A new report “Leaving nothing on the table: Unlocking off-radar transaction value” released by Aon plc, the leading global professional services firm providing a broad range of risk, retirement and health solutions, has found that innovative new approaches to identifying, quantifying and hedging transaction risks are emerging and the uptake of M&A insurance across Europe, the Middle East and Africa (EMEA) has increased significantly as risks associated with transactions become more complex.
The report, produced in partnership with Longitude, a Financial Times company, finds that the number of M&A transactions insured via Aon in EMEA has more than tripled since 2014, rising from 83 to 316, a trend which is even more exaggerated in the North American market where Aon placed M&A insurance for over 650 transactions in 2018. Deal value of these transactions has also increased, particularly amongst private equity (PE) and corporate buyers, where there has been an increase in EMEA of more than 300% since 2014, with average value now $270 million.
The increase in M&A insurance uptake is linked to disruptive forces such as technology and digitalisation, environmental and political change, and the rise of new business models; these forces are complicating the deal landscape by creating new operational threats and strategic risks. The report also finds that growing awareness of insurance as a cost-effective hedging tool is increasing its appeal to acquirers and use as a solution for certain transaction risks.
Alistair Lester, CEO of Aon’s M&A and Transaction Solutions in EMEA said: “Digital disruption has driven a shift in business value from the tangible to the intangible. In a transaction context, this disruption is throwing up major considerations for acquirers when evaluating target companies, including future growth potential and operational risks they will be subject to. Almost all deals will face impact from the pace of technological change and this particularly comes to bear on cyber and intellectual property due diligence.”
Edwin Charnaud, Chairman of Aon’s M&A and Transaction Solutions in EMEA added: “Businesses are facing more complex risks than ever before, and thus the value of M&A insurance has arguably never been greater. Given that the risk landscape is evolving so quickly, adapting the due diligence process and finding new solutions to mitigate this expanding universe of risks is critical to create a competitive edge, protect against unforeseen pitfalls, and ultimately unlock transaction value. We fully expect the increased uptake of M&A insurance to continue.”
Key findings include:
The need for a more holistic approach to cyber due diligence
- Data breaches continue to be a major threat. The European Union Agency for Network and Information Security (ENISA) identified a 28% increase in the number of customer records breached within EU organisations in Q1 2018 and in Q2 2018, three European countries featured in the top-four source countries for web-based attacks.
- Failure to address cyber risk in a holistic and comprehensive way can not only erode deal value but can become a deal-breaker.
- Acquirers must now focus not only on cybersecurity in deal-due-diligence but also ensure that businesses have the systems and processes required to comply with regulatory developments, such as GDPR.
Increasing value of intangible assets
- The value of intangible assets is quickly outpacing that of tangible assets. In 2018, intangible assets comprised 84% of business value of the five largest companies by market cap in the S&P 500.
- As the value of IP increases, inadequate due diligence, including a failure to adequately protect IP or infringing on the IP rights of a third party, has become a major instigator of financial losses through litigation damages, legal costs or indirect costs such as hits to share price.
- Losses will only intensify as the number of patent filings increases (patent applications at the European Patent Office increased by 11% between 2008 and 2017) and the number of IP-related lawsuits increases in tandem (non-practising entity [NPE]-related litigation averaged 19% annual growth in Europe between 2007 and 2017).
“There’s an increasing view that every deal we do now is a technology deal, regardless of sector,” says Shaun Mercer, Managing Director, The Carlyle Group. “There are differing degrees, but most deals face some impact from the pace of technological change – this particularly comes to bear on cyber and intellectual property due diligence.”
Insurance as a cost-effective hedging tool
- The increased adoption of W&I insurance has generated a significant increase in opportunities for insurance instruments to solve other transaction related risk issues, including for known items and to replace other more traditional financing solutions.
- Insurance capital is becoming a go-to solution for solving some transaction risks, particularly those commonly covered under warranty and indemnity (W&I) insurance.
- Demand for W&I cover for M&A deals in EMEA is growing. The number of transactions and value of limits placed by Aon in EMEA has increased by more than 300% since 2014.
- PE funds value the strategic advantage it can provide in making their approach more attractive to selling companies while for corporates the ability to free up capital on the balance sheet is the primary driver.