M&A in Insurance

M&A in Insurance: Why Skipping Technical Due diligence is a Costly Mistake

Mergers and acquisitions (M&A) are a powerful and very common strategy in the mature insurance market. As the market consolidates, larger groups often acquire smaller agencies to quickly increase their market share or client portfolio. From a business perspective, this works great, allowing for rapid scaling.

However, from a technology standpoint, the picture is usually not so rosy.

The Problem: Treating Technology as an Afterthought

Before an acquisition, it is standard practice to conduct a very thorough legal and tax verification of the company being purchased. This Due Diligence is absolutely essential.

But what about the technology? Unfortunately, it still happens quite often that the technological verification stage is skipped. This is a bit like buying a car or an apartment based only on the documents, without a technical inspection. No one would do that, so why is it different with M&A?

The consequences of this oversight can be severe and difficult to predict.

A Case Study: The Price of Negligence

Consider the story of one international corporation that needed to solve a very specific, niche problem. They decided to acquire a small company from Central Europe that was an expert in the required field. All the legal steps were successful, but was the whole endeavor a success?

Unfortunately, no. It turned out that from a technological point of view, the solution was very old, and its operating speed and ergonomics completely failed to meet the requirements of the clients who had asked for the system.

To save the situation, the international corporation decided to rewrite the system from scratch, using only the know-how from the acquired company. They paid for the whole package but ended up using only a part of it, and even that benefit was heavily delayed.

Conducting Technical Due Diligence would have allowed them to detect these problems before the transaction. We don’t know if the deal would have been canceled, but the results of such a report would have certainly influenced the price.

The Value of a Technical Audit

The lack of Technical Due Diligence can lead not only to overpaying for the company but also to months of operational downtime and additional costs resulting from the urgent need to replace obsolete technologies.

We’ve seen this from the other side as well. In one case, a Large Group asked us to perform Technical Due Diligence while acquiring another company. We thoroughly examined many aspects, from infrastructure and systems to integration and security. The report revealed over a dozen problems with a “critical” priority. The buyers then obliged the other party to implement the necessary fixes. The transaction went through, and the buyer avoided the potential consequences of the identified problems.

Before you sign the next M&A deal, ask yourself: have you checked the engine, or are you just admiring the paperwork?

 

Krzysztof Ryk, COO