Emerging trends - the differences in claims causes across different industries
The Liberty GTS Claims Briefing for 2021 has recently been published. The study analyses the trends for M&A claims and gives clear markers on high-risk areas within M&A deals. In this article, we’ve looked at which industries are the highest risk, and why.
Two sectors dominate when it comes to claims. Industrials is the biggest, and within this manufacturing is the largest problem area. This year there has been a cluster of claims in aerospace and defence, mostly relating to customer contracts. These types of businesses are often dependent on a small number of contracts. If a contract issue slips through the net during a deal, there is clearly the potential for a large claim.
In second place, healthcare businesses have been generating an increasing number of claims in the last few years, largely in the Americas, and many of these are large claims. We believe healthcare transactions must be examined under a heightened risk standard.
Many claims relate to billing or coding issues that have been triggered by audits or a whistle-blower report. These can result in large claims and can trigger a government investigation. Other more recent healthcare claims have involved cyber-related issues. The sharp increase in the number of such attacks reported means that deal teams will in future need to ensure that the underlying business has adequate cyber cover in place as part of their due diligence.
By contrast, businesses operating in the pharmaceutical, biotechnology and medical devices space are producing production-related claims, and these notifications have accounted for some of our largest claims in this sector. Interestingly, we have seen very few claims involving IP issues, usually one of the most significant areas of focus during the due diligence process.
IT deal pricing pushes up claims
In 2020 there has been a noticeable uptick in claims from IT companies , reflecting the increasing number of deals in this space. This has thrown a spotlight on high valuation multiples on deals involving young, fast-growing tech businesses. A high valuation multiple can obviously result in a large claim where the loss is calculated on a ‘multiple-of-EBITDA’ basis, even when the underlying issue is not particularly significant.
As a result we predict that the market may increasingly look to cap the size of the multiple or even exclude the use of a transaction multiple altogether.
Education, Real Estate and Food & Beverage
One unexpected area of increased risk in the last year has been education (private universities and schools). These have involved a range of issues, including the lack of appropriate permits, unpaid tax, non-compliance with health & safety and irregular enrolment practices. This suggests that this sub-sector may involve more risk than traditionally thought.
Elsewhere the big issues are different. In real estate , most claims are tax related, though we also see claims for lease and tenancy-related issues, meaning that deals involving retail sites generate more claims than deals involving office buildings. Other common issues include unpaid utility bills and disputes between landlord and tenants around fit-out costs. We are also seeing an increasing number of claims relating to health & safety issues, including non-compliance with fire regulations.
Finally, food and beverage claims have been a notable climber in 2020-21, particularly in Asia. This is partly down to the fact that this industry has complicated supply and distribution agreements. They are also susceptible to problems with obsolescence and spoilage. We have also seen wage-related disputes, reflecting the reality of a low cost, shift-based workforce. There has been an increase in consumer actions against food and beverage companies based on allegations of deceptive advertising.
So, while we see two sectors that need careful watching: healthcare and IT, there is no room for complacency in other industries which each have their own particular post-deal issues to watch out for.