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Deal or Bad Deal?

Deal or Bad Deal?. M & A Q & A. Deal or Bad Deal? Panel Members. MODERATOR : James M. Fasone , Division Senior Vice President Arthur J. Gallagher Risk Management Services Simon Hodge , Managing Director Wachovia Insurance Services William Monat , President and CEO

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Deal or Bad Deal?

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  1. Deal or Bad Deal? M & A Q & A Washington, D.C. ~ November 7-9, 2007

  2. Deal or Bad Deal?Panel Members MODERATOR: • James M. Fasone, Division Senior Vice President Arthur J. Gallagher Risk Management Services • Simon Hodge, Managing Director Wachovia Insurance Services • William Monat, President and CEO Transactions Risk Solutions • Miles D. Scully, Managing Partner Gordon & Rees LLP • Kim Patlis Walsh, Managing Director Corporate Risk Solutions • Chris Warrior, Underwriter, Specialty Lines Beazley Group plc

  3. Overview • Exposures Created from Mergers and Acquisitions • Insurance Coverage Implications • Underwriting Issues and Concerns • Emerging M&A Trends • Product Solutions

  4. Overview of PE Market Source: The Private Equity Analyst, July 2007

  5. Transaction Structures • Degree of successor liability depends upon the type of transaction • Three Primary Types: • Merger • Stock Acquisition • Asset Acquisition

  6. M&A Challenges • Data Access Needed • Purchase Agreement • Due Diligence Information • Pro Forma Financials • Insurance Policies

  7. M&A Challenges(cont’d) • Understanding Insurance and Indemnification Agreements • Understanding Change in Control Provisions • Interfacing With Other Deal Pros • Managing the Politics • Meeting Expectations

  8. Deal Killers • Bank write-downs • Lack of financing / fundraising • Valuations, inability to exit and profit quickly • Buyer/Seller can’t agree on liabilities, indemnification language, R&W’s, covenants

  9. Deal Killers(cont’d) • Purchase price adjustments • Other • Scrutiny from legislative bodies • Certain Industry developments

  10. Making It A Better Deal • Assist Negotiation of Transaction Documents / Indemnity Agreements • Identification of Transactional Risk Protections • R&W insurance, tax liability, litigation buyouts • Purchase price adjustments due to accruals / reserve practices • Deal protection / failed deal insurance • Successor liability

  11. Making It A Better Deal(cont’d) • Other Insurance Protections • D&O runoff / tail, ongoing • Address international exposures • Surety / alternative collateral • Environmental • Products liability • Political risk insurance

  12. State of Transactional Insurance Market • Maturing marketplace for transactional products • U.S. product experience – 10 plus years • Building acceptance in deal community – steady process • Underwriting methodology • Significant opportunity to grow products

  13. Liquidity Crisis – Impact on M&A and PE Markets • Financing for mega deals difficult • Higher debt costs driving down EBITDA Multiples that PE firms can pay • Re-focusing of PE capital • Targeted funds – infrastructure, foreign, etc.

  14. Liquidity Crisis – Impact on M&A and PE Markets(cont’d) • Smaller buyouts with more PE equity vs. debt • Distressed buyouts • Strategic deals • Foreign acquisition of U.S. companies

  15. Product Innovations New Product Innovations • Private Equity – Product that addresses contingency exposures faced by PE firms at fund close to enable distributions without risk of claw backs – indemnity obligations or contingencies • Adapt products to changing deal environments as new issues arise

  16. Emerging Trends in M&A • Deal Boom: 2006 and 2007 Leading to U.S. Sub-Prime Crisis • Mega-deals closed by private equity groups, incredible valuations • Movement from publicly traded firms in hands of shareholders to PEGs • IPOs of PE/Alternative Investment Firms • Continued boom of restructurings / refinancing

  17. Emerging Trends in M&A(cont’d) • Impact of Post-Debt / Credit Crunch • Private equity investment slowdown • Debt financing and tax benefits more expensive and difficult to secure • Deal valuations significantly reduced • Overleveraged debt lenders, fragility of certain hedge funds • Outside U.S. investors cautious; European banks hit hard due to mortgage-backed products • Continued regulatory scrutiny, SEC watchdog investigates deeper into banks, investment firms, alternative investment firms

  18. Takeaways • M&A Market Highly Complex • Product Solutions Very Deal Specific • Still Relatively New Market • Deal Slowdown Predicted • Market Ripe for Product Development

  19. AudienceQ & A

  20. Many thanks to . . . • James M. Fasone • Simon Hodge • William Monat • Miles D. Scully • Kim Patlis Walsh • Chris Warrior

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