Insuring Against The Operational Risk of Mergers and Acquisitions Transactions

Mergers and acquisitions are today one of the most widely used ways in the business world to ensure development from external growth, which can take place through the merger of two or more entities, or the acquisition of other existing companies or their assets.

Business growth through M&A has reached new levels, which has been on the rise for decades, partly as a result of the opportunities and needs arising from the internationalization and globalization of markets.

However, specialists point out that even when they are always announced as great value-creating operations, the evidence tells us that corporate mergers and acquisitions can usually be hindered by a multitude of obstacles throughout the process. To move steadily forward in today’s corporate environment, it is important to know where risks can arise and how to avoid them.

RISK

What is operational risk as it relates to M&A? This question is answered by scientific research on these issues, which identifies regulatory and management issues, tax complexities, legal constraints, cultural differences and availability of financing, among others, as risks.

With regard to regulatory issues, which can be top priority risks for a cross-border transaction, it is important to understand regional or sector-specific requirements to avoid significant problems throughout the process, from the identification of targets to regulatory compliance once the transaction is closed.

Tax issues are also a major risk when managing cross border or complex transactions. Tax rules and structures can vary from country to country, which can have significant implications for the business acquisition.

In the case of legal requirements, which also differ from region to region, it is necessary to ensure that they are fully understood before moving forward with the process, as legal restrictions are an important risk before closing a deal.

Management issues can also create problems at multiple points in the deal process, whether due to lack of clarity at the opportunity stage, communication problems during negotiations, or the implementation of a flawed project management system. It is important to understand the cultural and communication complexities during the opportunity phase to anticipate management problems and to avoid losing key personnel and subsequent integration problems.

The risks arising from the availability of funding likewise vary considerably from region to region. In North America, for example, no risks related to the availability of financing are identified, while in Latin America this issue is an obstacle, as it is in Africa and the Middle East, probably driven by the complexity of banking conditions in these geographic areas.

These operational risks have led companies venturing into the world of mergers and acquisitions to insure their transactions. For example, Rep and Warranty Insurance is a type of insurance policy purchased in connection with M&A transactions, which covers indemnification for certain breaches of representations and warranties in transaction agreements.

A form of insurance that can help secure investment capital in a competitive market is the Fidelity Bond, which essentially insures fraud risk.

Also adding to the list of insurance relevant to M&A is Directors and Officers Insurance (D&O Insurance); Aside from protecting the Buyer or Seller entities and their directors and officers, one of the guarantees of D&O insurance is that it attracts top executives and leaders to an organization pre or post merger or acquisition.

D&O insurance also helps motivate key personnel to stay with the companies after M&A transactions are completed, thus avoiding HR risks. Maintaining internal expertise has a positive effect on the morale of the rest of the employees, boosting team integration and influencing external relations.

Conclusion

In short, securing the stages of a merger or acquisition process, based on the analysis including the insurance of the operational risk of the transactions, will make it possible to navigate the turbulent waters of this competitive universe.