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Business mergers and acquisitions for strategic growth are on rise
A rebounding economy has firms looking for quick expansion, but there are risks involved.
A local risk management firm is seeing a trend toward mergers and acquisitions as businesses gain confidence in economic stability.
There is an emerging trend in risk management revolving around mergers and acquisitions as companies move forward with growth strategies to build strength and geographic reach. As businesses move forward with consolidating companies into one entity, there are liabilities and risks that may be unforeseen.
Deloitte, a professional services organization, surveyed 2,500 U.S. executives from companies and private equity firms in April 2014 to gauge the outlook of mergers and acquisitions. Of the respondents, 84 percent of corporate executives are expecting to maintain or increase their current merger and acquisition activity pace over the next two years.
As of March 2014, the value of worldwide deals reached a total of $756.1 billion, which is a 52 percent increase from the first quarter of 2013, according to Thomson Reuter’s first-quarter mergers and acquisitions review. The value of deals in the first quarter of 2014 for the United States totaled $277.8 billion, which is the highest-value first quarter since 2007 when it was $361.4 billion, according to a Mergermarket trend report in April.
Lynn Jekkals, resident managing director at Aon Risk Solutions in Grand Rapids, said her firm is seeing an increase in activity nationally in mergers and acquisitions with clients and with companies in general.
“It seems like the growth strategy of purchasing a competitor seems to be gaining steam,” said Jekkals.
“What that means for risk management is there is a great deal of due diligence that needs to be done on the target company to make sure that the program they had in place protected the assets of the firm appropriately in terms of coverage terms, endorsements and limits.”
Aon Risk Solutions provides risk management, insurance and reinsurance brokerage, human resources and outsourcing services to its clients, through its more than 66,000 colleagues worldwide.
Specializing in mergers and acquisitions as one of its risk management services, Aon assists clients in financial, insurance, pensions and employee benefits transactions as part of its due diligence process.
With economic activity stabilizing and beginning to strengthen, investors and companies are looking to growth strategies in terms of mergers and acquisitions rather than as desperation sales. As individuals gain confidence in the direction the economy is headed, companies are starting to expand and seek out opportunities, according to Jekkals.
“In the past several years, there might have been opportunities out there, but some of them were buying companies out of bankruptcy and really buying troubled companies that weren’t making it through the tough times,” she said.
“The reason for acquisition (now) appears to be more positive, based on the economic factors.”
There are several outstanding liabilities associated with business acquisitions or mergers, such as general liability programs, workers compensation programs, and a tax opinion given by an accounting firm on the deal, according to Jekkals.
A way to manage some of those risks is for businesses to perform proper due diligence and utilize partners in the insurance industry through some of the various liability issues.
“We typically get involved with all the deals that our clients do and we do the insurance due diligence right alongside them, so that we can look for things that they need to be aware of and point out potential insurance solutions to them,” she said. “Really, just taking the time to look at everything is key because you don’t want any unforeseen surprises. It is not good for anybody.”
One of the key risks businesses may face during the acquisition process is associated with pollution liability, in terms of contamination that may have occurred on the site, whether by the target company or a predecessor.
“If you are taking on the liabilities through the acquisition, we want to make sure that you have appropriate Phase I and Phase II done by an environmental firm,” said Jekkals in reference to the pollution liability.
“What a lot of our clients do is, they want to transfer that risk for unknown exposures to an insurance policy, and that is very easily done and very readily available in the market to transfer that risk.”
The second major liability seen recently involves companies taking on legacy workers’ compensation exposures if the target company has a large deductible program as the two companies either join as one entity or a takeover occurs.
“Workers’ compensation claims can be open for a very long time, and you have to make sure that the company you are purchasing is adequately reserving for those losses,” said Jekkals.
In terms of geographic expansion, Jekkals said there are other types of liabilities companies need to consider, including whether an exporting manufacturer or supplier has insurance and its coverage; and knowing the insurance laws in other countries.
“If you get to the point where you have brick-and-mortar in another country, there are risk factors with that, as far as what is the insurance law in that country as far as what is compulsory,” said Jekkals. “It is very different than what we have here in the United States, so partnering with someone who can help you navigate that and tell you what is necessary, beyond necessary, (and) what is customary.”
Deloitte’s 2014 mergers and acquisitions survey reported approximately 60 percent of respondents anticipate acquiring a target in a foreign market, with a driving reason being growth opportunities and diversifying customer base.
“I think that the world is definitely flat, and almost every company we work with is global in some fashion, whether it is just exporting or importing product. The globalization is here, and there are exposures with that,” said Jekkals.
“That is one of the things that is fun to do and help our clients with as they enter exciting new territories.”