In 2017, the Italian merger and acquisitions market recorded 733 operations (-1 per cent with respect to the 740 in 2016) for a total value of approximately €41 billion (-28 per cent with respect to the €56 billion in 2016).
The 2017 M&A market was characterised by many large operations but also by the lengthy and complex processes necessary to complete them. Many deals, even significant ones both for value and for their industrial impact, were announced during the year but have not yet been completed.
In any case, foreign investor interest in Italian companies was confirmed: 244 operations in 2017 for a total value of approximately €20 billion (€19 billion in 240 operations in 2016). Italian companies always represent an interesting investment opportunity not only in the light of the strength of their brands, but also for the fact that many of them are facing problematic generational shifts, or need capital injections (and new management features) to support their expansion, or are in turnaround situations.
Instead investments in M&As by Italian companies and entrepreneurs were more contained than last year and they invested 20.6 billion euro (-42 per cent from the 37 billion last year), of which 11.3 in Italy and 9.3 abroad, in 489 operations (-2 per cent with respect to 500 in 2016)
At a sector level, 2017 was again dominated by Financial Services, in which there were four operations each for a value of more than a billion euro.
The Support Services & Infrastructures (SS&I) area was particularly interesting with more than 100 operations for a value of €7.5 billion (93 operations for €7.1 billion in 2016).
The Energy and Utilities sector amounted to €6.6 billion, in line with last year, with 75 operations.
Consumer and Industrial Markets stayed in first place in terms of number of operations, respectively with 221 and 168 operations, for a value of €3.8 and €7.2 billion.
The figures for last year must be examined carefully.
Despite the reduction in values the market nevertheless was very lively and the number of operations is in line with the last year’s record values.
Last year, furthermore, the political elections were about to happen. We believe that investors, above all foreign ones, may have waited for the Italian political scenario to stabilise.
We can, however, certainly say that again for this year interest in the Italian market will continue: 2018 may count on a rich pipeline of preannounced operations something which has never happened in the past years.
Analysts estimate operations for at least €35 billion.
Also for the current year an important trend worth mentioning, in the negotiation of agreements for mergers and acquisitions, concerns warranty and indemnity insurance for transaction liability.
The adoption of this kind of insurance is spreading more and more, and increased in the past year, both in domestic and cross-border transactions.
Warranty and indemnity insurance provides protection against losses suffered by the buyer in the case of breach of the seller’s warranties in an M&A contract.
Despite a thorough due diligence activity, unknown risks may remain, seriously affecting the value of the new company or the company acquired. Warranty insurance provides financial protection against this type of risk.
There are two kinds of warranty and indemnity policies.
A seller-side policy is constructed as third-party insurance. The policyholder is the seller. By means of this policy the seller ensures that any compensation for damages suffered by the buyer in the event of the breach of the representations and warranties is covered.
This type of policy normally has a ‘mirror structure’ because its terms and conditions are guaranteed, its ceiling and the period of coverage coincide with the representations and warranties, the amount of the contractual liability limit negotiated between the parties, and the period provided for in the purchase agreement.
In particular, the seller’s representations and warranties are copied and rewritten in the policy, because they constitute the object of the insurance coverage. Even the definitions in the policy are the same as those in the acquisition or merger agreement.
In an acquisition agreement, this type of policy may have some advantages for the seller.
First of all, it can help the seller to negotiate a higher price for the target company. It can also avoid the use of a fidejussioni (a type of personal guarantee), which is expensive, often hard to find and which transfers the risk to third parties. Furthermore, in a fidejussione contract, article 1950 of the ICC provides for the right of recourse of the guarantor against the principal debtor.
Instead, with an insurance policy, in case of losses the insurer has to indemnify the buyer, without any right of recourse against the seller.
Generally speaking the policy is usually ‘tailor made’ and based on the specific needs of the parties.
A possible negative effect of choosing warranties and indemnities insurance is the fact that the negotiation process may become more cumbersome as it will involve three parties and not just the buyer and the seller.
A second issue that may arise, concerns fraud on the part of the seller. In this respect article 1917 of the ICC states that the insurer is not obliged to indemnify the insured when the damages are caused by him or her intentionally.
Accordingly, the paradox would arise that in this case, the warranty and indemnity insurance would not cover the most serious case of breach (ie, when the seller fraudulently provides misleading representations and warranties).
The buyer-side policy is constructed as a first party insurance (or insurance for damages).
The buyer is the policyholder who ensures that he has an extra layer of protection compared to that provided in the acquisition agreement, in the event of breach of warranty by the seller.
This kind of policy is normally selected when there are limited possibilities of taking legal action to recover damages against the seller. Unlike the seller-side policy, this one does not have the above-mentioned ‘mirror structure’ but normally guarantees higher coverage to buyers (ceiling, duration and conditions) compared to what is provided by the seller in the agreement. For example, it may provide for an extension of the coverage period after that negotiated in the agreement, or an higher ceiling than that warranted by the seller.
For this kind of policy an issue could be the relationship between the duration of the seller’s representations and warranties and the period of the warranty and indemnity insurance coverage.
According to Supreme Court ruling No. 16963 of 24 July 2014, the representations and warranties constitute an ancillary performance (prestazione), different from the case of warranties for defects that the seller must provide in a sale contract pursuant to article 1495 of the ICC. According to this article, the buyer loses the right to the warranty against defects when they are not reported by the seller within eight days of their discovery, and, in any event, within one year. The representations and warranties, instead, as they are another type of warranty, are not subject to these short terms, but to the 10-year ordinary limitation period, provided by article 2946 of the ICC.
The issue arises because, insurance companies normally use to provide coverage for up to a maximum of seven years, and not for up to the 10-year limitation period. Accordingly, there could be an uncovered three-year period.
Finally, it normally takes about three weeks for the insurance policy to be issued, but when the insurance company has been involved from the very beginning of the negotiations, it is possible for the policy to be executed on the day of signing or on the closing date.
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