This is part 4 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.
International M&A presents both different and heightened risks; therefore, conducting a robust diligence is key. Acquiring organizations should let the profile of the target company drive the investigation—what does the company actually do? How does it compare with the acquirer? Even a slight difference in profile between the acquiring and target companies can introduce risks the organization is not used to mitigating. Ultimately, a transaction’s level of risk is going to inform the decisions made. The investigation should answer such questions as: Who are the target’s customers? Where are the customers located and what are their business operations? Does the target use a distributor model? Do they use third-party sales agents? Are foreign governments customers?
Reviewing Supply Chain Risk
One area for investigation and review is the target’s supply chain. It’s important to understand each step of the organization’s entire supply chain—from where the underlying goods are produced all the way through to the end customers—and the risks that can bring. This may involve a physical look at the target company’s facilities to see what, if any, issues might arise from a physical inspection.
Examining Cultural Synergies
A critical, but sometimes overlooked, aspect of investigation is determining the target’s culture. Why is culture so important—and why can getting it right can be such a challenge in the international acquisition context? Often, it’s because people forget that, from a cultural norm perspective, business is not always done the same way. Business in the United States is very different than business in Sub-Saharan Africa, which in turn is very different than business in Asia. Looking at common business practices is a key part of diligence in a global deal.
Determining the Practice of Compliance
One area that is receiving a lot of attention right now is anti-money laundering (AML) compliance. An acquirer will need to review the target’s AML program. This is most particularly true for banks and other financial institutions that are expanding their global footprint. The acquiring institution should dig into the target’s AML compliance programs, examining the company’s governance, its customer due diligence program, and its know-your-customer (KYC) policies, procedures, and controls.
Also conduct a review of the target’s compliance program from an anti-corruption and business ethics perspective. Is it just a paper program, or do they put it into practice? Review their policies and procedures. Try to understand the tone from the top: Is there a Code of Conduct along with an overall tone of doing business ethically? These are all key questions that should be answered in the pre-acquisition due diligence process. Also important is a target’s training program: Who delivers the training? Who is being trained (and who is not)? The answers to such questions can be key indicia of the culture of an organization.
A new area for background review in the international transaction arena is national security. The Committee for Foreign Investment in the United States (CFIUS) became much more prominent under the Trump administration. That prominence will continue in the new administration as well.
Join us for Part 5, where we discuss integration issues after deal closure.
