2020 began with renewed optimism for cross-border deal making, with growing consensus that geo-political threats were subsiding and the business world was moving into a period of increased certainty. Unfortunately, few predicted the speed at which the Covid-19 pandemic would consume the world and the rapid change it would bring. The exit paths from lockdown will be precarious and the new environment will have to be mastered.
Opportunity for dealmakers has not disappeared. US buyers have always looked to Europe for investment options at all stages of the financial cycle. At McGill and Partners, we are acutely aware that financial sponsors’ primary focus will understandably be their existing portfolio companies, but with $2.5 trillion of dry powder at their disposal (Bain & Company, 2020) attention will turn to investment opportunities. Times of uncertainty beget a desire for familiarity. US clients may increasingly elect to structure European acquisitions in the US format and the M&A insurance market is ready to respond.
Characteristics of a US deal structure are commonly viewed as more buyer-friendly, which is usually reflected in the breadth of M&A insurance coverage. These include the disclosure obligations of the sellers and the transfer of economic risk to the buyer at closing rather than at signing. If a buyer is focused on structuring a US-style deal in Europe, then it is possible to obtain a M&A insurance solution that is akin to US Representation & Warranty (R&W) insurance.
Examples of the practical effects can be spilt into two categories: (1) technical coverage; and (2) underwriting style. Technical coverage includes a number of points, one of the more fundamental being the differences in disclosure regime. It is standard on European transactions for the data room to be deemed generally disclosed in the transaction agreement and the R&W policy. This is not the case in the US; the data room is not deemed disclosed in the transaction agreement or the R&W policy and instead specific disclosure schedules are prepared. If buyers are able to adopt a US-style disclosure regime in the transaction agreement on a European deal, the M&A insurance can follow suit. If the parties cannot agree to a US-style approach to disclosure, in certain circumstances an artificial approach using insurance may be possible.
Underwriting style is unique to each insurance carrier, but fundamental differences exist between the approaches taken in the US and in Europe. As an example, the requirement to provide written responses ahead of an underwriting call is not commonplace in the US and should not be required on a US-style deal.
Why is this important now? As we emerge from the crisis and dealmakers begin looking for opportunities, many anticipate a shift in M&A leverage from sellers to buyers, which in turn may allow US buyers to initiate and dictate US-style deal terms. Previously, European sellers have often been able to resist the preparation of US style disclosure schedules, but they may now have to reconsider if US buyers are offering attractive deal terms. The strength of the dollar relative to European currencies may also increase the buying power of US investors in Europe. The ability to achieve true US-style M&A insurance coverage in Europe will allow US buyers to use insurance to gain comfort with a level of protection that is more familiar, allowing them to pursue investment opportunities with confidence.
At McGill and Partners, we are implementing our unparalleled cross-border insurance broking and underwriting expertise in EMEA, North America and Asia-Pacific regions to help clients achieve the full potential of the insurance market. With our experience, creativity and tenacity, we help US clients to embrace acquisition opportunities with confidence.
The bolder your ambition, the better we become
Our decades of global experience combined with legal and investment banking backgrounds enable us to deliver market defining risk solutions. We provide a fresh, boutique perspective that helps our clients to capitalize on fast moving opportunities and obtain tailored solutions. If you would like more information, please contact charles.inglis@mcgillpartners.com or another member of the M&A team:
James Swan | james.swan@mcgillpartners.com
Sam Murray | sam.murray@mcgillpartners.com
Edward Ring | edward.ring@mcgillpartners.com
Abheek Dutta | abheek.dutta@mcgillpartners.com