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ARC: HOW MID-MARKET COMPANIES CAN GUARD AGAINST MERGER AND ACQUISITION RISKS

Risk managers can play vital roles in mergers and acquisitions

Risk managers can play vital roles in mergers and acquisitions, potentially helping acquiring companies avoid unexpected liability issues and assisting target companies maximize sale value, according to a consultant who runs his own firm advising companies on the risk management aspects of deals.

Speaking last week on a panel discussing mergers and acquisitions at Business Insurance's 2013 Risk Management Summit in New York, Joseph W. Bauer, principal at Bauer Advising L.L.C. in Chelsea, Mich., and a member of the Council of Chief Legal Officers of the Conference Board, said that in every deal in which he's been involved, there's been an opportunity for the risk manager to add value or identify issues that otherwise would have gone unnoticed.

“The whole idea of liability data and information is something you know better than anybody in the room and if you speak up you will be recognized for that information,” Mr. Bauer said. “Do not underestimate the real value you can document and show to senior management through claims and liability data.”

The typical negotiation table discussing a merger or acquisition will include a pair of very capable transaction lawyers, said Mr. Bauer, the retired general counsel of Lubrizol Corp. While those transaction lawyers are typically very capable at that aspect of the law, “They haven't looked at a lawsuit in 40 years. They wouldn't know an interrogatory if it walked in the door and handed them a cup of coffee,” he said. That being the case, “They're open to your nudging them,” Mr. Bauer said.

“As the buyer, you're going to be running this thing after closing,” Mr. Bauer said. “Liability claims management is more than just organizing the claims data.” Addressing such issues as certificates of insurance, additional insured provisions and letters of credit associated with the deal are also important ways the risk manager can help enhance the success of an acquisition.

“A lot of money is left on the table because you're unable to enforce the other party's insurance after closing because you can't produce the proper certificates of insurance,” Mr. Bauer said.

Mr. Bauer advised risk managers that as part of the acquiring company team, “Show your deal team that you can help make this a more knowledgeable transaction,” and that the risk manager's role in the deal can be much more than just the usual due diligence.

On the other side of the transaction, the risk manager for the seller can help prevent the deal's price from eroding and help ensure certainty of the deal's close. “Because a deal that doesn't close is a nightmare,” Mr. Bauer said. “You can be a key player'' in ensuring the deal closes as the risk manager.

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The seller's risk manager also can demonstrate to the buyer that the target company has a grip on its legacy liabilities and that the proper insurance is in place, Mr. Bauer said, as well as providing accurate property exposure values.

The risk and insurance manager can be as important as anyone else at the deal table, Mr. Bauer said. “You can have a seat at the table by showing you can provide insights that don't occur to others,” he said.

Another panelist, Meghan Magruder, a law partner at King & Spalding L.L.P. in Atlanta, said that in a merger or acquisition, evaluating insurance and liability issues is critical, offering the risk manager an opportunity to bring value.

“If your company expects to acquire or be acquired by another company ... the cost of the transaction cannot be assessed unless you've looked at the contracts, the insurance and the indemnification at issue,” Ms. Magruder said.

The buyer's due diligence must include a focused assessment of the seller's liability exposure and insurance coverages, she said.

“Often overlooked by risk managers today is the value of historical insurance that might address latent or long-tail liabilities that come up,” she said. While it can be a time-consuming process, there's great value in charting the seller's current and historic policies.

If significant liabilities are found, the price can be reduced or the buyer can ask the seller to provide indemnification, Ms. Magruder said.

The buyer also should review the seller's key contracts for: risk transfer provisions that might provide indemnification; new exposures when acquiring operations in unfamiliar locations; new coverages that should be purchased; or whether existing property schedules should be updated.

And, she said, in evaluating the seller's coverages, “You're not just looking at coverage, you're looking at how much is left, how much of the limits has been eroded.”

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