations, according to Aon:
• the seller’s interests are controlled by a retiring founder, a trustee in bankruptcy, an estate or a private equity fund, and it is not practical or possible to have funds tied up in escrow.
• cross-border transactions that give the buyer geographical concerns about collecting on the seller’s indemnity.
• executives of the seller are being retained to manage the business for the buyer and there are outstanding issues with respect to the value of the deal as a result of inaccurate representations.