The perils of cross-border M&A deals

Worldwide M&A activity totalled US $3.9 trillion for 2019, according to Refinitiv, representing the fourth highest total for the period on record.  As businesses seek growth opportunities, many are increasingly looking for acquisition targets in overseas markets.  While cross-border M&A was down during that period compared to the prior year, it is still significant at over US $800 billion. 

Cross-border deals however can present a very different set of risks to those done domestically. The desire to enter new markets needs to be balanced against how much is known about the intended target and the jurisdiction in which they are operating.

Uncharted territory

Looking at our wealth of M&A Claims Data, we are able to pinpoint some of the things that tend to go awry, with financial statements, tax and compliance with laws being the three largest categories of what triggers businesses to claim against their W&I insurance. This is particularly true in a cross-border deal where acquirers may be less familiar with the regulatory, tax and legal framework. 

European employment laws for example are very different to those in the US, and language and business culture are often challenging across any geography. It is easy to assume that deals are done in the same way when customs and practices are in fact very different.

Tax is also a growing area of concern, with many countries putting corporations’ tax arrangements under greater scrutiny. Many aspects of the deal are literally foreign to the buyers and for that reason we see some buyers who only use W&I insurance when they are doing deals outside their home country. They may be very familiar with the process, but just want the extra comfort that they have some coverage if something goes wrong and that they won’t need to take extreme steps to collect from a foreign seller 

Devil is in the detail

Another pitfall that we see quite often is when the target company has operations and subsidiaries in other countries that are not deemed to be material to the buyer. Buyers can often underestimate the complexity of those businesses, especially if they are non-core. The subsidiaries may be small but that does not mean that they can’t generate a large claim. 

The issue again is often that the acquirer may assume that the due diligence approach they use on domestic deals is sufficient and does not fully take into account local quirks or differences in legal systems. The result is that there may be gaps in knowledge and therefore enhanced risk.

Looking abroad may be the answer to a strategic challenge, but analysis of our portfolio – which spans multiple geographies and sectors – means we are in a unique position to share insights into common deal pitfalls, based on observations about the claims made on these policies.

Our claims data shows that even the most thorough due diligence process can fail to uncover potential sources of dispute and litigation. One in five W&I insurance policies results in a claim notification, with larger and more complex deals more likely to lead to a claim and a largerloss , highlighting a very real issue on which corporates need to focus.


Mary Duffy, Global Head of Mergers & Acquisitions