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Changes in the European M&A scene.

Chris F. Best is editor of Foresight, a London-based insurance and risk management journal published by Risk and Insurance Group Ltd.

After 16 years of deliberation, an important building block in the construction of a single European market was put into place last December. The Council of Ministers finally agreed on a community merger regulation giving the European Commission exclusive rights to regulate mergers and acquisitions within the community.

The new rules, which went into effect Sept. 21, stipulate that the commission must approve all largescale mergers. As the implications of mergers and acquisitions are now among their most pressing concerns, risk managers are watching the situation closely. This may be because few risk managers are in close contact with their corporate development directorates and even fewer are given an opportunity to contribute to the appraisal process.

While few acquisition negotiations flounder due to the lack of insurance coverage, Brian Pountney, risk manager of Bass PLC and chairman of the Association of Risk Managers in Industry and Commerce, said at a recent conference that the degree of risk assumed, if properly appreciated, might produce different outcomes.

Mr. Pountney offered some observations on the matter. First, if there is interest in installing a risk management program in an acquired company where none previously existed, do it without delay. Second, if risk management is a new requirement, it will be more easily accepted. Third, if little attention was given to loss prevention in the past, bringing the new entity up to group standards can be costly. That cost, he said, should be part of the acquisition viability study. Finally, if advisers and auditors are used to support the acquisition, make them responsible for their actions by requiring adequate professional indemnity coverage.

Mr. Pountney also explained that when a company makes an acquisition in the same industry, there may be a tendency to integrate factories and warehouses and concentrate production in more limited resources. These strategies, however, may make the company susceptible to market-share loss. He advised risk managers to make sure the dangers are fully understood in the boardroom and to include without delay members of the acquired company in corporate planning strategies.

Risk managers should also consider including the new entity in the acquiring company's directors' and officers' program, he said, because merger and acquisition activity usually stimulates claims. However, to start protection when the acquisition or merger is already in progress may be too late. To protect board members before they are immersed in the activity, include in the company's D&O policy a provision that applies an extended "run-off" cover in the event of an acquisition. Do not rely on generosity, he cautioned. After bloody battles, retribution could be the order of the day.

Lastly, Mr. Pountney observed, as an employee of the acquired corporation, the risk manager may find his or her own job on the line. Hopefully, he added, the acquirer will be impressed enough with the risk manager's achievements that it will seek his or her services instead.

Environmental Impacts

Alastair Laurie-Walker of Bowring London's risk evaluation group, spoke at the conference on environmental problems and their effect on mergers and acquisitions. He said the U.S. requirement in some states that government consent be obtained on certain environmental matters before an acquisition can be put to bed might be mirrored in European legislation.

He noted that when Hanson Trust was considering the purchase of Power General, one issue was whether it would be responsible for reducing the emissions from certain coal-fired power stations. If so, the purchase price would have to include the cost of expensive gas desulphurization plants.

"In the United States and West Germany, current owners of contaminated land are responsible for the clean up even though they may not have caused it," he explained. "This legislation is costing a U.K. company some F-7 million to EIO million for pollution caused at the time of the Third Reich."

Risk Management a Threat?

Risk managers usually consider mergers and acquisitions from the standpoint of the initiating company, but what about using them to defend against hostile takeovers and unwelcome merger offers? In that case, they would first have to ensure that there are no "spies" inside their companies. Bill Robinson of Securicor Consultancy said many otherwise professional organizations can be incredibly lax when it comes to information security.

That may be true, but few organizations are willing to go to the extreme lengths to make sure their employees are security-conscious. indeed, some consider risk management itself a hostile acquisition in that it uses techniques such as bio-data screening and psychometric testing to identify employees with attitude problems and to screen prospective employees.
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Title Annotation:mergers and acquisitions
Author:Best, Chris F.
Publication:Risk Management
Article Type:column
Date:Nov 1, 1990
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