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Aon defines new forms of twists

“These two things together created a perfect storm to push valuations to really high, which would encourage many business owners to want to sell, and there was relatively inexpensive funding to do so. So, it proved to be a very active market.”

In 2022, Aon believes the return of last year’s M&A activity can continue to some extent, albeit not to the record levels seen in 2021. Today’s dealmakers face new forms of volatility, including geopolitical uncertainty caused by The Russian invasion of Ukraine, inflation and the potential for stagflation, a rising interest rate environment, changing tax and regulatory landscapes, the rapid acceleration of the digital economy, and a highly complex cyber risk landscape.

“A lot of things have changed very quickly. People are talking about different headwinds in the market, but I think the main headwinds are the volatility that all these events bring.” What they agree on is the right price – but if things are moving too quickly, positively or negatively, it’s very difficult to make that deal.

This is not a merger and acquisition activity [significantly drops] If we enter a recession, or if interest rates change, or even if there is inflation; What the market needs is a sense of stability so that people can make those deals.”

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What does the current volatility of M&A activity mean in 2022? Blitz believes this will be a “different year, with different deals”. Aon’s M&A risk review report, focused on the first quarter of 22, showed a particularly strong outlook for mergers and acquisitions in sectors such as technology, media and telecoms (TMT), while dealmakers were more skeptical of the outlook in energy, mining and utilities ( EMU) space.

However, Blitz noted: “There wasn’t much interest in the 24th and 1st quarter of ’22 about the EMU space, but fast forward two months later, and we now have the energy industry ready for restructuring because of all the problems it’s having stemmed from the war. In Ukraine. So, I think we will see a lot of deal activity there, some distressed transactions.”

There are ways dealmakers can protect themselves from market volatility, including multiple insurance solutions—such as delegate and warranties (R&W), tax liability insurance, intellectual property insurance, and more—as well as an increased focus on diligence.

“In a very busy and mobile time, dealmakers don’t always consider insurance solutions, but anything you can do to take potential risks off the table is very valuable,” Blitz said. “The increased focus on diligence is also critical, whether it be on human capital issues, regulation, ESG issues, or the Internet. In this environment, there is less room for errors, so the more homework there is. The more you can do, and the more you can transfer the risk to third parties, the more likely it is that the trade will succeed in the right way.”

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R&W insurance is designed to cover unknown and unintended breaches of representations and warranties contained in merger and acquisition agreements. The market has grown along with the explosion in dealmaking, so much so that Blitz believes R&W insurance “has become the standard in private M&A deals.”

“People buy R&W insurance because it allows for more economically efficient transactions, where the seller gets more revenue at closing, rather than leaving money in escrow. This is important in this economic environment because their revenue is under greater pressure – and it can still be protected Buyer insured.

“I think what we will see in this period of volatility are larger limits being bought in any one trade, because the buyer may be more risk averse than at other times, as well as focus more on breadth of coverage. This is also beneficial for R&W insurers because Buyers and their advisors have a greater desire to dig deeper into the diligence, so I think insurers would benefit from that perspective.”

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