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Merger and acquisition (M&A) activity in the U.S. has seen an extraordinary surge in the last couple of years. In the first quarter of 2018 alone, there were 952 deals worth $330.8 billion. By all accounts, the red-hot M&A market is only expected to keep heating up in the next three to five years.
Private equity (PE) firms face growing competition from cash-rich strategic investors. “Strategics,” as they’re referred to, are corporate investors or conglomerates that typically invest in like industries with an eye toward acquiring the companies they invest in.
Competition to snatch up U.S. companies also comes from foreign investors, but these investors often approach risk differently than their U.S. counterparts. While domestic strategics usually have very experienced in-house teams to run through the due diligence process, foreign strategics may not have the same level of insight into the American legal system and cultural mores, both of which can affect risk.
If you’re a foreign investor entering the American M&A market, working with a domestic risk advisor can help better assess everything from product warranties to catastrophic loss exposure as well as navigate through critical contract negotiations.
Warranties on Product Liability or Services
When buying a company in a stock transaction, acquirers typically take on the contractual promises of that company’s product and service warranties. Standard product warranty agreements run 12 months, but some companies offer extended warranties, guaranteeing their products for multiple years. Acquiring a company means that the acquirer must now stand behind those products and services for the life of the warranty and accept contractual obligations to third-party customers or vendors.
Many investors are often not comfortable with existing product warranties, or the definitions of loss and damages in the existing contracts.
Specialized insurance products, such as manufacturer errors and omissions, can be written to cover warranties that were put in place years ago for products that were sold before the acquisition. Of course, underwriters will want to have detailed information regarding the type of product that’s out there, how it’s being used, how much product is in circulation and loss experience
The Litigation Risk
America, no doubt is an active legal environment. Most foreign buyers understand that reality on some level, but during the M&A cycle, they must ensure their coverage aligns with the legal atmosphere they’re buying into. Litigation and settlement payouts are costly, time consuming and can damage a company’s long-term reputation.
For example, let’s say a strategic investor buys a manufacturing company in the U.S. that makes electric ovens. After the acquisition, a faulty control panel causes an oven to malfunction and start a house fire. The manufacturer warranty covers the oven, but consequential losses from fire extend far beyond replacement costs to loss of life, pain and suffering, and emotional stress. These are catastrophic losses that aren’t only costly to litigate and settle, but can interfere with business operation.
The new owner of the oven factory now needs to understand the contractual agreement with third-party customers and vendors, as well as the financial, legal and reputational risks they’ve taken on with existing agreements.
Communicating with Cultural Context
People from different cultures communicate differently. Working with non-U.S. clients places a premium on listening and understanding the concerns and risks of the potential buyer, as well as how they view each deal from a financial, risk management and reputational standpoint. In her often-cited Harvard Business Review article “Getting to Si, Ja, Oui, Hai, and Da,” Erin Meyer explains some of the communication nuances between cultures. Some, she says, are more direct in their language while others are subtle. Some value language that expresses emotion; others see emotion as a weakness.
A productive, open discussion about all the risks associated with acquiring U.S. companies, and the best ways to manage and mitigate them, requires coming to the table with both expertise in understanding those risks and cultural nuances needed to communicate them.
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