Consider two actions to help reduce risks that under SFAS 141(R), might affect deal structuring:
Understand that once the deal is done, there may be more to
do. After closing, depending upon the specifics of the transaction, you
may need to continually monitor and reassess the deal because its
impact on financials will vary depending on future economic conditions.
Monitor these conditions to understand. Plan for potential volatility
in your financial statements and performance.
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.
