M&A activity is reaching fever pitch in the UK but integrating risk and insurance programmes can be a complex task.
In 2017, there was a record 1,543 acquisitions in the UK and, according to EY, 60 per cent of British companies are planning acquisitions in 2018.
Mergers and acquisitions (M&A) are fraught with risk but integrating risk cultures and insurance programmes can be particularly challenging.
“Buyers should first look at the target business and ask: does this business do what we think it does?” advises Adrian Lamasz, Senior Partner in the M&A team at JLT Specialty.
“The next steps are to identify the biggest interests and risks that sit within that business, how that business mitigates its risks and the quality of the risk management regime it has in place.”
According to Lamasz, both parties stand to benefit from transparency in the lead-up to a transaction.
“The more variables you take out of the equation, the better price you usually get,” he says, suggesting sellers provide a full overview of their risk management process, including work that still needs to be done.
“If you know you’ve got an area that might be knotty from an acquirer’s point of view, address it head on. It will put you in a better negotiating position and avoid wasted time.”
M&A and risk culture
From a buyer’s perspective, historical insurance claims can offer useful insights into a target company’s risk culture, particularly employers’ liability (EL) claims, which shine a light on health and safety records.
“The quality of historic insurance documentation is also a good indicator of the diligence of the company,” Lamasz adds.
Before a deal, it is essential to identify any significant outstanding claims, and to establish the rules around who is responsible for claims that refer to incidents that occurred before completion, Lamasz explains.
“Contractual hygiene is also crucial,” he says. “Grey areas around obligations to suppliers and customers lead to significant and complex claims, as well as potential reputational damage.”
Once potential integration issues have been highlighted, the focus should shift to what the new entity will look like and how the target business can be optimised, says Andy Taylor, Client Service Director at JLT Specialty. However, improvements to risk regimes are best made in baby steps.
“You must decide what your priorities are and implement change one step at a time. If you try to impose an entire risk management culture on day one, you run the risk of getting nothing done,” Taylor says.
Key priorities, he notes, include ensuring statutory requirements are being met and that all staff have relevant health and safety training and qualifications.
Are you adequately insured?
When it comes to insurance, buyers should assess the target’s attachment points and coverage adequacy across its assets, earnings and liabilities, identify gaps in coverage and establish where scale savings and efficiencies can be achieved.
There also needs to be a review of how the new business could affect lead times, business continuity arrangements and business interruption coverage across the group, particularly where operations are inter-reliant.
“If a company buys a key supplier for vertical integration, for example, what was once covered under a supplier’s extension could become a bottleneck within the acquirer’s own business,” notes Taylor.
Professional liability cover is another consideration, as it only operates during the live cover period. “If there are a series of significant professional liability claims within a few months of completion, the new insurer may want the company to demonstrate that they didn’t occur under the prior period,” explains Lamasz.
“Buyers should therefore make sure sellers fully investigate and disclose all potential losses so as not to jeopardise any future insurance.”
Further insurance housekeeping includes checking coverage in every territory, compliance with regulatory obligations and ensuring there are no drafting errors or inconsistencies in their documentation.
“Even with due diligence, you never find all the skeletons in the closet until you have bought the business,” Taylor warns.
However, he reminds buyers that, despite the risks, target companies can help them improve their own programmes.
“Often the group programme is wider and better thought out than the target’s, but that is not always the case. If the target has good coverage, take it on board.”
Seeds of change: A JLT client from the service sector
“In one recent acquisition, we had a short time to complete the deal. On the face of it, we were buying a new factory with the latest machines, but after completion we found the target company had virtually no risk management structure and statutory inspections had not been carried out. We immediately installed an interim senior executive at the company to oversee improvements to the risk programme,” notes our client from the service sector.
Change does not happen overnight. Sometimes it can take a couple of years to get a company into the process of doing regular risk assessments, auditing and benchmarking against other businesses in the group.
Perhaps counter-intuitively, we find that often companies whose management remains in place are most open to change.
For more information, please contact Adrian Lamasz, Senior Partner on +44 (0)121 626 781 or email firstname.lastname@example.org