This is part 3 of the five-part series “Compliance, Diligence, and M&A” with Tom Fox and the FCPA Compliance Report. During the series, Tom was joined by K2 Integrity experts Hannah Coleman and Tom Pannell for a discussion on due diligence’s role in the M&A process, and how it can create a more successful environment for integration. Listen to the series from the beginning.
Most M&As are friendly affairs, or at least not unwanted takeovers. While working closely with an organization to create a deal can certainly make things go more smoothly on the financial transaction front, it can lead to another issue: being so familiar with an organization that you are blinded to potential reputational issues. This is where hiring an experienced due diligence investigator to perform reputational due diligence can be extremely helpful.
In such transactions, there is a certain level of familiarity and comfort that has been established between the acquirer and the acquiree. It is very easy to think, “I know this person, he’s a good guy,” or, “She’s reliable. I feel comfortable with her.” The problem is that such familiarity can breed complacency. But caution is needed. The media is replete with stories about folks who have had long and very accomplished careers and been forced to resign based on misrepresentations about something like educational credentials or something that happened in their early career. One example is the 2012 story of the Yahoo CEO who was forced out when an activist investor did the homework, went digging, and found that the CEO had embellished details of his college degree.
In the current age of social media amplification, things from decades back can really echo forward into the present in significant and impactful ways, even if the person made social media missteps while a teenager.
Timing is also a crucial element—it can be easy to underestimate how quickly these deals can move. This means that if there are significant issues that are identified, you want to still be able to address those and remediate them to everyone’s satisfaction before the organization is “locked into terms.” By ensuring that the reputational due diligence is conducted before the transaction is completed, it moves the due diligence from detective to preventive, so that an organization does not have to remediate via claw backs or other contractually based mechanisms. This is especially important with reputational damage, as bad press cannot be remediated or clawed back.
The job of investigators is helping their clients make the best decisions so that they are not caught flat-footed. Identifying significant issues does not always mean the death of a deal; if a client can get comfortable with the issues identified and make a plan for how to handle an issue if it arises, the deal can move forward.
With the amount of information publicly available, are investigators still necessary? While some high-profile issues might be uncovered, such a top-level review might be too limited. Consider: Even with the amount of information readily available through a Google search, it will not reveal the terms (or sometimes the existence) of a lawsuit that was settled confidentially, and an amateur investigator might not know how to dig deeper. In addition, in some jurisdictions around the world, there are a lot of limitations to the kind of data the public can access. This makes the challenge getting enough information and knowing where to look to find it.
Unfortunately, if an organization has a check-the-box mentality and chooses just to do a cursory investigation, it can miss some obvious red flags. In one example, a company hired K2 Integrity to perform due diligence on certain executives at a target company. A basic search turned up nothing, but digging deeper, the investigators uncovered a Twitter account created by an executive that did not use his first or last name, so did not immediately surface. Unfortunately, there was some content on the account that would have been considered widely offensive and problematic in tone and in content. While the client was not thrilled, having that knowledge gave them the opportunity to address the situation proactively and take care of it, to ensure that it was not going to blow up at some point down the line.
Join us for Part 4, where we discuss deals through a global lens.
