Home – Why Your M&A Strategy Needs Enhanced Due Diligence

Why Your M&A Strategy Needs Enhanced Due Diligence

Posted on 07-10-2015 by Ulyana Androsova

 Undertaking mergers and acquisitions demands confidence, especially in the arena of high risk-high reward emerging markets. Yet according to a poll of 1,300 professionals across industries ranging from financial services to technology and manufacturing, nearly 90 percent fail to conduct due diligence for compliance risks such as corruption, money laundering and fraud. Is it any wonder that only 10.4 percent express confidence in their management of M&A risks?

The survey, conducted by Deloitte Financial Advisory Services LLP, highlights a major stumbling block in M&A strategies—not looking deep enough into potential M&A targets. In a press release about the poll results, Bill Pollard, a partner in the forensic investigations practice of Deloitte said, “When deal timelines are compressed, the M&A market is strong and confidentiality agreements loom, it may be tempting to take shortcuts in certain diligence areas such as fraud, FCPA and other integrity risks.” Short cuts, however, may be the quickest route to trouble. You don’t have to look far for proof. Lately, enforcement actions by the U.S. Department of Justice (DOJ) have been hitting the headlines with alarming frequency.

5 Reasons for Enhanced Due Diligence

You can’t always put the brakes on accelerated timelines for M&A activity—as the saying goes, you have to strike while the iron is hot. But failing to adequately vet the merger or acquisition target company—and its third-party relationships certainly isn’t a fast track to success. Instead, companies need to leverage tools that support an efficient, but thorough, due-diligence process. Here’s why:   

  1. Conducting due diligence after the acquisitionthat’s too little, too late.  You need to identify potential FCPA or other regulatory compliance exposure—from past or current activities—to ensure you have a program in place to control those situations in the future. Both the Securities and Exchange Commission (SEC) and the DOJ have cited lack of due diligence prior to engaging in partnerships, mergers or acquisitions in previous enforcement actions.
  2. Self-reported information must be substantiated. In a perfect world, you could take pre-merger or acquisition disclosures at face value, but in the real world, your motto should be trust, but verify. And you have to look deeper than financials.
  3. Geography, politics and industry all play a role in the level of risk.  Cross-border acquisitions are complicated. Logistics and language barriers aside, you need to conduct a thorough risk assessment that considers location-based factors that can increase risk, such as the stability of the local government.
  4. Third-party relationships matter. Your due diligence needs to expand to any subsidiary, partner or third party that conducts business on behalf of the potential acquisition. Does the company deal with local agents to facilitate business activities in different regions?  If so, are there regions where bribery is considered an ‘accepted’ practice?  Corruption may be commonplace due to political or socio-economic conditions, but a lack of awareness about the actions of third-party agents can lead to an enforcement action just as easily as direct involvement.
  5. All it takes is one international text or email.  In the eyes of regulators, even if actions take place outside of the U.S., an executive in this country can still be held liable for non-compliance. If communications send up a red flag, and you turn a blind eye to it, then it won’t matter if you had no direct participation in corrupt activities; you’ll still be on the hook.

M&A opportunities abound in today’s emerging markets and elsewhere, but with those opportunities come greater risk. Rather than relying on a superficial due-diligence strategy, you need to develop a due-diligence and monitoring program that looks beyond financial information so you can accomplish your next acquisition with confidence.

3 Ways to Apply This Information Now

  1. Learn how Lexis Diligence® improves your ability to conduct due diligence efficiently.
  2. Check out our recent blog on proactive monitoring of risk factors
  3. Share this blog on LinkedIn to keep the dialogue going with your colleagues and contacts. 

Comments


Anonymous
Anonymous
Posted on : 16 Oct 2015 1:30 PM

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