Mergers and acquisitions are lucrative opportunities for businesses to expand their areas of operation, gain a larger market share, maximise profits or reduce competition. However, they are among the most complex and potentially risky business activities as there are several opportunities for failure during and after the purchase.

The best way to avoid merger and acquisition failure is by identifying and evaluating red-flags prior to the purchase, according to Rudi Kruger, General Manager of Risk Solutions at LexisNexis South Africa.

“Mergers and acquisitions can increase share value, if successfully executed. However, a drop in share value post merge could be the result of not meeting stated objectives. This is why strict and effective due diligence should be an integral element of a merger and acquisition,” he said.

Kruger offered insight into common mistakes during the due diligence process that can lead to failed mergers and acquisitions.

Financial health
Improper assessment of the target company’s financial health is one of the leading causes of acquisition failures. When conducting due diligence on the company’s financials, it is vital to ensure that you have access to up-to-date audited statements dated back at least three years. Ensure that there are no auditor conditions associated with the company. You should also compare budgets with actuals and determine if the business revenue forecasts are realistic. Other necessary checks include business trends, quality of the financial management systems, condition and value of stock and assets, details of liabilities and ability to pay debts.

Legal compliance
Non-compliance with regional laws and regulations could spell trouble. It is important to establish the complete picture of laws applicable to the business and industry of operation. Then, thoroughly investigate whether the business meets all of these compliance requirements as well as its abidance to good governance practices.

Disclosures
Thorough due diligence helps uncover information that may not have been declared by the target company. This includes factors such as pending legal cases or underhanded management deals, which could tarnish the reputation of the business. In addition, failure to verify the claims made by management leaves room for nasty surprises later on, which may be too late.

Competitive risk
Failing to investigate industry trends and the competitive market is a costly mistake. It is important to establish the risks associated with competitor developments, innovative solutions and new technology that could replace your offering.
 
Workforce Taking over a business means taking over a whole new workforce, which is why reviewing the workplace satisfaction level is important. Determine if employees are happy, productive and committed. In addition, evaluate the human resources function and look into areas like employee benefits, notice periods, restraint of trade agreements and terms of contracts. Other areas of high significance include evaluating the strengths and weaknesses of the sales department.

Accountability and transparency
It is a mistake to neglect vetting the company’s leadership as any misdemeanours or bad decisions on their part will impact the business negatively. It is wise to perform company or person checks, explore associated entity interests, check against sanctions, check for red flags and politically exposed persons, search for negative news, check the litigation history and assess country risk.

“Due diligence needn’t be a headache, and your business can avoid compliance risk by vetting and monitoring clients, agents, partners, suppliers and other third parties in a quick and comprehensive manner,” said Kruger. “Our solution, Lexis® Diligence protects your organisation – by uncovering third-party violations before you complete transactions. Whether it be verifying the identity of clients globally, or screening them against international sanctions, Lexis Diligence helps to protect your business from compliance risks. All of this comes in the form of an online tool that is easy to work with, and saves you both time and money,” he added.

Lexis Diligence also enables compliance officers to review data from the UK, EU, US and selected Asian jurisdictions. The solution is backed by a comprehensive database of more than 40 years of global archived news and data, designed to help a company perform the necessary due diligence in the areas of risk, compliance and fraud. This makes it a valuable tool for meeting anti-bribery, corruption and anti-money laundering requirements, such as those set out in the UK Bribery Act 2010.

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