Avoid pitfalls of mergers and acquisitions, urges broker

October 16, 2009

As the green shoots of economic recovery begin to grow, many firms in Swindon will look to strengthen their position by merging with or taking over other businesses.

There have recently been encouraging signs to suggest Britain is on the road to beating the recession.

But insurance broker Jardine Lloyd Thompson (JLT) is warning the town’s firms to protect themselves against the unforeseen financial risks that can arise with the sale and acquisition of businesses.

A leading insurer in this sector has recently published data which shows a spike in the number of enquiries for M&A insurance in the last year with the majority of buyers being trade acquisitions, with fewer private equity driven transactions.

No matter how well contracts are written, risks are inherent in any acquisitions or disposals – but insurance can offer an essential safety net, according to JLT’s Corporate Risks team.

They say insurance can offer another option to escrow arrangements, where a holding account is set in place to protect against unforeseen financial risk. Escrows can be costly and have become less favourable in the current economic climate, but Warranty and Indemnity insurance is a cost-effective alternative.

Tom Cowdrill, Regional Managing Director of JLT’s Southern Region, said: “With Warranty and Indemnity insurance, a seller can make a truly ‘clean exit’ when selling a company by safeguarding them from potential calls on underlying guarantees.

“Similarly, a buyer will no longer have to deal with issues such as the creditworthiness of guarantees, or potential problems with special purpose entities that are to be liquidated after the deal closes.

Statistics show the proportion of sellers seeking insurance has increased, which JLT says could be a result of higher liability caps and broader warranty and indemnity wording being demanded by buyers.

Tom added that a credible insurance broker will understand the risks involved and create a tailor-made policy for each merger and acquisitions scenario.

He said: “For example, we helped a venture capital backed entrepreneur with the acquisition of a wireless equipment manufacturer when it was discovered that the head office had an asbestos problem. By using our knowledge of the sector JLT was able to negotiate and place a Pollution Legal Liability policy and the deal went through.

“In short, insurance can be a lifeline when it comes to closing M&A deals.”

JLT has built a reputation for enabling private equity firms, industrial companies and individuals to make potential deals become reality.

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