When we talk about M&A, it’s tempting to focus on the deals involving PE and VC firms because this sector has had record activity in the last several years.
But let’s not forget another facet of M&A: corporate acquisition, by which a company buys another company or portion of that company (usually smaller than the Buyer) to expand their business. Technically, the Buyer has to purchase all or most of the shares of the target company.
The conditions are right for increased activity here:
- There were $2.2 trillion in M&A transactions in 2018, in the U.S. alone. This is the fourth year in a row above $2 trillion.
- Corporate acquisition teams have more cash on hand due to tax reform.
- There is a looser regulatory environment.
- Many companies view acquisition as their exit plan – not an IPO – and they’re making themselves attractive targets.
- Corporations and PE are divesting units or portfolio companies at a higher rate, which makes for more possible acquisitions.
Private equity gets all the attention… its share of M&A transactions is growing year after year. It’s “sexy.” But corporate acquisition still represents the majority of deals each year.
According to Pitchbook’s Annual M&A Report for 2018, here’s how many corporate acquisition deals there were in the U.S. and Europe for the last few years, along with the percentage of total deals they represented:
- 2015 – 20,047 (74.6%)
- 2016 – 17,896 (72.6%)
- 2017 – 16,199 (70.1%)
- 2018 – 12,261 (65.8%)
As you can see, Private Equity is closing in somewhat. But the corporate acquisition is holding strong.
Why Corporates Go Strategic
We can see that corporate acquisition is a widespread practice. But why would a company decide to grow through acquisition rather than “organically?” It can be an ideal tool for growth. But it’s not taken lightly.
Corporations have whole departments dedicated to strategic acquisition strategy. There are several objectives but three main ones:
- Expanding their client/customer base in a region they already operate in.
- Expanding their client/customer base into new markets.
- Adding new, proven technology related to the business or to expand to a new niche, without having to develop it yourself. (Or go through the time and expense)
The idea is for the purchasing company to grow stronger, of course.
But the corporate acquisition isn’t without risks. That is why corporate acquirers should take a page from PE firms when it comes to protecting their deals with a specialized type of coverage: Representations and Warranty (R&W) insurance. Savvy PE acquirers are increasingly using this type of coverage because deals today are so complex and fast-paced… and that means issues can be missed in the due diligence to the tune of millions, even billions, of dollars.
When this insurance is in place, if there is a breach of Seller Representations post-closing, a third-party, the insurer, pays the damages directly to the Buyer.
In addition, (R&W) insurance is low cost, makes for less contentious negotiations, and the Seller takes home more money at closing because less cash is held in escrow. And, unlike what you might have experienced with other types of insurance, R&W claims are paid in the vast majority of cases.
For more information on how R&W insurance can transform your next corporate acquisition, you can check out this special report that showcases all its benefits, the costs, and how to secure it.
8 Things You Need to Know About Representations and Warranty Insurance.