Mergers and acquisitions (M&A) are popular methods for corporate expansion, enabling companies to achieve synergies and increase market share. In the Middle East, the technology sector accounts for the majority of the transaction volume, followed by the chemical and medical care sectors. In 2023, the United Arab Emirates (UAE) topped both the list of target and bidder nations in terms of value, followed by the Kingdom of Saudi Arabia (KSA) and Kuwait.
However, M&A carry inherent risks, particularly when comprehensive anti-bribery and anti-corruption (ABAC) due diligence is not diligently conducted. An unfavorable outcome in M&A could result in significant financial losses for firms, tarnishing a company's reputation and exposing directors to the risk of personal liability. Fraud concerns in acquisitions and investments have caused billion-dollar write-offs for multinational firms in the last decade. As a result, many have questioned the due diligence and supervision of high-profile and skilled investors after company collapses. Even experienced boards have acknowledged occasional lapses in giving sufficient attention to ABAC due diligence.
M&A transactions present a variety of challenges and risks. By nature, major M&A transactions require interaction with government entities, which tends to increase the likelihood of bribery and corruption. Provision or receipt of unwarranted benefits to the target firm may result in financial losses due to legal penalties in addition to reputational harm. Moreover, M&A risks extend beyond the country where the involved parties operate, encompassing potential exposure beyond national boundaries. For example, if the target deals with consumers or suppliers in different countries, other non-domestic restrictions may apply. The following are key risks that could damage a deal’s value if adequate ABAC due diligence is not conducted.
An instructive example of a failed acquisition is eLandia International acquiring Latin Node in 2007 for approximately US$20 million with the aim of gaining access to customers in emerging markets. During a post-closing financial integration review, eLandia identified suspicious payments to government officials. After a thorough investigation, Latin Node admitted to having paid approximately US$2.2 million in bribes to officials of state-owned telecommunications companies in Yemen and Honduras. Within a year of purchasing Latin Node, eLandia wiped out its investment and incurred additional costs due to (1) Latin Node becoming insolvent (2) the termination of Latin Node’s senior management (3) incurring financial penalties and (4) the loss of customers. Had a proper due diligence been conducted pre-acquisition, such disastrous deals could have potentially been avoided.
Based on Deloitte’s 2023 M&A Trends Survey, nearly all survey respondents (90% of businesses and 93% of private equity firms) believe that an effective transformation strategy and execution are critical to M&A results. Two-thirds of those surveyed at the Third Annual Due Diligence Symposium responded that poor due diligence was the major reason many mergers failed within a few years. Given the number of failed mergers, there is plenty of room to strengthen the type of operational due diligence that can detect deal-breaking issues before they destroy shareholder value.
Conducting ABAC checks and integrity assessments before a corporate transaction helps gain critical insights into the target company's compliance risks - findings that can be used in drafting the contract. Additionally, it may propose post-acquisition measures for the buyer, such as advising against retaining specific contracts or business relationships. Throughout the entire transaction process, it is essential to incorporate pertinent guidelines and internal controls to minimize ABAC risks within the target company.
Furthermore, ABAC checks can provide decision-makers with comprehensive information about the target company's integrity, allowing for informed decisions during negotiations and post-acquisition planning. In return, this allows for the preservation of the value of the transaction by addressing and mitigating corruption related risks early in the due diligence process.
Due to the broad reach of legislations like the US Foreign Corrupt Practices Act (FCPA) or the UK Bribery Act, it is critical that ABAC due diligence is conducted pre and post M&A to evaluate and test the target’s ABAC and compliance programs. ABAC due diligence enhances understanding about the target, enabling valuation, risk assessment, and incorporation into the buyer's anti-corruption program. Additionally, it could identify factors impacting transaction pricing. Organizations can navigate and mitigate ABAC risks in an M&A setting through different types of services/approaches such as the following:
Companies that conduct robust ABAC due diligence on their targets, such as the approaches just mentioned, mitigate legal and reputational risks associated with M&As and drive alignment with their values and strategic goals. This process equips decision-makers with the information needed to ultimately make a conscious decision if the transaction is a “deal” or “no deal.” Hence, rigorous due diligence plays a pivotal role in the success of an M&A process.
By Collin Keeney, Partner, Wael Tahtah, Director, Omar Hennawi, Manager and Sofia Vrablova, Senior Associate, Forensic, Deloitte Middle East