Signed, sealed, delivered
Matthew Griffith shares some strategies for delivering successful (re)insurance M&A – before and after the ink has dried
2015 saw some landmark deals, not least the largest insurance industry transaction to date – Ace’s $29.5bn acquisition of Chubb. There were other insurance megadeals that grabbed the headlines and many more sizeable transactions were executed across the life, non-life and broking sectors.
The momentum has continued into 2016, although, with continued market volatility and uncertainty about a potential Brexit, it remains to be seen how things will unfold and how this may impact the appetite for transactions and deal dynamics in the months ahead.
What is clear is that delivering on ambitious growth plans organically has become more challenging.
Businesses are looking at, and have closed, transactions that they would not have considered just a few years ago. M&A has been on the agenda, with boards turning to transactions to help deliver their strategic plans.
Despite economic and political headwinds, boosting revenue, reaching new customers and geographies, broadening product sets, accessing new or innovative distribution capabilities and realising potential cost efficiencies are likely to remain on the list of strategic drivers.
M&A may be the solution but, with many businesses facing similar challenges, there is often stiff competition for attractive assets, particularly with continued private equity interest in the sector. This has intensified in the current climate, with some market participants having surplus cash to deploy and more affordable funding available in a low interest rate environment.
This competitive dynamic was certainly a feature of the market last year, with many potential buyers dedicating cash and resources in auction processes which, by definition, can only be successful for one bidder or consortium.
So how can businesses prepare for successful M&A in a competitive environment from a legal point of view?
The A Team
Choosing the right external advisers is important but getting the right internal team in place and ready to go is vital, particularly where speed of execution is key.
The in-house team, knowing the business better than anyone, will have the keenest eye during due diligence and a key role to play in planning the all-important post-deal integration.
Freeing up capability in key business units and corporate functions such as finance, tax and HR can therefore make a real difference.
Ensuring that the team understands the strategic drivers is key and briefing them about the M&A process, and what to expect, helps them see their input in the wider context.
Due diligence is often a major and multi-disciplinary workstream, requiring significant cost and internal and external resources. Getting maximum value out of the exercise is essential.
On the buy side, it is all about planning ahead and targeting key issues, particularly when under time pressure in a competitive process. Which things do you want to see, what really matters and what will make you walk away? Discovering a deal-breaker late in the day is in nobody's interest.
Ensure that the process is co-ordinated across disciplines so that, for example, the legal or regulatory ramifications of an issue emerging in the technology review are considered.
Importantly, use due diligence to fully test valuation assumptions and feed the outputs, as positive actions, into the integration workstream and the post-deal 100-day plan.
In a competitive market, building relationships with potential targets, investment banks and financial advisers well ahead of a deal can pay dividends later.
But when it comes to submitting non-binding offers, being razor sharp on the differentiating features of your bid can set your proposal apart. Price is obviously key, but is often not the only evaluation criteria.
There is value in emphasising the underlying rationale for the deal, any ongoing roles in the combined business for key employees and selling shareholders (in owner-managed businesses) and why the proposed bid is the right one for the sellers and the target company.
Think carefully about changes to the seller's draft documents and be as clear as possible on any required closing conditions and the actions that will be taken to satisfy them.
Buyers need to look carefully at the proposed transaction structure to anticipate potential issues.
Can any non-core subsidiaries or businesses be hived off pre-closing? Is a share sale or a purchase of the target's business and assets the preferred route and what are the risks and benefits of one against the other?
Critically, is a formal process required in order to effect the transaction or could a different structure such as a reinsurance deal combined with a renewal rights transfer achieve the same economic result?
A Part VII insurance business transfer may be required in the UK to move a portfolio of policies from one insurer to another, which requires the involvement of the regulators (in the UK and often elsewhere in the European Economic Area), a regulator-approved independent expert to opine on the scheme and the sanction of the court to proceed.
It is now a well-trodden path, but there are some potholes for the unwary and, like any major project, a Part VII transfer requires significant time and resources to complete.
Considering well in advance how the potential buyer, and its plans for the business, are likely to be perceived by the regulator and how the bid might be modified to alleviate any potential concerns, is time well spent – particularly if the buyer is unfamiliar to the regulator.
Getting ahead of the game with the change of control documentation, assembling all of the required supporting information and having a clear process to manage the application will reduce the time required to complete, submit and receive the necessary approvals.
In the UK, there are time limits within which the Financial Conduct Authority (or Prudential Regulation Authority) must respond, but the clock does not start to tick until the regulator has acknowledged receipt of the complete application.
Expect questions to be raised and be ready to answer them clearly and quickly to avoid delays.
If a private company target has a significant number of individual investors, looking at the current shareholding structure to anticipate any challenges is also important; and, in any case, making sure that all of the major selling shareholders are on-side is vital.
Sometimes shareholdings are widely spread, which can make getting everyone to sign up to a conventional sale agreement a challenge.
In these cases, and sometimes when there are unwilling or untraceable shareholders, there are different ways to approach the deal – for example, a private company offer or, possibly, a court-sanctioned scheme of arrangement. But the implications of either route (not least to the timetable and cost) need to be considered.
Ensuring clarity regarding the deal’s impact on any share options, and the tax treatment available to any individual selling shareholders, will also avoid misunderstandings and delays further down the track.
These are some of the practical considerations to take into account in successfully getting M&A deals over the line.
Once the ink is dry, post-deal integration, cultural alignment, talent retention and the evaluation of deals against the base and stretch case acquisition criteria after completion are also vital in assessing the ultimate success of any transaction, but those are important topics for another day.
This article was first published in the Insider Quarterly.