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The year of M&A: Navigating risk in a volatile market

The year of M&A: Navigating risk in a volatile market

In 2020, companies faced unprecedented risk as they tried to maintain business continuity while keeping their employees safe. But many experts didn’t anticipate one new pandemic-era risk trend: the rise of mergers and acquisitions (M&A).

Although M&A activity slowed down for the first half of 2020, it rapidly picked up steam in the second half of the year and is projected to grow even more in 2021. Follow along to learn more about how this flurry of M&A transactions is shifting the risk landscape—and what companies can do about it.

Slow down to speed up

After the pandemic hit in March 2020, companies anticipating another recession tightened their belts and focused on liquidity. As a result, M&A activity slowed down considerably—and experts predicted that the trend would last through the end of the year. But in the second half of 2020, historically low interest rates fed the M&A market. As Morgan Stanley reports, in the last quarter alone, there were 1,250 M&A deals globally, totaling over $1 trillion.

For the most part, these deals took place in industries that were the least impacted by Covid-19. Technology, healthcare, and financial services saw the most activity, whereas industrials and real estate fell well below historical transaction volumes. But many financial experts anticipate those harder hit sectors will rebound in 2021, now that there’s a clearer outlook on the market. With M&A volumes hitting their highest quarterly values in years despite the economic impact of the pandemic, it’s clear that these deals will continue to be a foundational part of business growth.

SPACs take the lead

Contributing to this contentious economic landscape are special purpose acquisition companies, or SPACs. Sometimes called “blank check companies,” these businesses are explicitly created to take other companies public, allowing businesses to avoid the traditional IPO process. SPACs don’t form with a specific merger in mind—instead, investors pool money and then have two years to find a privately held company to acquire.

According to David Perez, chief underwriting officer of Global Risk Solutions at Liberty Mutual Insurance, the uncertainty of these transactions increases insurance risk.

“From an insurance perspective, you’re underwriting the company raising the capital, but you don’t always know what company they’ll actually acquire. That leaves a wide range of potential risks to contend with,” he says.

Because this area of the market is entirely speculative, it can lead to huge swings in stock values. Perez notes that some companies see “swings of 1,000 points from month to month.” That kind of volatility was formerly unheard of—and it is a major contributing factor to the hardening D&O insurance market.

Weathering the hard market

It’s common for companies to rely on M&A as part of their business growth strategy, and it’s also common for companies looking to merge to rely on insurance coverage to reduce risk. But acquiring that coverage is becoming more challenging in a hardening market.

Particularly in high-risk areas, like the directors and officers (D&O) market, coverage is limited, and premiums are high. Many providers don’t have the capacity to insure SPACs because of increased risk, and the need for coverage in a limited market is driving up the cost of D&O insurance across the board.

The representations and warranties (R&W) market, as with the wider M&A market, has seen deal flow and appetite in the product continue to be strong, however, claims frequency is increasing. According to Rowan Bamford, President of Liberty Global Transaction Solutions, “this is due to difficulty in doing full due diligence given the COVID-19 pandemic and increasingly competitive M&A processes which result in more seller-friendly terms and compressed timeframes. As a result, insurers are having to increase rate to match the heightened risk profile and tighten policy terms,” he says. But even in a hard market, it’s important to stay protected. For SPACs and privately held companies alike, collaborating with underwriters is the best strategy to ensure adequate coverage during transition periods. And with M&A activity projected to grow even more in 2021, businesses in every sector need to consider the likelihood that a merger is in their future.

Do you want to learn more about the top risk trends impacting the business landscape in 2021? Read our series on risk and the post-COVID economy.

This website is general in nature, and is provided as a courtesy to you. Information is accurate to the best of Liberty Mutual’s knowledge, but companies and individuals should not rely on it to prevent and mitigate all risks as an explanation of coverage or benefits under an insurance policy. Consult your professional advisor regarding your particular facts and circumstance. By citing external authorities or linking to other websites, Liberty Mutual is not endorsing them.