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How AI Will Take Over M&A Due Diligence
AI is on everybody’s mind these days… the topic du jour. You’ve no doubt seen how this technology will revolutionize how people live, work, communicate… Really there is no area where AI will not touch – if it doesn’t already. That extends to the world of M&A, specifically the due diligence process. Basically, the number of M&A transactions is ever-increasing. And with deals getting more and more complex, every step of the way towards getting those deals done is increasing in complexity too. Take deal structures. In the past, a Seller would have an asking price for their company. After some negotiation with the Buyer, the final price would be worked out. Then the Buyer would pay that amount in cash… take ownership… deal is done. Not so much anymore. Buyers now say that, because of Covid and other uncertainties in the market, there was a period where valuations were very high. They feel that everybody was overpaying – and doing so eagerly. But now that things have settled down. And between restrictions on lenders, the cost of finance, and other factors, many Buyers are saying to Sellers: “I’d love to buy you for $100M… if you’re worth $100M – which I don’t know yet. Can we figure out a way for me to pay you $60M now? Then, when we know more and you hit certain milestone post-closing, you’ll get your other $40M?” Basically, Buyers are using all sort of structures in deals right now. Seller financing, earn-outs, incentive payments… In other words, Buyers are seeking to hedge right now and are getting their way because, while it was a Seller’s market during and right after Covid, it’s now more of a Buyer’s market. It’s important to note that Buyers are not doing all this to take advantage of
A New Trend in M&A Insurance You Should Know About
In this era of sky-high valuations, PE firms seeking inorganic growth are increasingly looking at an alternative to acquiring fully built out platform companies. The strategy is to buy a platform that is not fully built out yet and available for a lower price and then “add on” other small companies. Not only are these acquisitions cheaper, but they are also easier to transition into the platform, which helps accelerate growth. This trend has also led to increasing adoption of two unique M&A insurance products that have been available for a couple of years but were not widely used until
New Targets for Ransomware Attacks – and How to Protect Yourself
The dream of every startup is to one day be acquired by a PE or VC firm or a Strategic Buyer. All the hard work and dedication finally pays off. And it’s only natural that these firms will announce the happy news to the world with a press release whether it’s a merger or announcement of a successful round of fundraising. Unfortunately, these days such announcements have put a target squarely on the backs of soon-to-be or newly acquired companies in all sorts of industries, from manufacturing to tech to healthcare to consumer-oriented businesses. These days, of course, every company
Cyber Security & Privacy Liability
Cyber crime is a major problem in the United States and around the world. It seems every day there is another news story about hackers and other criminals who have been able to breach company networks and get their hands on confidential data…or take companies hostage by locking them out of their networks or even shutting down a business’s operations until a ransom is paid. Remember, the Colonial Pipeline ransomware attack in May 2021? Cyber criminals managed to access computerized equipment that operates the pipeline, which runs from Texas and New York and delivers about 36 billion gallons per year
Material Contracts and Representations and Warranty Insurance
As Representations and Warranty insurance matures as a product and comes into wider use, Underwriters are taking lessons learned from past claims to equip future policyholders on ways to either identify pre-closing trouble-spots, or to mitigate their impact post-closing. They’re looking for patterns or “danger areas” where breaches are more likely to occur. Many such breaches result in losses far exceeding the R&W policy limit. So, it’s essential that Buyers take action so that they can catch any issues before a deal closes. That way they can address the issue with the Seller. (Read to the end of this article for
Staging Your Deal for a Better Rep and Warranty Experience
When you sell your house, one of the best ways to get noticed by potential buyers is to “stage” the home. This is interior design. Nice furniture and décor. No personal items or family photos. No family photos on the wall. No crazy paint schemes on the wall. Some sellers even hire professional decorators to arrange their homes in this way. Similarly, in the M&A world, if you want to use Representations and Warranty (R&W) insurance, you should be prepared to stage your deal to make it more appealing to Underwriters who would be approving and writing your policy. Doing
The Reluctant Strategic Acquirer
Representations and Warranty insurance transfers all the risk in an M&A deal, including the indemnity obligation, to a third party – that’s the insurer. It’s hard to argue against a major benefit like that. Plus, R&W coverage makes negotiations smoother and faster (and cheaper when it comes to less attorney fees) because all the nitty-gritty of a deal doesn’t have to be picked over. If there’s a breach, a claim is filed, and the insurance company pays. Easy. It’s no wonder it is more widely available and widely used than ever before. The perception may be that R&W coverage has
Trends to Look Out for in the M&A Insurance Market in 2022
If you thought M&A activity would slow in 2022 after the record year in 2021…think again. Market watchers see current levels continuing through at least the first half of next year. As you know, an increase in M&A activity equals more demand for R&W insurance. And that means you should expect to see many of the same trends driving the use of Representations & Warranty (R&W) and other M&A-related coverage continue as well—if not become even more widespread. Here’s a breakdown of what you should be looking out for in the coming year: 1. The “extra” frees being charged on
What Is Insurance Diligence…and Why Should You Care About It?
When evaluating a target company for acquisition, the Buyer conducts a thorough check of financials, IP, tax obligations, contracts, customer lists, and other key aspects of the business. That’s due diligence. But to make an informed decision on whether or not to move forward and close the deal, there’s another aspect of diligence that I recommend…that some don’t seriously many do not consider – insurance diligence. You get some insights on the mindset of management and the caliber of operations from the amount of insurance and the quality of that coverage they have in place. Also, digging deeper, if they