The latest trend in M&A advisory, in Croatia and the region, is to offer to both sellers and buyers of CEE targets a special type of M&A insurance policy – a Warranty Insurance Policy (WIP).
A WIP is intended to ensure that both buyers and sellers can enjoy the ease of mind in their M&A deals of having an insurance policy covering their liability for the deal. While WIP was viewed historically as a product of limited application in Croatia and the region, in recent years we have seen a significant expansion of the use and importance of these policies.
Today, WIP in the region is generally viewed as an attractive product when deployed in the right circumstances, often providing for a longer period of coverage and higher limits than would be available in a customary seller indemnification arrangement. On the one hand, for sellers, it is easier since they are no longer liable for years even after they close a deal and, for the buyers, it is easier since they no longer need to worry about compensating for potential damages – they know that the insurance policy will be enforceable and that they will get their money back in a worst-case scenario.
Although WIP for corporate transactions has existed for approximately two decades in the UK and the US, it has only recently become a common practice in Croatian and regional deals. In fact, in Croatia in particular, this kind of policy is not yet offered by local insurers, but by those in the UK and other European insurance providers.
And this trend comes at a good time, as we see that there is a very high level of activity in M&A in both the Croatian, regional, and CEE markets. This is especially the case in the ICT, media, and manufacturing sectors. At a general level, it appears that a number of Croatian companies have now reached the point where they are becoming attractive for strategic partners, or private equity investors, as they are generating profit. It has taken them 10-30 years to reach this level of maturity, but now they are seeking strategic or financial investors in order to properly structure themselves, properly implement ESOP programs, and then go public. Notably, these IPOs will not be made in Croatia, but in London or New York.
M&A transactions have kept at a high rate despite the pandemic because many of the banks have quite a lot of funds available to invest, and interest rates remain low. One other reason for this increase in M&A activity is that, during this pandemic period, buyers found themselves in a good negotiating position – so, for those able to invest, and to buy targets, there are some excellent opportunities available.
Another trend worth highlighting is that of offering and providing a bundled legal and consulting service, such as an LMC (Legal Management Consulting), usually developed by lawyers in collaboration with experts in practice areas such as mainstream management consultancy, risk advisory, and tax management consulting – which in essence represents a collection of models, frameworks, and systems designed to help in-house lawyers run their departments more efficiently, and meet their business needs. The demand for these premium and sophisticated services shows a high level of professionalism regarding compliance in our client’s corporate legal departments, across various industries.
I believe it also shows their interest in using the latest technologies to improve their legal policies and legal departments’ functionality. And this trend is certainly coming to the region as well. For example, several local, Croatian-based clients active globally in the ICT, telecommunications, and automotive sectors are interested in these types of bundled services, which shows a maturing market when it comes to approaching legal services.
By Tarja Krehic, Managing Partner, Krehic & Partners in Cooperation with Deloitte Legal