3 Cyber Risks Tech Companies Need to Watch When Entering an M&A Deal

By: Joe Perrett | July 16, 2022

Previously an M&A underwriter working across a range of private equity and strategic acquisitions in the US and Europe, Joe Perrett now heads up CFC’s transaction liability private enterprise product team. He can be reached at [email protected].

Topics: Cyber | M&A

For the majority of businesses, the global pandemic fast-tracked their digital transformation programs by months or even years.

And there’s no doubt that the accelerated demand for digital technology solutions was a boon to an already booming sector and saw a rush of start-ups come to market.

Despite signs that the tech market itself is seeing a return to more normal rates of growth, the number of global unicorns (privately owned start-ups valued over $1 billion) grew by almost 14% from 936 to 1,066 in the first quarter of this year — and the majority of these sit within the tech sector.

This growth has undoubtedly fueled the level of tech mergers and acquisitions.

Indeed, tech M&A values exceeded $1 trillion for the first time last year, a 60% increase on 2020, and SMB businesses are key targets for the giants of the sector.

Of the 616 acquisitions collectively made by the five big techs in the U.S. — Google, Apple, Facebook, Amazon and Microsoft — in recent years, 400 were SMB tech companies.

By their very nature, tech businesses can be ground-breaking and in many cases are bringing new and innovative solutions to market so when it comes to any merger or acquisition, the risks they present are wide ranging and can differ greatly to those of more traditional businesses.

These risks are not necessarily in physical assets but are often intangible and in many cases unique.

As in many other industry sectors, representation and warranty (R&W) insurance has become an increasingly important risk transfer mechanism within tech M&A — and in a sector that has heightened risks, R&W insurance is proving its value as one recent report states that claims are especially prevalent within the manufacturing and technology sectors.

With the report citing compliance with laws and intellectual property making up 16% and 7% of all claims, we’ve taken a closer look at the tech sector to identify the top three risk areas specifically within tech M&A deals.

1) Intellectual Property (IP)

IP is often the most fundamental and valuable asset tech companies have.

In a sector with IP at the core of its value, litigation will be commonplace as businesses look to protect their most valuable assets and obtain a competitive advantage.

Litigation can be complex, lengthy and most importantly very costly. An IP infringement action, for example by a competitor, can easily cripple any tech business, dragging on for years.

Perhaps the most high profile case to date has been the Samsung and Apple patent infringement litigation, which began in 2011 and concluded seven years later in 2018 with Samsung having to pay $539M in damages.

R&W in a tech merger or acquisition agreement are likely to include IP, so sellers could be liable for any problems that arise post-deal.

2) Data Protection

Compliance with regulations and legislation is important for any businesses, but tech companies tend to have particular exposure to data protection regulation and any breach can have severe consequences.

Client data is a highly valued commodity in today’s world, and the protection of this data has been the focus of regulators around the globe.

Most countries have data protection regulation in place that outlines strict requirements on how data can be collected and used, and the penalties for breaching these rules are severe.

Uber in 2016 was fined $148M when there was a large data breach of their driver and user accounts.

Tech companies are often data custodians because their customers trust them with their data in large volumes, which raises their exposure to data protection regulation. In tech M&A transactions, data breach issues which surface after a deal can lead to hefty claims and lengthy litigation.

3) Cybersecurity

Cyber threats have grown considerably in recent years.

Google revealed that it blocks more than 18 million malware and phishing emails related just to COVID-19 every day.

Financial consequences have also become more severe, with cybercrime costing organizations $2.9M every minute.

The implications of a cyber security breach within tech firms are probably greater than those in any other sector. This is in part related to data protection, as cyberattacks can have flow-on effects on a tech company’s customer base which can result in litigation.

It’s not surprising therefore that in tech M&A, cybersecurity and risk exposure are analyzed in minute detail during the due diligence process.

As tech M&A transactions continue to increase, claims are also on the rise. It is vitally important that companies in this sector looking to undertake any transaction truly understand the unique risks that any deal presents and also understand the limitations of their everyday insurance covers — for example, E&O policies typically exclude patent litigation.

Having fit-for-purpose R&W insurance in place can help facilitate a smoother transaction and provide the seller with peace of mind. &

The Qualities to Look for when Selecting a Financial Lines Carrier

Operating a business comes with its share of challenges, but having an insurance partner that strives to understand and align with your operations can make all the difference.

By: MSIG USA | October 31, 2024

Running a commercial business is no small feat. Leaders are often tasked with making difficult decisions — sometimes with limited data — and communicating these decisions with confidence while acknowledging their inherent uncertainty.

