Let’s Make a Deal: Risk Managers Have Key Role to Play in M&A

Risk managers have a critical role in protecting their organizations’ people and property, and that job is particularly complex in mergers or acquisitions. In this and upcoming blogs, LineSlip Solutions will explore risk professionals’ role in mergers and acquisitions (and how they can make an even bigger impact.)

Even if a risk manager’s organization has not yet experienced a merger or acquisition, there is a strong possibility that more organizations – public or private – will either consider M&A or be approached as a target. There is a huge amount of available capital in private equity coffers, seeking returns, and virtually every business is looking for growth opportunities. For many, M&A is a strategic way to accelerate growth.

The global volume of mergers and acquisitions hit a record high in 2021, with deals totaling more than $5.1 trillion. The global head of M&A at Morgan Stanley observed that 2022 looks to be another good year for deals, “While it may not be another record year, all the key elements that made the 2021 M&A so strong are largely in place.”

Factors Risk Managers Should Watch

Several factors are present that should be on risk managers’ radar, as these might influence their organizations’ willingness to entertain M&A in 2022. These factors include:

• Surplus capital
  Private equity firms and investment sponsors are looking to put their surplus capital to work, so they are actively seeking deal opportunities to achieve their return goals.

• Relatively low interest rates
  Even though the U.S. Federal Reserve is expected to increase interest rates and taper the fiscal stimulus it implemented during the pandemic, those increases are forecast to be small. Meanwhile, rates themselves have remained low for a long time. In this environment, investment returns are more challenging, but the cost of capital also is reduced. That has helped fuel investors’ appetite for mergers and acquisitions, and those conditions might continue for the next few years.

• SPACs
  Special-purpose acquisition companies, also known as reverse-merger or blank-check companies, have continued to drive M&A as SPAC sponsors look for privately held companies with high-growth potential. Morgan Stanley estimates that SPACs accounted for about 20% of M&A volume in 2021. SPACs have raised record amounts of capital, and the value of their dealmaking is soaring – through the first nine months of 2021, de-SPAC transactions (the process by which a merged or acquired entity becomes a publicly traded company) totaled more than $370.6 billion. In all of 2020, that figure was $139.4 billion.

Protecting deal value

Risk professionals can play an important role for their organizations during M&A due diligence and during integration when a deal is reached. If we consider the fundamental role of risk management as protecting the value of an asset, then a risk manager’s input is critical to preserve the value of a potential merger or acquisition.

Putting data on insurance and employee benefits into the data room is a routine matter in all M&A transactions, as those become part of the financial analysis, but risk managers can go far beyond that to protect the deal’s value.

An issue that can greatly reduce the attractiveness of a target – and even torpedo a deal – is unfunded liabilities. Risk managers need to use their skills and experience to spot these in the data on their own organization and that of the company across the M&A table. Here are some tips to unearth unfunded liabilities:

• Keep insurance data up to date
  Having accurate insurance program data at one’s fingertips is a good starting point. Knowing what your property, liability, workers compensation, directors and officers liability and other relevant policies will cover and won’t is critical to envisioning uninsured loss scenarios.

• Look at current loss funding
  In addition to external risk transfer through insurance, what liabilities have the organizations retained? Are they self-insured for any exposures? How are their captives funded, if they exist? Are adequate reserves set aside?

• Dive into the risk factors
  Public companies must disclose material risk factors in their filings, to keep investors informed of risks. Even though a private entity does not have such reporting requirements, any proposed deal should involve a detailed look at the risk factors for its business – and those that could arise.

Because good data is critical to managing the risks in M&A, risk professionals should make sure their organizations’ risk technology is working to their full advantage – capturing, keeping updated and delivering easy access to all the details.