Risk 101 | How insurance brokers can help you avoid mergers & acquisitions red flags  

TD Canada Trust. BCE Acquisitions. Cogeco. Old and new, mergers and acquisitions always make headlines. Mergers are about market share, efficiencies and most importantly, opportunities. On the other hand, they are also about speculation, uncertainty and more often than not, redundancies.

Above all, mergers & acquisitions are times of risk and that’s why it is so important to integrate risk management best practices into your plans.

As a result, we’ve pulled together some useful information about risk exposures and mitigation opportunities. When you are contemplating a merger or acquisition, there are actions you can take to avoid risk red flags. Keep reading to learn more.

Mergers & Acquisitions in 2021 – a cautiously optimistic outlook

Billion dollar deals happen. However, during the early weeks and months of the global pandemic, many mergers and acquisitions were put on temporary hold. A recent report on Nasdaq.com notes that M&A activity is starting to rebound.

Canadian security firm GardaWorld’s offer and a proposal to buy Cogeco Inc by a U.S. firm have made recent headlines. “Some $40.9 billion worth of M&A deals were announced in the third quarter, the highest since the onset of the coronavirus crisis in late 2019 and a 200% jump from the three months ended in June.”1

Meanwhile, a Scotiabank executive noted, “”We expect continued growth in M&A volumes in 2021, fueled by reduced volatility, increased market confidence and improved access to capital”.2  

All this sounds like good news right? Well, this may well be the case. In other words, it is often during unprecedented and unpredictable markets that leaders start considering new horizons.

For instance, an E&Y article about “Three ways Canadian companies can plan M&A for what comes next” suggest that: “It became evident following the global financial crisis that companies who made bold acquisitions in the recovering market outperformed their peers in the decade that followed.

Similarly, Canadian executives have the opportunity, once the extraordinary challenges presented by COVID-19 are past them, to take decisive action, create a plan to reshape the results of their organization and implement a focused M&A strategy to fuel growth into the next decade.”3

As a result, Canadian companies are looking at the potential silver lining that the COVID-19 pandemic might hold. Likewise, they are also looking to manage the complex risks associated with any size of merger and/or acquisition. This is where ALIGNED experts can help. Our Toronto insurance brokers deal exclusively within the commercial insurance marketplace. This means that they have deep knowledge not only of available products but how best to match these with the needs of corporate clients.

Why privacy can pose a significant risk during a merger or acquisition

Every business deals in information. However, during a merger or acquisition, the need to acquire information may trump caution during the due diligence process. Looking at privacy risks during the M&A process, The Canadian Business Journal interviewed two executives about potential privacy risks.

For instance, one of the executives noted, “There seems to be a widespread belief that privacy laws don’t impact the M&A process in a meaningful way, and yet nothing could be further from the truth.  Beyond any obligations in the non-disclosure agreement (NDA) to protect information, any personal identifiable information (PII) will be governed by different statutes in different jurisdictions.  This means that simply possessing employee or client data that qualifies as PII will impose obligations on the company that has it.  It is really important to be cognizant of the various statutory regimes that may come into play when dealing with data.”4

And when asked about what the companies should do to mitigate these risks, both executives shared some helpful tips.

For example:

  • “The acquiring company should be careful to only request information that they actually need to assess the value of the deal. There is a tendency for acquiring companies to request everything under the sun, and then share this information widely not only with the due diligence team, but also with 3rd parties such as legal counsel and accounting firms.”5
  • “Acquiring companies should also get warranties from the target firm before any information is shared.  The acquiring company would want representations that the target is authorized to share any information, not just data that would qualify as PII under statute, but also for any intellectual property or other proprietary information.”6

Thankfully, there are specific actions companies can take – including buying representations and warranties coverage – to help mitigate M&A related risks. Most importantly, working with ALIGNED’s Toronto insurance brokers who understand the nuances of M&A related coverage can help.

Here’s what you need to know about Representations and Warranties coverage

Disclosures are not always crystal clear. Despite best intentions, during a merger or acquisition situation, either company may fail to fully or completely disclose relevant information. As a result, these discrepancies could add up to significant liabilities once the deal closes. That is to say, these liabilities may not be covered by pre-existing general liability policies.

Known as representations and warranties insurance, this form of commercial coverage protects buyers and sellers of a company against these types of inaccuracies.

The primary benefits of this coverage can include:

  • Accelerating the speed with which a M&A transaction can be completed
  • Avoiding post-transaction indemnity obligations
  • Ensuring that a transaction is closed within a required timeframe
  • Expediting post-transaction financing and flexibility

Across Toronto and Canada, our insurance brokers know how to find the best insurance options for mergers and acquisitions. We work closely with top insurance companies and can help you manage the complexities of an M&A with the best coverage options.

Prepping for a merger or acquisition? Talk to an ALIGNED Insurance broker Toronto

Getting aligned is important – especially if you are merging or acquiring another business. We can help you avoid red flags during an M&A, contact us now to learn about the expertise and support we can deliver.

Source(s):1,2 Nasdaq.com: Canada M&A emerges from pandemic lows in Q3; activity seen picking up ; 3 EY.com: Three ways Canadian companies can plan M&A for what comes next ; 4,5,6 CBJ.ca: Mergers & Acquisitions Privacy Risks

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