Andrew Hunt - Private Equity and M&A Practice Marsh Technology Conference 2005Zurich, Switzerland.

The Changing Face of the Technology Industry

Managing Risk in M&A

May 26 & 27

Marsh 2

Agenda

Back drop to M&A Activity - Context

Overview of trends in managing M&A risk

Development of insurance strategies / solutions to manage deal risk:

– Warranty and Indemnity

– Contingent Liability Solutions

– Management Liability

The insurance market for M&A risk

Key points for those involved in M&A activity

Marsh 3

Backdrop to M&A Activity - Context

Market recovery - deals are being done

M&A’s and IPO’s up - market is “cautiously optimistic”

Transaction profile

– Size and type of deals

– Who ?

Deal activity involves risk and the appetite for risk is changing. How do you exploit opportunities whilst effectively managing an adverse outcome ?

Marsh 4

Overview of Trends in Managing M&A Risk

A changing attitude towards deal risk :

– Greater sensitivity towards retaining contingent liability / inheriting liability

– Greater focus on levels of indemnity received

– Concern shown over strength of covenant of seller

– M&A participants are looking to exploit different attitudes to risk

– A product of types of deals and other characteristics

– Risk Due Diligence / Risk Transfer ?

Marsh 5

Overview of Trends in Managing M&A Risk

M&A Practitioners are considering use of the Insurance Market to achieve :

Facilitation - Insurance provides smoothing mechanism overcoming a deal obstacle

Protection - Insurance utilised to enhance risk management

Valuation - Issues cause potential devaluation of share-price

Strategic - Issues present problems for board / investors to conclude transactions in commercially efficient way

Most transactions that we see fall into one or a combination of the above

Marsh 6

Warranty and Indemnity Insurance

A generic approach to the insuring of contractual liabilities that arise

from a transaction (warranties and/or indemnities)

The established M&A insurance solution

Significant up turn in use

– Deals excess of £100m limit placed

– Continental European / global transactions

Increasingly used to provide enhanced protection

– Above the indemnity cap

– Credit protection

Used in auction scenarios to strategic effect

Consideration given earlier on in process - e.g. particularly on sell side

Greater sophistication of insurance market

Marsh 7

Transaction: Business involved in an early bid stage for an upstream supplier.

Situation: The team took a call from a corporate finance company who were advising the Client in respect of the acquisition. The Client was in a competitive bid situation against a number of other interested parties to buy the target and the corporate finance company wanted to understand the dynamics of warranty and indemnity insurance.

Action: The Marsh team was able to structure an insurance solution that the Client used to strategically enhance their bid by substantially reducing their requirement for the seller to provide warranties.

Outcome: The insurance proved to be a win-win situation - the seller was able to effect a clean exit and the attractiveness of this allowed them to award exclusivity to our client. The policy was effected prior to completion of the transaction.

Pricing: Limit of insurance GBP 8m at a premium of GBP 320k

Case study - August 2004Warranty and Indemnity insurance - Buyers Policy Creating strategic value

Marsh 8

Transaction: The sale of an insolvent company to a listed trade buyer. The syndicate of banks that had financed the company managed the sale.

Situation: The banks were unwilling to provide warranties and retain any liability under the terms of this sale. The debt free value of the company was almost the same as the consideration and since the proceeds were being used entirely to repay the outstanding debt facility, no capital was available against a future breach.

As part of the corporate governance standards the buyers’ board required warranties from the seller to sign-off the acquisition.

Action: The Buyers’ CFO was amenable for alternative solutions and sought advice from Marsh. The concept of Buyers Warranty and Indemnity insurance to bridge the warranty gap was presented and provided the necessary comfort to the board.

Outcome: The team structured a buyers warranty and indemnity insurance programme which was syndicated amongst 8 different insurers in the UK, USA and Bermuda. The insurance enabled our client to complete the deal and obtain the requisite sign off from the company board.

Pricing: Limit of insurance GBP 100m at a premium of GBP 4.5m

Case study - May 2004Warranty and Indemnity Insurance - Buyers PolicyEnabling an acquisition of an insolvent company

Marsh 9

Contingent Liability Insurance Solutions

Insurance based on an “opinion” of a contingent liability for which the outcome and / or quantum are uncertain

‘probable’ loss(likely case)

‘possible’ loss(worst case)

Risk to be transferred

Buffer

Retained Risk

Typical Litigation Buy-Out Insurance

Most common applications are:

Tax

Intellectual Property

General Litigation

Environmental

Insurance Policy

Marsh 10

Contingent Liability Insurance SolutionsProcess to ascertain and obtain insurance

Phase I - Ascertain insurability of contingent liability

– Understanding nature of the exposures

– Legal opinion from client’s legal advisor with a classification of “probable loss” (i.e. expected case) and “possible loss” (i.e. worst possible case)

– Provision of initial “non binding” terms (limits of cover, attachment point of insurance and estimate costing of further due diligence work

Phase II - Due Diligence

– Engagement of insurers external advisors

– Insurers due diligence - independent legal opinion

Phase III - Implementation

– Provision of binding terms, outlining costing and structure

– Finalisation of the policy form

Marsh 11

Management Liability Insurance

Whilst preparing a transaction or Public Securities Offering you need to analyse your Directors & Officers Liability Insurance (D&O) policy and consider the way forward

Action:

Analyse the existing D&O policy in respect of the transaction

Consider the D&O policy post transaction / IPO / Securities offering (run-off cover / new D&O policy / Public Offering Securities Insurance)

Identify how liabilities arising out of the prospectus can be transferred to insurance market

Structure and place a bespoke Public Offering Securities Liability insurance programme

Marsh 12

Transaction: European based technology / media company owned by a consortium of private equity firms wanted to finance the acquisition of three target companies through a bond offering in the USA and Europe. Majority to be placed in the USA Rule 144A.

Situation: The bond offering would leave the company to be highly leveraged. Various directors of the company and the sponsoring private equity firms were required to contribute to the offering document with personal liabilities attaching. This was of discomfort to some of the companies’ executives and investment directors at the PE firms.

The Directors and Officers liability insurance of the company excluded any liabilities relating to securities offering.

Action: Marsh structured and placed a Public Offering Securities Insurance (POSi) syndicated over 8 markets in combination with enhancing the D&O policy for the EUR 1.5b bond offering.

Outcome: The protection of the POSI programme and the updated D&O policy provided the necessary comfort to the involved directors.

Pricing: Limit of insurance EUR 100m at a premium of EUR 3.3m

Case study - June 2004Public Offering Securities Insurance (POSi) Protection for Public Offering

Marsh 13

The Insurance Market for M&A Risk

What is feasible ?

Global application

Market focuses on risk characteristics

Process is critical

Providers are deal doers

Marsh 14

When does Risk Transfer work well in M&A ?

Clearly understood motivation

Realistic expectations of market appetite

Insurance is part of the solution - it supports the deal

Preparation and communication