Mergers and acquisitions ("M&A")
can be a double-edged sword. When done right, M&A can allow
acquirers to scale their businesses and create value through
synergies. When done poorly, M&A can result in drastic
overpayments for assets that are not nearly as valuable as believed
and for economies of scale that are very difficult to achieve.
One of the main risks in M&A is information asymmetry:
simply put, the vendor knows much more about its business than the
acquirer. While the acquirer is able to perform due diligence, time
pressures to close the deal mean that this process can sometimes be
imperfect; issues are sometimes missed. This is where
Representations and Warranties (R&W) insurance
can come into play. This brief article provides a brief overview of
R&W insurance, and discusses some of the issues we have
encountered as forensic accountants and business valuators in
quantifying losses under this type of insurance coverage.
