Not Perfect, But Good Enough? Acquiring Corruption-Tainted Companies

June 2014

IN THIS ISSUE

— Risks Ahead: Assessing Companies Tainted by Corruption
— Deep Dives: Identifying Red Flags of Ongoing Corruption Risk

GREETINGS!

Welcome to the June edition of our newsletter! In this issue, we’ll examine the aspects of due diligence when considering the acquisition of a company with corruption or regulatory red flags in its past.

RISKS AHEAD: ASSESSING COMPANIES TAINTED BY CORRUPTION

For many years, standard operating procedure for mergers & acquisitions has been for an acquirer to quickly turn the other way if corrupt behavior, such as the bribery of regulators, was identified at a target company. Yet the increasingly globalized business world has made this a more challenging, and perhaps less black-and-white, proposition than it has been in years past.

While certain legal measures make sense in such scenarios — such as requiring the target company to have set aside a higher level of reserves and/or insurance in the event of future acts occurring — investigative due diligence is key to assessing whether the reward to the acquirer is worth the risk, should patterns of corruption continue to exist.

DEEP DIVES: IDENTIFYING RED FLAGS OF ONGOING CORRUPTION RISK

One reason such transactions occur at all is that the very notion of corruption varies from country to country. yet certain indicators often exist to suggest that something improper is occurring, whether previously identified by authorities or not. For example, does the business derive a disproportionate share of its revenue from government contracts, particularly one or two agencies? What are the backgrounds of the persons leading those agencies, and what ties might they have (or have had) to the company’s executives? If a single government agency is a large customer of the target company, that could indicate a pattern of corruption and favoritism, and also prove to be a deal deterrent, if that agency is responsible for a large share of the business’ revenue.

There will clearly be occasions where the risks will outweigh the potential rewards. But a holistic due diligence effort, using both public records and human intelligence, can help your clients ascertain and understand those risks well in advance of a proposed acquisition.