Financier Worldwide .com logo
Free trial subscription | Subscribe now | Register for free NEWSwire | Products & services | FW Direct (RSS/XML)
User ID:  password:  
remember me
Forgot your password?
= requires subscription
Advanced Search
Print Edition
April 2014


Current issue
Editorial submissions
About FW magazine
FW Digital
Media Information
Contact us
Reprints & syndications
Contract publishing
Creative marketing solutions
TalkingPoint: Managing Transactional Risk « Back
February 2012
FW moderates a discussion looking at transactional risk between Matthew Altham at AMR International, Stephen M. Joiner at Deloitte and Neo Combarro at Lockton Companies LLP.

FW: In your experience, do acquirers pay enough attention to identifying and assessing risks during the deal process? What are the benefits of allocating more time and resources to this process?

Altham: Of course there are many examples of companies paying insufficient attention to risks in acquisitions – one only needs to think about RBS and ABN Amro, where minimal due diligence was carried out. In general, however, our clients are hyper-sensitive about understanding risks in the deal process. Unfortunately, sellers and their advisers can sometimes try to squeeze the time available for due diligence programmes. The discovery process in due diligence is non-linear, and often the juiciest insights are revealed only after several weeks of research and analysis. Of course, this is precisely why advisers want to run tight deadlines.

Combarro: In the current economic environment, due diligence process is very thorough. That is not to say that it wasn’t before, however, there has been a fundamental change in the risk appetite of buyers. This has shifted significantly to a far greater reduction in the risk factors that acquirers are willing to assume. Consequently, they are looking to clearly identify all risk factors and illuminate and minimise those risk factors as much as possible.

Mergers and acquisitions can create significant risks but through proper planning, execution, and valuation these risks are generally manageable. That’s why it is important to identify and assess risks throughout the deal process. We do see acquirers with varying risks appetites and strategies that approach the identification and assessment of risks in different manners and with varying degrees of diligence. We see some companies that choose an integrated approach that executes a transaction with a diverse and broad team spanning from corporate management to the business unit and functional leaders. This broad team is involved to identify the full spectrum of risks which includes financial, operational, strategic and regulatory. Ultimately this team must not only identify these risks which will be assumed but also determine if such risks can be eliminated or reduced to an acceptable level commensurate with the transaction’s expected returns. Other companies seem to limit the responsibility for assessing risks to a specialised deal group that owns and drives the process. These acquirers may ultimately accept more deal risks and seek to reduce transaction risks in the integration process or through legal protections.

FW: On the buy-side, could you outline the key areas that every buyer should at least consider factoring into the scope of their due diligence?

Combarro: As an insurance broker we often see the insurance elements not being adequately addressed within the due diligence process and used to mitigate balance sheet risk. This can range from the adequacy of the programme to ring-fence those risks. The use of insurance can provide critical protection that would otherwise be assumed by the balance sheet. This can translate into added liabilities which created added burdens which could otherwise be removed.

Joiner: Every transaction is different and due diligence should be tailored to each situation with a focus on matters that impact the deal value drivers. Financial, legal/regulatory, operational, and tax due diligence are generally the core essentials to identify risks and exposures, as well as to support  these value drivers or quantify the impact on acquisition price of a deviation from the value driver. In addition, in certain industries and in certain geographies there are other critical key areas that should be addressed. For instance, environmental diligence could be critical in a manufacturing environment and US buyers may want to consider target compliance with the Foreign Corrupt Practices Act (“FCPA”) in certain developing countries.

Altham: The classic commercial due diligence scope looks at the market and the competitive situation, using detailed research, analysis, and customer referencing, and puts this all together to come up with a view of the achievability of the forecasts. Good due diligence will also look at post-acquisition planning and integration. This model is well established and still holds true today, however it can lend itself to a somewhat formulaic approach. It is important to identify the two or three key issues which will impact performance, and then drill down from there. So rather than merely ask the question “what is the size of the market and how fast is it growing?”, buyers should ask more strategic questions, such as “at what rate is usage shifting from print to online and what will the impact be on advertising budget allocation?” and then break that question down. Good due diligence also needs to provide clear answers to the questions “what do I do with the business after I own it?”, “what kind of an owner should I be?”, and “how do I add value?”.

FW: Given the heightened sensitivity to risk in today’s market, how important is it for buyers to ensure that the target company is meeting its regulatory compliance obligations – including in areas that may not be immediately obvious?

Joiner: It is extremely important for buyers to evaluate the target company’s compliance with various regulatory compliance obligations. Non-compliance can result in financial costs – one-time and ongoing – that impact the target company’s operating results and in some instances harm the buyer’s reputation in the market. For instance, non-compliance with the FCPA may have significant implications from a reputational standpoint and can result in significant costs post closing. Also, many developing countries have complex and burdensome regulations regarding both income taxes and indirect taxes which sometimes promote intentional and unintentional non-compliance. This non-compliance can result in significant penalties and interests by developing countries for a buyer post deal. Buyers should seek the advice of seasoned M&A professionals that know the industry and the market to ensure that these risks are addressed in the M&A diligence process.
Prev | 1 | 2 | 3 | 4 | Next

Add Comment
No comments yet

Subscribe Now
Products and Services
View basket (0) items
Article options
 Printable Version
 Research Assistant
 Add to Assistant
 Send to a Colleague
Also in this section
 • Bankruptcy & Restructuring: Corporate Advisor Handbook 2014
 • TalkingPoint: Valuations and fairness opinions for ESOPs
 • The value of a proactive legal risk management policy for retail companies
 • The move to mobile: an overview of the key mobile payment technologies and the challenge of risk management
 • Utilising transactional insurance as a financial solution for your next deal
About Us | Contact Us | Advertise | Careers | Privacy Policy | Terms & Conditions
© Copyright 2001-2014 Financier Worldwide Limited. All rights reserved.