Innovative insurance solutions for today's mergers and acquisitions
June, 29th 2016
The year 2015 set a record for mergers and acquisitions (M&A) activity with more than $2.1 trillion in deals reported in the United States.
Melissa Crowe of the Puget Sound Business Journal reported that Washington's 50 largest deals of 2015 accounted for more than $17 billion. While the first quarter of 2016 has slowed, a recent survey by Deloitte reported 87 percent of respondents expected deal activity to sustain or increase over last year.
If you are a buyer, including representations and warranties insurance may give your offer the competitive advantage in today’s hot M&A marketplace that you need to get the deal. Enlarge If you are a buyer, including representations and warranties insurance may give your… more
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If record valuations and low interest rates were fuel to 2015's M&A activity, transactional insurance may have been the match. To facilitate a deal, buyers offered to procure representations and warranties insurance (RWI), which reduce the necessary amount of purchasing price held in escrow for indemnification of breaches in the representations and warranties. RWI provides protection against financial loss for certain unintentional and unknown breaches of the seller’s representation and warranties made in an acquisition or merger agreement. Benefits include:
Protection of the buyer beyond the negotiated indemnity cap and survival limitations in a purchase agreement. Provides the seller with a clean exit by reducing or eliminating the need to establish escrows or purchase price holdbacks, thereby enabling the seller to quickly distribute greater portions of the purchase price to its investor(s) or owner(s).
Enhances the seller’s return on capital in the current low interest rate environment.
Protects the buyer against the collectability or solvency risk of an unsecured indemnity by a seller.
Enhances a buyer’s bid in a competitive auction process by requiring a seller to provide short survival periods, modest liability caps and reduced escrow amounts for breaches of representations and warranties in a bidder’s draft purchase agreement.
Preserves key relationships by mitigating the need for a buyer to pursue claims against management sellers working for the buyer.
While RWI has been around since the 90s, broader coverage and a significant drop in premium have resulted in four times the number of deals insured since 2012. Recently, real estate transactions in which the entity holding the real estate is the target of the M&A have also been considered by a handful of insurers.