Navigating uncertainty

When undertaking a strategic sale or purchase, it is always wise to have the experts in each field beside you. In volatile and uncertain times, the need to have experienced, creative and dedicated advisors to help navigate the obstacles becomes even more critical. Although there are some similarities to previous crises, COVID-19 presents many novel challenges that advisors need to be alert to and which require creative solutions. At McGill and Partners, our M&A team has been advising clients and helping them to navigate some of these challenges as underwriters adjust their approach in the current climate.

Creating opportunity from uncertainty

We have also been looking at how M&A insurance can be used to help create opportunity from the current uncertainty. While M&A plans may have been put on hold, many of our clients have found that now is a good time to think about the opportunities created by the crisis. There are many creative ways we develop bespoke insurance solutions to facilitate these opportunities, helping clients to transfer risks from their transactions to insurers. Here are some of the solutions you may wish to consider as you position yourself to take advantage of a change in the market:

Buying from a distressed seller

Corporates looking to sell non-core assets to bolster cash reserves to weather the storm or indebted sellers looking to reduce debt burdens present opportunities for buyers. Sometimes these sellers will not be willing to give recourse for a breach of the warranties they are giving buyers. In other cases, buyers may not be willing to rely on the seller being in a financial position to pay a claim. Our M&A team has extensive experience working on transactions where there is no recourse to a seller or where management are not fully engaged in the sale process; these transactions are often conducted in compressed timetables and it is essential to consider the approach to disclosure and the scope of diligence that can reasonably be carried out when assessing the insurance options that might be available to provide buyers with protection. Careful consideration must also be given to a distressed asset’s valuation and how this affects a buyer’s losses and available recovery.

Buying from an insolvency practitioner

The acquisition of a company or business from an insolvency practitioner can often present an attractive opportunity but carries its own difficulties. Insolvency practitioners will seek to obtain the best price on a sale in the circumstances but will not be willing to incur personal liability, limiting the protection a buyer might be offered. It is possible to structure solutions that provide protection for the breach of a set of ‘synthetic’ warranties in situations in which the seller is not willing or able to give such warranties, affording the buyer greater certainty of the asset they are buying with the comfort of insurance capital to back the warranties.

Acquiring a public company

The equity markets have fallen significantly in recent months. Combined with the volatility in currency markets, many clients are scanning for opportunities to acquire public companies at a significant discount to the prevailing price just months ago. In many jurisdictions, the protection a buyer can obtain is influenced by the regulatory regime in force. We may be able structure a solution that gives a buyer protection:

Where a sale process has been conducted, it may be possible to obtain insurance protection that gives greater certainty by insuring against the inaccuracy of information provided by the target.

_Where there has been little or no disclosure from the target, it may be possible to structure a solution that provides protection for a synthetic set of core warranties covering the business of the target.

Preparing a portfolio company for sale

Naturally, many of our clients are turning to their portfolio companies and supporting them through these challenging times. In doing so, some are starting to consider preparing these companies for sale and addressing issues in those businesses that might inhibit a sale or for which buyers might discount the target’s valuation. Our experienced M&A team has worked with clients over the years to develop creative solutions to use insurance capital to optimise proceeds on a sale:

_ Hard and soft staples are becoming increasingly common as sellers seek to take control of the insurance process to maximise its efficiency and present a sale package that gives buyers a high level of protection. Where sellers are using any delays due to the current environment to conduct vendor due diligence, we have found that hard staples can be a particularly effective way to facilitate the sale, maintain control of the process and deliver superior cover for bidders.

_Our M&A team has structured contingent risk insurance solutions to isolate risks in portfolio companies that allow sellers to address issues before commencing a sale process and present buyers with a solution, giving comfort and avoiding costly price-chips, extensive negotiations or avoidable indemnities.

Taking a minority stake

As companies move to shore up their balance sheets, there will be opportunities to take equity positions in companies in exchange for minority stakes at attractive valuations. The warranties given to new investors can be insured to provide protection for the investment in the event of a breach, but it is important to structure the solution to ensure it is practicable, including that information an investor needs to make a claim reflects the information they will receive as an investor; that any involvement the insurer needs in any third party claims made against the company or in any settlements is suitable; whether subrogation rights can be exercised; and how loss is calculated.

The bolder your ambition, the better we become

Combining true expertise with a fresh perspective to deliver market defining risk solutions, our experienced M&A team is committed to helping clients to navigate the current uncertainty and to capitalise on the opportunities presented. There are many other creative bespoke solutions our M&A team has developed to address deal issues, each tailored to the situation and the needs and objectives of the client. If you would like more information on the solutions outlined, or to find out if we can use our expertise and creativity to help you to resolve any other deal issue, please contact james.swan@mcgillpartners.com.