By Chris St Cartmail
An intriguing tale of a cross-border private equity deal that failed at the last hurdle and produced no winners. As relayed by a finance broker and dealmaker - one of the author’s cohorts on the Mergers & Acquisitions programme at Imperial College Business School.
The owner of a Southeast Asian insurance company asked the broker for help finding fresh capital after his company’s auditor forced them to recognise reinsurance liabilities at fair value, creating the immediate need for a considerable injection of funds. Survival of the business and the livelihood of 400 employees were on the line.
The broker, who was well connected in the private equity world, put the word out and with relative ease found an investor that had some serious interest. After looking over the business, the PE was impressed enough with the company’s financials and prospects to offer an investment in return for a slice of the business.
Following purchaser’s due diligence, the owner signed the negotiated Sale & Purchase Agreement 26 times (!) for himself and as proxy for other shareholders, who were mostly mainly family and friends.
Soon after closing, the owner changed his mind about selling and refused to consummate the transaction. As this was a clear contravention of the contract, the private equity company sued the insurance company, winning the case and subsequently awarded damages in a Singapore court.
Towards the end of the same year, the regulator still wanted to see fresh capital being injected into the company. To generate cash flow, the company began diverting major resources into selling COVID lump sum policies and used this cash flow to somehow survive the year-end.
A few months later COVID goes rampant, claims pile up and the company goes into default. Eventually, on a rainy Friday afternoon, the financial regulator had no other choice than to announce that the company will be shut down and run-off.
The lessons to be learned here may be more about emotions, ego and culture than economics.
In the broker’s view, the main reason why the ‘big-ego’ owner of the insurance company blew a perfectly decent deal at the last minute was driven by the concept of not wanting to lose face.
One needs to understand that the company had booked liabilities favourably (though wrongly) for years, allowing it to show better than actual profits and pay substantial dividends to support the owner family's rather lavish lifestyle.
So, in the eyes of his wife and daughters, the owner was a business hero. But after signing the SPA, his wife (not knowing the full picture) was not happy that he had given away the company too cheaply, as this was clearly going to water down her dividends.
The owner then decided to take the risk of a dispute with the investor and facing the uncertain challenge of producing the cash internally, rather than confessing to his wife that he had gotten it wrong earlier with the accounting of liabilities.
The broker and the investor admit they made the mistake of giving the owner too much time to have second thoughts during closing and not immediately starting the post-merger integration workshops. The investor's due diligence might have been a little better, in terms of understanding the seller’s motives and getting complete clarity on the Regulator issue.
There is also a lesson for cross border M&A here: The private equity investor won damages after the deal collapse only because of two small points in the SPA. Firstly, it specified the legal jurisdiction as Singapore, and secondly that each shareholder had unlimited personal liability. The owner thought that he could easily break a contract on his home turf notwithstanding he had signed it 26 times, thinking that local connections would protect him from repercussions.
The family and friends investors realised too late that they themselves had a big problem looming in Singapore. With its strong legal system, Singapore provides robust enforcement of contracts, at speed. It also happened to be one of the family’s favourite shopping destinations, and they put pressure on the owner to get legal issues out of the way fast. There went out the window any notion of escaping punishment for breaking the contract.
The broker's own personal lesson?
“I will never ever enter any negotiations with corporate lawyers without pizza being arranged in advance. Even if everybody believes that it's a matter of just 10 minutes to agree on final contractual points, always be prepared for a long and nasty session. There's nothing worse than sitting in a small room for hours with "hangry" lawyers quarrelling about sub point 22.214.171.124”.
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