2007 International Conference Washington, D.C. ~ November 7-9, 2007 Deal or Bad Deal? M & A Q & A
Deal or Bad Deal? Panel Members MODERATOR: James M. Fasone, Division Senior Vice President Arthur J. Gallagher Risk Management Services Simon Hodge, Managing Director Wachovia Insurance Services William Monat, President and CEO Transactions Risk Solutions Miles D. Scully, Managing Partner Gordon & Rees LLP Kim Patlis Walsh, Managing Director Corporate Risk Solutions Chris Warrior, Underwriter, Specialty Lines Beazley Group plc
Overview Exposures Created from Mergers and Acquisitions Insurance Coverage Implications Underwriting Issues and Concerns Emerging M&A Trends Product Solutions
Overview of PE Market Source: The Private Equity Analyst, July 2007
Transaction Structures Degree of successor liability depends upon the type of transaction Three Primary Types: Merger Stock Acquisition Asset Acquisition
M&A Challenges Data Access Needed Purchase Agreement Due Diligence Information Pro Forma Financials Insurance Policies
M&A Challenges (cont’d) Understanding Insurance and Indemnification Agreements Understanding Change in Control Provisions Interfacing With Other Deal Pros Managing the Politics Meeting Expectations
Deal Killers Bank write-downs Lack of financing / fundraising Valuations, inability to exit and profit quickly Buyer/Seller can’t agree on liabilities, indemnification language, R&W’s, covenants
Deal Killers (cont’d) Purchase price adjustments Other Scrutiny from legislative bodies Certain Industry developments
Making It A Better Deal Assist Negotiation of Transaction Documents / Indemnity Agreements Identification of Transactional Risk Protections R&W insurance, tax liability, litigation buyouts Purchase price adjustments due to accruals / reserve practices Deal protection / failed deal insurance Successor liability
Making It A Better Deal (cont’d) Other Insurance Protections D&O runoff / tail, ongoing Address international exposures Surety / alternative collateral Environmental Products liability Political risk insurance
State of Transactional Insurance Market Maturing marketplace for transactional products U.S. product experience – 10 plus years Building acceptance in deal community – steady process Underwriting methodology Significant opportunity to grow products
Liquidity Crisis – Impact on M&A and PE Markets Financing for mega deals difficult Higher debt costs driving down EBITDA Multiples that PE firms can pay Re-focusing of PE capital Targeted funds – infrastructure, foreign, etc.
Liquidity Crisis – Impact on M&A and PE Markets (cont’d) Smaller buyouts with more PE equity vs. debt Distressed buyouts Strategic deals Foreign acquisition of U.S. companies
Product Innovations New Product Innovations Private Equity – Product that addresses contingency exposures faced by PE firms at fund close to enable distributions without risk of claw backs – indemnity obligations or contingencies Adapt products to changing deal environments as new issues arise
Emerging Trends in M&A Deal Boom: 2006 and 2007 Leading to U.S. Sub-Prime Crisis Mega-deals closed by private equity groups, incredible valuations Movement from publicly traded firms in hands of shareholders to PEGs IPOs of PE/Alternative Investment Firms Continued boom of restructurings / refinancing
Emerging Trends in M&A (cont’d) Impact of Post-Debt / Credit Crunch Private equity investment slowdown Debt financing and tax benefits more expensive and difficult to secure Deal valuations significantly reduced Overleveraged debt lenders, fragility of certain hedge funds Outside U.S. investors cautious; European banks hit hard due to mortgage-backed products Continued regulatory scrutiny, SEC watchdog investigates deeper into banks, investment firms, alternative investment firms
Takeaways M&A Market Highly Complex Product Solutions Very Deal Specific Still Relatively New Market Deal Slowdown Predicted Market Ripe for Product Development
Audience Q & A
Many thanks to... James M. Fasone Simon Hodge William Monat Miles D. Scully Kim Patlis Walsh Chris Warrior