1. Bring greater value to the deal
company’s activities may hinder the deal process. But the process doesn’t have to delay or stop the deal. Rather, it becomes a valuable intelligence-gathering effort that can ultimately inform strategic business decisions.
Equipped with better information, you may be able to renegotiate the valuation of a deal, carve out certain operations or personnel or incorporate safeguards against the risks associated with historical transactions. At the very least, the process allows you to stop improper practices by, for example, terminating a risky third party.
2. Uncover the blind spots
Illegal or unethical behaviour by company personnel isn’t always obvious to someone looking into a business at the outset of M&A discussions. Inappropriate payment or business practices can be hidden in large amounts of data or through seemingly normal third-party transactions that are, in fact, kickbacks or payments to offshore accounts.
Data analytics and modelling can quickly sift through vast amounts of information to find those hidden problems. Specialized analytical software can help to identify high-risk transactions and test them to see whether they comply with the acquisition target’s own internal rules and broader anti-corruption and anti-bribery regulations.
Dealmakers also need to look outside the data room. This means having people on the ground, before you sign the deal, who understand regional business practices, law enforcement, language and culture and can identify dealings that may lead to trouble and have an impact on ultimate deal value.
Corruption may involve vendors or the target companies’ subsidiaries, and it often centres on smaller amounts of money that slip under the radar of financial due diligence. But it’s important to realize that enforcement officials don’t distinguish between financially material and non-material amounts when pursuing bribery and corruption.
Even efforts to be a good corporate citizen can present a problem, as in the case of donations by the target company to organizations linked to a government minister. A company doesn’t necessarily have to be selling products or services to the government to be at risk. Other activities, such as applying for government licences and permits, can also create problems.
A forensics diligence team also typically interviews different people and looks at different documents than those performing financial due diligence may consider. For instance, it will seek whistleblower reports and documents detailing a company’s bribery and corruption controls, investigate local tendering and recordation practices and talk to officials such as the chief legal and compliance officer and foreign sales managers.
3. Seal a successful deal
Following the closure of a deal, the acquiring party has about six months to uncover and report illicit activity if it’s going to avoid successor liability. A post-acquisition forensics review can be helpful, but a pre-acquisition one is even better.
Companies that fail to conduct necessary forensic due diligence can find themselves paying a heavy price for what they didn’t know before signing the deal. In one case, a company lost $900 million in deal value after learning that much of the revenue the target organization was reporting involved corrupt practices.
In a second case, the purchaser ended up spending more money than the acquisition price itself to deal with unexpected corruption and bribery issues discovered by management after closing the deal.