Integrity checks halt M&A deals

Despite resurgence in deal activity in recent months, investors are still being cautious when it comes to signing on the dotted line.

‘Definitely the level of deals that are halted prior to completion has increased over the past year or two. An issue that might have gone back to the negotiation table has become more of an obstacle,’ said Ian Smart, managing partner of corporate finance at Grant Thornton.

Global accounting and corporate governance scandals have made companies focus more on due diligence as a decision-making tool. Smart said integrity due diligence, which evaluates the suitability of potential business partners and managers, had become the current ‘hot topic’.

The Risk Advisory Group, a consultancy specialising in integrity due diligence, said one in four of the deals it had been involved with had collapsed or been significantly modified after background checks.

As a result of its investigations, companies had pulled out of one in 10 M&A deals, and one in eight cases had modifications made to the deal.

Henry Pugh, director of business intelligence at The Risk Advisory Group, said: ‘We find everything from undisclosed directorships of liquidated companies and poor references from former business partners, to illegally acquired wealth and suspected links with criminal or terrorist groups.’

The groups’ clients are from a range of financial institutions including investment banks, private equity houses, private banks and multilateral lending institutions.

Smart said much of the increased pressure for more checks had come from the lower corporate profits of the past few years.

‘In the current environment there are more questions to be asked. The whole process is taking longer and that’s a direct result of confidence.

Integrity due diligence is a wider issue of management and their capabilities and whether they’ve got any black marks against them,’ said Smart.

Pugh added: ‘The corporate scandals of 2002, in both the US and UK highlight the need for careful evaluation of any new business partner.’

DEAL BREAKERS

• One in four M&A deals collapse or are significantly modified after checks

• Companies pull out of one in ten mergers or acquisitions as a result of information uncovered

• In one in eight cases, modifications to the deal have to be made as a result of issues identified in the investigation

Source: The Risk Advisory Group.