It’s always reassuring when something you’re witnessing in the market gets confirmed with cold, hard numbers. I was lucky enough to have this happen at the Weil Silicon Valley M&A Forum when we heard from Mike Wyatt of Morgan Stanley.
He confirmed that the make-up of buyers of tech companies have fundamentally changed in the last few years. Obviously, then, my thought is: What does that mean for reps and warranties insurance?
Reps and warranties has been a fast-growing tool primarily utilized by the private equity community to help them differentiate their bids in an auction situation. It’s a way of transferring the risk associated with a breach of reps in the SPA to the insurance market.
So, does the changing face of who is buying tech companies affect the use and growth of this product?
Mike and Morgan Stanley provided us with a couple of startling facts. With 17 technology IPOs in 2016, tech M&A is outpacing the IPO market 8:1. Well, that’s certainly what we at Woodruff Sawyer and our clients have been experiencing.
Within the world of tech M&A, who is buying and what they are buying is fundamentally different. It used to be a world where tech companies bought other tech companies. They are certainly poised to continue doing that with huge cash balances and looking to spend it on M&A. According to Mike’s figures, US tech buying US tech still accounted for 26% of acquisitions.
However, in the last few years, they have been dealing with growing competition from new types of acquirers in this space.
First up, we have the sponsors; companies like Cvent, Vista Equity Partners, and EMC2. According to Morgan Stanley, they made up 32% of the acquisitions in the last year. As we know, the explosion of reps and warranties has mainly been driven by this group, with private equity accounting for the majority of policies purchased. They are well versed in the product and show no signs of dropping it as a tool.
The second group of new entrants are the cross-industry buyers; the Verizons, Delteks, and GE Capitals of the world. They have apparently accounted for 20% of acquisitions in the tech field, according to Morgan Stanley.
They are certainly getting on board with reps and warranties insurance; it’s stopped being an advantage and has become table stakes in putting in a bid against a private equity bidder who will almost certainly have included it in theirs.
Lastly, we’ve seen a lot more cross-border transactions, especially coming from China. Now, that was partly due to government initiatives within China, and who knows if they will continue encouraging this type of activity, but cross-border accounts for 22% of acquisitions.
Again, this has driven the growth of a particular kind of reps and warranties product, a kind of synthetic indemnity product that allows the buyer to get the kind of coverage they are used to, even if the seller isn’t prepared to give it, as its not market practice in their jurisdiction.
From a reps and warranties perspective, this is all good news. New buyers using the product is bound to stimulate more capacity down the line, which is good for competition. Additionally, new buyers have new needs and this will lead to the evolution of the product.
While this growth of potential users is primarily in tech, where it leads, others will follow. It also means that demand is going to continue to outstrip supply and that not considering reps and warranties insurance when you’re trying to buy will put you at an immediate disadvantage.
New entrants are coming into the market almost monthly, so hopefully the system will stabilize itself. On the other hand, it also means that downward pricing pressure will probably be minimal. If you have further questions, you can reach out to me or your Woodruff Sawyer team.