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Mergers and Acquisitions deals impacted by Corporate Social Responsibility risks

* Survey finds a third of Europe’s largest companies are hit by material environmental liabilities post deal.

* Brand and reputation are increasingly the casualties of environmental risk in deals.

 

M&A transactions conducted by some of Europe’s largest companies have resulted in unexpected environmental risks, despite efforts by many of them to identify the threats before the deal. A survey found that a third of companies interviewed had been impacted by material health, safety, social and environmental (HSSE) issues post transaction. The risks are not without cost. Where an issue was discovered post deal, 42 percent found it resulted in higher operating costs and 21 percent in direct financial liabilities.

The extent to which HSSE issues impact corporate deals is highlighted in a new report from KPMG LLP (UK). The report Impact – a survey of Environmental Due Diligence is based on a survey carried out by an independent research company, TNS, of 105 companies from the top 500 quoted companies in Europe. It paints a picture whereby deals in many mainstream economic sectors are habitually revalued or restructured on account of HSSE factors, with many companies admitting to walking away from a deal, especially if it is thought that the HSSE impact will damage the acquirer’s reputation.

Commenting on the report, Stephen Oxley, Head of Pharmaceuticals at KPMG, said: “Corporate Social Responsibility (CSR) is increasingly recognised as key to sustainable commercial success. Whilst environmental due diligence has been on the radar of deal doers for the past decade, there is variable understanding of the broader CSR issues impact transaction success. This is a significant factor in explaining why so many companies still fall foul of environmental risk.”

A large majority of those conducting EDD found that the findings had altered the outcome of transactions. The survey found that:

* seven out of ten companies had pulled out of, renegotiated or restructured a deal as a result of HSSE issues emerging from EDD;

* 67 percent of Risk Category 1 (see notes to editors) and 33 percent of Risk Category 2 companies say that negative EDD findings had led them to pull out of a deal;

* EDD results had led to price renegotiations in 64 percent of cases for Risk Category 1 and 48 percent for Risk Category 2.

* 60 percent of companies were hit by material issue despite conducting EDD.

Oxley notes: “Environmental risks can have a huge impact on deals but the approach taken by companies to evaluate HSSE risk during transactions is variable, even within the same sector. Some have detailed procedures updated annually to reflect the ever changing landscape of HSSE risk, others have no procedures. Some are very commercial in their approach, always linking the environmental finding back to how it could impact business performance, others focussing only on the technical finding itself. And some companies ensure the EDD findings are considered by other ‘overlapping’ due diligence assessments, such as financial, legal and commercial – others do not.”

“These variations mean the scope of EDD is no longer as uniform as it once was. Now two EDD exercises on the same target could prioritise quite different findings for action and negotiation – and one could miss material issues which the other identifies.”

“For example, virtually all respondents recognised the potential for reputation and brand damage from HSSE issues and many companies said they had pulled out of deals when a significant risk of material impact to their reputation was identified. However, only a third of companies specifically scope their EDD to look for HSSE issues which could impact brand and reputation. Inadequate social and community standards were the most frequently quoted issues to present material brand and reputation risk on a deal – issues which are not normally included in the scope of many EDD investigations.”

The research identified a number of critical success factors:

companies need to have a commercially driven scoping and assessment approach, which focuses on understanding the business performance implications of HSSE issues;
EDD findings should be integrated into the commercial, legal and financial due diligence assessments;
the investigation should look beyond just the environmental agenda and adapt the scope to look at broader corporate social responsibility risks, especially when considering brand/ reputation risk;
the evolution of EDD cannot be at the expense of investigating the traditional areas of risk, such as contaminated land and regulatory compliance. Robust technical skills remain critical.

Oxley concludes: “The companies which are incorporating the ‘critical success factors’ are the ones suffering the least from post deal problems – and in the long run more likely to be successful in their M&A transactions.”

KPMG Transaction Services provides assistance, including financial and commercial evaluation, on M&A transactions, acquisitions and disposals, debt offerings, project and structured finance and related due diligence and working capital reviews.

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