Not enough attention is paid to risk exposure issues in merger and acquisition transactions involving insurers, sometimes leaving the purchaser with unexpected exposures, an insurance brokerage executive said.
Geoffrey Clark, managing director of Marsh's Private Equity Mergers and Acquisition practice, said too often in a merger or acquisition transaction not enough attention is paid to insurance issues. Risk managers, who are the experts in this field, are left out of reviewing the deal to the detriment of its success.
"Risk management can impact literally every aspect of the deal and can make a material difference in the key positions of the deal team throughout the process," he said.
His comments came today during a telephone seminar titled, "Strategic and Financial Buyers: Two Takes on M&A," sponsored by Marsh, a subsidiary of New York-based Marsh & McLennan Companies.
Some of the most critical areas where a risk manager can influence the deal are in deciding if it should be consummated, the price of the deal, the agreement itself, and the integration of the companies.
Among the issues a risk manager has the expertise in examining are reserve adequacies. Also, a target company's risk, quality and solvency of the historical policies, and any known litigation or outstanding environmental matters.
"Understanding these [items], and the impact that they have, can be the key difference between more efficient price versus overpayment or post-cost surprises," said Mr. Clark.
In one instance, Mr. Clark cited a risk management review by Marsh that discovered the income of a target company was overstated by close to 34 percent because of inadequate reserve accrual from its self-insurance plan and insolvent insurers. This gave the client "enormous negotiating leverage" resulting in a one-third price reduction.
"You can never be overinformed about the potential risk in a deal," said Mr. Clark.
He said all clients should get involved as early as possible in the deal with a comprehensive risk assessment. In their acquisition plans, the client should develop a consistent, sustainable, comprehensive plan and use the information gathered to develop a clear, measurable integration plan.
Business objectives can vary in acquisition strategy, said Mr. Clark. Private equity firms are looking for a financial return for their investors.
There is a lot of competition for growth, he noted, but globalization is making mergers and acquisitions more complicated as executives have to deal with different rules and regulations in foreign countries.
The failure rate of mergers and acquisitions, he said, can be dramatically reduced by a comprehensive due diligence program.
Additional information about the conference is available by e-mail at [email protected].
A replay of the conference is available online at: link.marsh.com/ajtk/servlet/JJ?H=23awb5&R=1257816428
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