Jay Rosen considers the impact mergers and acquisitions have on both the acquired entity and the acquirer, starting with the inherent risk in the entire M&A process.
Surprisingly, a company’s ethical and cultural perspective is not often considered in the pre-acquisition phase. Companies spend huge amounts of resources to hire lawyers, investment bankers and accountants for the pre-acquisition phase. They scrub the financials, analyzing income, revenues and expenses, yet they often spend almost no time looking at issues like the ethical culture of the company to be acquired.
Investment bankers and attorneys are anxious to get the deal over the finishing line (and collect their fees), but companies may be making a big mistake by not evaluating the target company’s culture.
During the pre-acquisition phase, it’s not necessary to reinvent the wheel to perform ethics, cultural and compliance due diligence. Some of the deal team are already performing due diligence for other parts of the transaction. For example, a slew of accountants and other professionals are poring over the books and records of the company to be acquired. The question is, are they looking at it through the right lens? Are they looking at it not just in terms of the robustness of the revenues and what the revenue stream looks like? And is there a way to trim expenses and achieve some financial synergies?
Why not take a deeper dive and ask what the payments look like? To whom are they made? If they are made to third parties in high-risk jurisdictions, what is the target’s level of due diligence and training for third-party agents?
It is not always a question of a brand-new set of considerations. It’s sometimes a question of integrating those considerations and educating the acquiring company as to what they should be looking for.
As we discussed last week, one of the biggest risks is around ethical culture and cultural fit. One of the reasons is the asymmetrical incentives in place. Most usually, the senior management of the target company has a very strong financial incentive to push the envelope when it comes to finances and financial projections. To counteract this bias, the acquirer should assess the organization’s human capital. This is more than just the senior executive team; you must also talk to employees out in the field, in the sales organization, in finance and accounts payable to get a much broader and more well-rounded sense of the culture of the organization. This can save the acquiring entity quite a bit of heartache.
Post-closing, whether it is a honeymoon period, a period of terror for the former target or perhaps a little of both, if you are the acquirer and you do not have a full picture of the culture of your new entity, you may be in for not only quite a shock, but some potential legal exposure as well.
For example, a large, multinational firm purchased a foreign entity that had a great compliance program on paper. They had their own culture, policies and people. Unfortunately, the acquirer was not paying attention to what the mothership was telling them, and it took some very serious problems and a Department of Justice investigation for them to finally get the picture.
A lack of knowledge of each party’s culture can lead to many problems in the post-acquisition phase.
The key is to not only come in with a plan, but also listen and be attentive while implementing the plan. This can lead to a standoff in accomplishing the integration steps required under the FCPA or similar legislation. However, this may be a situation where an independent monitor can assist both parties. Even after closing, an independent integrity monitor can come in and help to smooth the process.
An independent third party comes in with credibility and experience, which allows employees at the acquired entity to freely communicate their concerns in a way that is very helpful to the acquiring company. Employees can communicate such basic issues, such as not understanding the new required training, how things do not seem to fit together or the most basic question of why something is now required. Employees can explain why risk areas may exist in other places but not in others. A third-party monitor, someone who is truly independent with no stake in the game, can help make those explanations in a non-threatening way. The key is that independent third-party expert. Unfortunately, in practice, this option is often ignored and can lead to some serious FCPA exposure down the road.
Please join me next week when we will consider how should you plan out your post-acquisition merger strategy.
In case you missed the earlier installments of this ongoing series, please see the links below.
Everything You Always Wanted to Know About Monitors But Were Afraid to Ask
Part 1, Part 2, Part 3, Part 4 and Part 5
Potential Issues in Corporate Monitorships
Part 1, Part 2, Part 3, Part 4 and Part 5
Suspension and Debarment in Monitoring
Part 1, Part 2, Part 3, Part 4 and Part 5
Monitoring in the Health Care Sector
Part 1, Part 2, Part 3, Part 4 and Part 5
The Basics of Corporate Culture
Part 1, Part 2, Part 3, Part 4, Part 5