“Expectations are incredibly high in today’s current climate,” said David Guild, head of financial lines, MSIG USA. “Companies and their leaders must be thoughtful and controlled in their communications, conveying both competence and a clear vision on an ever-evolving world stage.

Nevertheless good leaders (whether they are in the C-suite or on the board of directors) consistently persevere and face the challenges of our evolving world, equipping themselves with the necessary tools and techniques to keep operations running.

For financial companies and commercial businesses looking to keep pace with today’s risks and better understand their own exposures, finding the right insurer need not feel like an added weight.

Below are several qualities to look for in a partner that has the experience and insights to help mitigate and navigate their insureds’ unique exposures, giving leaders the space to focus on their core operations.

Sustainability in All Markets

David Guild, Head of Financial Lines, MSIG USA

When looking for a financial lines insurance partner, sustainability should be top of mind. Knowing that an insurer can provide solutions in a hard market alongside the soft will not only provide peace of mind but also help build resilience.

“Leaders should have the room to concentrate on their vision for the company and what it can achieve — not be burdened by potential risks that keep them awake at night. “Your insurance partners should be able to understand the trials and tribulations of running a business, to respect that there is no single right answer to most challenges, and be prepared to assist wherever, whenever issues may arise,” Guild said.

Sustainability is proven in an insurer’s ability to come through on the promises it makes. For example, MSIG USA’s approach has earned it an A+ rating, proof that its team can back the promises it makes and see them through to completion. “We are confident in our ability to serve your insurance needs, on a global scale,” Guild added.

“Everything we speak of revolves around the credibility of our platform, which is reflected in our A+ rating, a 350-year legacy within our family of companies, and our experienced team here in the U.S.”

An Emphasis on Company and Culture

Successful partnerships are built on a solid relationship between insurer and client.

At MSIG USA, “we aim to be a stable and sustainable presence for our clients,” Guild said. “The value of long-term relationships is at the core of what MSIG USA is all about. Our underwriters deeply appreciate the importance of these connections.

“We believe that building and maintaining strong, long-lasting relationships with our customers is essential to navigating the inevitable fluctuations of the insurance market. We are confident in our abilities, and in yours.” he added.

Company culture, as Guild mentioned, is more than an internal commitment; it’s something that can also drive business relationships.

For insurance partners, analyzing and aligning with their clients’ culture helps to solidify partnerships, as well as open the lines of communication and understanding.

“Variables will change, oftentimes rapidly. From our view, what matters is the culture of that company when responding to change. It’s about trusting their character rather than just the policies and procedures in place,” Guild said.

A Source of Truth and Clear Communication

Effective communication goes a long way in clearly understanding an insured’s business and future potential. This allows for sustainable partners to develop coverage that fits and to work closely with their Claims team to understand the partnership in context.

With the amount of data available today, and the number of ways information can quickly be disseminated through different medium, a good insurance partner knows that companies must be the single source of truth for their stakeholders.

“Quarterly and annual earnings calls provide a platform to discuss financial results and respond to investor questions. Investor presentations offer a more comprehensive overview of the company’s strategy, performance and outlook,” Guild explained.

We will look at what analysts and other third parties think about the information provided to try to glean what the investor base will think and how they will act. But ultimately, it is what the company says, and the way they say it, that we will assist in defending, if need be, and so we make sure to listen and learn from the company leadership.

Bringing These Qualities Under One Roof

Leaders want to know that, at the end of the day, their business is a priority for their partners.

Clear communication, a strong relationship and emphasis on sustainability are just the start. Their insurance partners should strive to understand their business, identify areas of concern and craft coverage customized to meet their needs.

With an impressive 350-year legacy, MSIG USA is doing just that for its clients, utilizing its global presence to further its clients’ goals.

“The key elements of our approach are an intellectual pursuit of information, a well-honed practice of underwriting that identifies material aspects for risk assessment, and clear communication of our insights to our clients: brokers and buyers alike. We aim to provide a transparent and informed perspective on the risks we underwrite,” Guild said.

“We bring sustainable, predictable insurance capital and what we believe is best in class service philosophy, honed by working with some of the most sophisticated brokers and buyers of insurance in the world.”

To learn more, visit: https://www.msigusa.com/financial-lines/.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with MSIG USA. The editorial staff of Risk & Insurance had no role in its preparation.

MSIG North America is a member of MS&AD Insurance Group Holdings, Inc. which is the 8th largest non-life insurance group in the world by revenue. Based in Tokyo, Japan, we operate in 48 countries/regions and generated $46B in 2021 with approximately 40,000 employees globally. MSIG North America is the marketing name used to refer to MSIG Holdings (U.S.A.), Inc. (“MSIGH”), and its subsidiary companies.