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— Analysis —
Ask corporate executives what the biggest barrier to successful merger and acquisition strategies in 2009 is, and many will say financing. Even with the Federal Reserve's unprecedented actions designed to unfreeze tight credit markets, banks are still very cautious in their lending. Financing isn't the only issue acquisitive companies face in 2009. Even businesses with strong cash positions or access to other sources of financing for M&A should watch for several other potential hurdles. New fair value accounting requirements. Under the Financial Accounting Standards Board's Statement No. 141(R), Business Combinations, the use of fair value in accounting for a merger, acquisition or other change in ownership is expanded. SFAS 141(R) requires changes in how companies account for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period, beginning on or after Dec. 15, 2008. These changes may create added volatility in an acquiring company's earnings because of the fair value accounting rules, and they may produce greater uncertainty at deal closing about the accretive or dilutive effects of the deal. The impact of the changes on an acquiring company's financial statements also may be uncertain because some balance sheet amounts will need remeasuring, based on current fair values.
Consider two actions to help reduce risks that under SFAS 141(R), might affect deal structuring: Heightened potential for fraud in distressed companies. In the target-rich environment that the downturn has created, the potential for fraud may become heightened, making shopping for M&A opportunities a particularly sticky issue. In fact, according to a recent online survey Deloitte conducted, nearly two-thirds (63.3%) of 1,486 participating professionals said they expect accounting fraud to increase during 2009 and 2010. There are three primary factors contributing to the potential for increased fraud risk. First is financial pressure. During an economic downturn, business units within target organizations may be pressed to meet or exceed financial targets. The second factor is opportunity. Corporate downsizing, reorganization and reprioritization of revenue-generating activities may result in the breakdown of otherwise effective internal controls and fraud control policies in target companies. Rationalization is the third factor. Increased opportunity, coupled with mounting pressures to perform, often make it easier for employees or management to justify fraudulent activities. The greater the pressure, the easier to rationalize inappropriate activity. To manage fraud risks, clearly define roles and responsibilities for fraud risk management at all levels of your organization. Perform fraud risk assessments regularly and monitor key metrics related to common fraud activities, especially those involving financial reporting. Increased regulatory actions affecting M&A. The new administration and Congress could bring about the biggest swing in the legislative and regulatory environment in 20 years. Among the first changes likely to affect M&A are securities and white-collar criminal enforcement. The Department of Justice will likely refocus on criminal enforcement, especially violations of the Foreign Corrupt Practices Act. This should be of significant concern if you consider acquiring a U.S. multinational or foreign company. The DOJ has an estimated 100 FCPA investigations under way now, and that number will likely rise. Finally, some initial actions by the new administration in antitrust may indicate increased antitrust scrutiny of proposed transactions. It would seem that greater cooperation between the DOJ and the Federal Trade Commission is likely, as well as increased collaboration between U.S. and foreign regulators regarding deals between multinational companies. The M&A landscape arguably has more moving parts today than at any time in recent memory. The risks these variables create mean executives should approach M&A even more cautiously. With proper controls and a keen eye toward legislative and regulatory developments, acquisitive companies may still find opportunities to position for the coming upturn through carefully executed M&A deals. David S. Williams is the leader of Deloitte Financial Advisory Services LLP. |
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