Candice Tal, founder and Chief Executive Officer (CEO) of Infortal Worldwide, the sponsor of this podcast series, continue to visit to consider various aspects of international due diligence investigations. In many ways this can be viewed as finding a needle in the corporate haystack of information and data. Tal will help us through that maelstrom to find useful and actionable information for your compliance program. In Part IV, we consider compliance related due diligence in mergers and acquisitions (M&A) and how it can protect companies from both financial loss and reputational damage.
The disastrous Hewlett-Packard (HP) merger with the UK Company Autonomy Corporation PLC was back in the news recently when the former Autonomy CEO was indicted by a US grand jury for making false representations in the sale of his company to HP back in 2010 for $11.1 billion. Some 18 months later, HP threw in the towel and wrote off $8.8 billion from the failed merger of the two companies. HP has claimed that Autonomy, with the knowledge and participation of its senior management, actively misrepresented its financial statements. Former Autonomy executives claim that there was no misrepresentation, only the differences in US and UK accounting standards and that HP could have performed full due diligence on Autonomy but either did so negligently or failed to do so.
Tal noted that compliance due diligence in M&A is different than looking at numbers; it is a much deeper dive. Compliance due diligence investigations are an overriding term for a number of different aspects or applications of due diligence. There could be agent and distributor due diligence, vendor due diligence together with looking at the company and its operations, its financial information, its executives, its Board of Directors and senior management. She cautioned that in the past, many companies really do not look at the executives of a target, which can lead to multiple problems later on, in terms of the Foreign Corrupt Practices Act (FCPA) violations and also shareholder losses, market losses and volatility at all levels.
She said that rarely do the purchasers look closely at the target’s Board of Directors but that it can be an important inquiry from the compliance perspective. For instance, if the Board has any issues that the acquirer should be aware of which would impact or even dictate tone at the top; this could be critical information. It might not even be untoward information which could be uncovered in the deep dive due diligence on the Board. It could uncover potential conflicts of interest which are currently in place or could occur should the merger occur. Finally, such a due diligence on the target’s Board could give the acquirer information on both the target’s culture and what needs to be in the remediation plan after closing.
Certainly a deep dive due diligence should be performed on the target’s CEO and senior management to see if there is anything in their past which could turn around and bite the acquirer after closing and integration. As Tal has previously noted, from her 30+ years of experience in performing deep dive investigations on senior executives, approximately 20% have significant issues in their background that were not known. Obviously this can present serious problems to an acquirer if the risks manifest after the closing.
Tal turned to another topic she has developed through her years of work in this field, which she called “the investigative hunch.” She said, “you expect to find certain pieces of information and you don’t find it anywhere. The question is: what does that mean? Does it mean anything or is it something that’s being covered up and potentially serious?” This example shines a light that there are many different aspects to investigative due diligence, particularly in M&A. Transactional due diligence is one part of compliance due diligence in the M&A context but it is only one part. Through a more robust, deeper dive due diligence you can begin to uncover both hidden and undisclosed information that can be found through both deep media and historical Internet searches. She concluded with “it’s a much, much greater type of investigative analysis than simply Level I due diligence.”
Tomorrow we will conclude our five-part series by reviewing deep dive due diligence in light of the increase in global anti-corruption investigations and enforcements.
Established in 1985, Infortal Worldwide has conducted over 2 million investigations globally. Infortal specializes in investigations for FCPA vendor risk management, M&A transactions, Board Due Diligence, and screening executives internationally, in addition to routine background checks. For more information, check out their website at www.infortal.com.