Managing Risks in M&A: How Risk Managers Can Ease Integrations

At some point in their careers, most risk professionals will experience a merger or acquisition in their organizations. Whether as an acquirer or a target, both parties in M&A can benefit from risk managers’ skills and insights during the integration process.  

In our previous article about Managing Risks in M&A, we noted that risk professionals can make a big impact during M&A due diligence. Once a deal is reached and the two entities in M&A risk management begin to combine their operations, the risk manager’s role becomes even more important. Even though the most obvious risks and liabilities tend to be identified and addressed during due diligence, various other risks can arise during the integration phase. 

What Risk Managers Should Consider During M&A

When two people get engaged and decide to marry, they should know well before tying the knot what their differences are and how to reconcile those. M&A risk management is similar in this regard, and companies don’t truly know how things will go until they bring their people and assets together. For this reason, risk professionals can help their organizations by looking for differences that can pose problems during a combination. These differences include: 

Risk Cultures

Organizations that view the value of risk management differently may be in for a short honeymoon. Complementary cultures matter when it comes to managing risks in the combined entity. One area to examine is the structure and influence of each entity’s risk management function, relative to its size. A larger organization might have a sizable department, while a smaller company could have a single person managing risk. Regardless of department size, an effective risk manager should possess a robust network and the ability to instill a risk management perspective at all levels. 

Risk Tolerances

Trouble lurks when organizations have divergent tolerances for risk. Companies of similar size, even in the same industry, can have vastly different views on which risks they retain and how much risk they prefer to transfer. Differing risk tolerances can significantly influence risk-financing strategies, which can be challenging for risk professionals to resolve. 

Risk-financing strategies

Company A has a clear preference for retaining and self-insuring most of its risk, buying excess layers at high attachment points only when necessary. Company B, however, is risk-averse and buys as much coverage as it can while keeping its retentions and deductibles low. When A and B decide to merge, their M&A risk management professionals will need to explore options and could face tough decisions about pre-loss funding, such as through a captive, and insurance program structures. Compromising on limits and retentions might be the only way to achieve cost-effective risk financing for both organizations. 

Maturity of risk management technology

Integrating risk management technology platforms can be challenging, particularly when one party in M&A has a more developed technology strategy than the other. Some risk managers get by with spreadsheets, while others embrace innovative tools that facilitate data-sharing and analysis. Risk professionals who are accustomed to using sophisticated technology to do their jobs won’t be eager to step backward. Risk managers should examine the impact of different technology systems on their workflows, risk analysis, and how risk data is stored and accessed. For example, how will the combined entity track its insurable assets, its policies, and exposure data? Which party has the most efficient platform for doing that? Either or both parties may have a steep learning curve and need to adopt new practices once their organizations merge. 

Conclusion

No matter the differences in risk management, if two organizations agree to combine because their leadership deems it a compelling opportunity to create value, risk professionals will want to seek ways to align the risk and insurance needs to the acquisition goals. One way they can make that job easier is to take advantage of the data and tools available to derive insights for their company’s risks and exposures. Protecting an organization’s people and assets, as well as preserving opportunities for growth, is a fundamental role for risk professionals. They can fulfill that role best with the right tools.