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Carve-Out Transactions

Carve-out transactions can bring a series of risks to buyers. Our team of specialists are available to work with you to aim to minimize post-close surprises, helping to deliver on a sound insurance strategy that enables you to focus on value creation.

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A number of global economic factors acting in concert are expected to result in a continued rise in carve-out transactions, as corporations of all sizes and across all industries are seeking to divest subsidiaries, assets, or teams that do not align with their corporate strategy.

The team of transaction advisory specialists within Marsh’s Private Equity and Mergers & Acquisitions (PEMA) Practice is well positioned to help you navigate the insurance challenges that can arise in such deals. We can help you identify the risks associated with the transaction and help you address the challenges that you may face through the process.

Specific risks of a carve-out

Carve-out transactions can carry several risks that should be considered before the sale is completed. These can include:

Insurance costs allocated to the target by the seller may have been subsidized or inaccurate. Additionally, when the target looks to procure insurance on a standalone basis, any purchasing power of the seller group may be lost unless the buyer is a similarly sized organization. As a consequence, the target could face higher premiums post-close, which may not align with current cost allocations.

Depending on the position agreed in the sale and purchase agreement (SPA), the target may also need to explore retrospective insurance to cover assumed historical liabilities (see below). This coverage may have a significant one-off cost, or may further increase the target’s ongoing annual insurance costs — if the cover is available at all.

Lastly, for certain asset-heavy industries — such as manufacturing — property insurers may apply increased scrutiny to the condition of the target’s physical assets once they are no longer part of a larger seller portfolio. This may lead to insurers imposing ‘risk improvement requirements’, which the target would be required to complete before full cover is granted. Some requirements — for example, the fitting of a fire suppression system — may require significant capital expenditure.

In a share purchase, the buyer will usually be acquiring the target with all of its liabilities. However, a new standalone insurance program incepted at completion for the target will typically not cover pre-completion liabilities by default.

Some cover for these liabilities may be available through conditional ongoing access to the seller’s insurance program. However, such access is subject to negotiation with the seller and careful SPA drafting. Additionally, buyers should be aware that the seller’s policy deductibles/excesses would apply to any claim under the seller’s program; these could be significantly higher than the newly standalone target can afford.

The target may also seek to cover some pre-completion liabilities via its new standalone insurance program. However, when available, this coverage is likely to be limited. Further, insurers will often require detailed target-specific information that may not have been recorded by the seller.

In most carve-outs, the target requires an entirely new insurance program at completion, since it typically will no longer benefit from insurance previously provided by the seller. This new program may need to be very different from the seller’s previous arrangements, given the target’s distinct size and risk profile.

Additionally, if the procurement of insurance was previously handled centrally by the seller, the target’s management team may have little or no prior experience with the processes. Further, while some of the information required to secure insurance quotations may be available from the seller, some may not and as such may need to be built up from scratch. A narrow window of time between signing and completion may make it more challenging to have a robust insurance program ready for the target by Day 1.

How Marsh can help

Our team of transaction advisory specialists have the knowledge and experience to help you understand the potential challenges associated with a carve-out transaction, allowing you to take preemptive action to minimize your risks. Our specialists can help you address these, among other, risks:

Coverage

We can help you design a new insurance program for the target based on its standalone size and risk profile, tailored to cover the target’s key insurable risks. Where any existing policies will continue, we can review these policies and identify potential actions you can take. 

Claims

We will review recent target claims experience to assess how it may impact new standalone insurance procurement. We will also explore whether the target has any ‘open’ claims or circumstances so you can seek confirmation that these matters will be handled via the seller’s insurance arrangements. 

SPA

We can assist you in understanding the seller’s position on pre-completion liabilities and other insurance considerations. Our input can inform your approach to commercial negotiations with sellers. 

Action planning

We can work with you to develop a phased insurance action plan to be implemented between signing and completion. Our ongoing support around data gathering, insurer engagement, and management collaboration will help the target have a new insurance program in place for Day 1.

Costs

We can help you identify insurance costs currently allocated to the target and develop estimates of what the target might pay for insurance on a standalone basis. This can better inform financial modelling and challenge seller assumptions that may be inaccurate. Where possible, we can also help you estimate the potential cost of insurance to cover pre-completion liabilities to quantify the financial impact of these liabilities not being retained by the seller. Additionally, we help you explore the extent to which the target’s physical assets might be subject to risk improvement requirements — and if so, whether the associated capital expenditure has already been budgeted. 

Continuity

We can help you identify which insurance policies are the target’s own, and can therefore continue post-completion, and which are the seller’s that must be replaced. Where target policy continuity may be impacted by the transaction due to ‘change of control’ clauses, we can recommend actions designed to continue cover without interruption.

Our cross-business capabilities

Marsh McLennan is one of the largest advisors in the private equity space; we work with more than 2,000 private equity funds, including global top 30 funds.

What we do for private equity clients
Commercial, operational, technical and pricing due diligence; building post-close operational value creation, revenue uplift strategies and M&A plans.

How we do it
Private Capital team with 300+ partners and aligned consultants across hubs in the Americas, Europe, and Asia-Pacific.

What we do for private equity clients
HR due diligence and Day 1 readiness across leadership, talent, renumeration, culture, and HR systems; optimizing talent attraction, retention, and the employee experience at portfolio companies.

How we do it
Global Private Equity Advisory Practice with 180+ HR M&A specialists. Mercer Alternatives also manages US$24 billion in private markets, with 220+ professionals.

What we do for private equity clients
Advising private equity funds on managing transactional risks as well as risk and insurance diligence; optimizing approaches to risk management and insurance for portfolio companies.

How we do it
Dedicated Private Equity and M&A (PEMA) practice with 400+ deal risk experts across 30 countries inclusive of 100+ transactional risk brokers.

What we do for private equity clients
Specialist capital raising and financial advisor team on transactions in the insurance and reinsurance sector.

How we do it
GC Securities, with approximately 25 investment professionals across North America and Europe.

25+

Years of industry-leading transaction experience

6000+

M&A transactions annually completed globally

5000+

Participating portfolio companies

2000+

Private equity funds, including global top 30 funds

800+

Global private equity M&A colleagues

Marsh McLennan Carve-out Playbook

A successful carve-out integration requires effective alignment and culture change, attention to operations management and performance improvements, a focus on customer retention and vendor integration, and intelligent rationalization — backed by detailed, step-by-step implementation support. These elements are the foundation of our approach, enhanced by our global reach and the combined resources of Oliver Wyman, Mercer and Marsh.

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