Mergers, Acquisitions, and EHSAug 13th, 2015 | By Michael Bittner | Category: Analysis, News and Notes
With a strong finish, 2015 could prove to be the biggest year ever for mergers and acquisitions (M&A). According to Dealogic, global M&A volume for 2015 stands at US$ 2.9 trillion through the end of July, good for second place behind 2007’s record-setting pace of US$ 3.2 trillion through July of that year. What’s driving this increased activity, and what does it mean for EHS leaders?
M&A Market Drivers
Forces driving the current M&A activity include the following:
- Corporate War Chests and Cheap Credit – Industrial and commercial companies have been largely silent the past few years when it comes to deal-making, but they have been aggressively cutting internal costs, allowing profits to grow even as sales have contracted in many markets or grown only slightly. This has led to the accumulation of substantial war chests at some companies. Because long-terms interest rates are hovering near 10-year lows, this money needs to find a home, and bargains abound in many sectors.
- Shrinking Sales – Although the U.S. economy is slowly gaining strength, Europe and the rest of the world have yet to shake off the full effects of the global recession. This trend has been compounded by slowing growth in China, the world’s second largest economy. With Chinese demand severely curtailed, global commodities are trading at their lowest prices in years, and overall exports to China have also slowed. Unable to expand their sales organically, many companies are looking at acquisitions as a means to grow their top line. In distressed industries such as mining and oil and gas, spin-offs and divestitures are gaining momentum as companies try to shed their least profitable assets.
- High Dollar – The strength of the U.S. dollar has adversely affected revenue and earnings of U.S. companies, but it has also made foreign acquisitions cheaper in relative terms. Acquisitions are being used this year to drive both revenue growth and geographic expansion.
- Tax Advantages – Because many countries have lower corporate income tax rates than the United States, companies outside of the U.S. can realize significant tax savings on their American acquisitions. Also, corporate inversions, where an American company buys a foreign-held company and then moves its headquarters to a country outside of the United States can sometimes reduce annual corporate income tax rates from the U.S. statutory maximum of 35% to less than 20%. This provides an immediate financial return for the relocated company and also makes future deals for U.S. competitors more attractive because of the future tax savings. These tax advantages have had a large impact on deal-making in the pharmaceutical sector, for example.
- Activist Investors – Activist investors continue to flex their muscles in 2015. This year’s focus seems to be on building shareholder value by divesting under-performing businesses and reaping the cash reward from the sale. Some companies, racing to get ahead of this trend, are shedding non-core assets rather than risk a protracted activist fight. The influence of the activists has resulted in a number of sales, company splits, and new company spin-offs.
- Fear of Being Left Behind – Sectors including health care and pharmaceuticals, vehicle components, semi-conductors, insurance, and telecommunications are experiencing a boom in deal making. Companies without a merger partner seem to be throwing caution to the wind in some cases, snapping up competitors to prevent being left behind. In some cases, these acquisitions are meant to grow the company and maintain pace with competitors; in other cases, growing one’s own company through acquisition can act as a disincentive to becoming a takeover target oneself.
Whether EHS leaders work for an acquiring, acquired, or divested business, company transitions are always chaotic events. People, programs, procedures, and IT systems that workers formerly understood and relied on may suddenly cease to exist, forcing them to forge new relationships and adopt new programs and procedures — or suffer the consequences. Even worse, the EHS vision, strategy, and approach deployed by the acquiring and acquired companies might be light years apart.
Surveys consistently note that cultural alignment is one of the biggest post-merger challenges faced by EHS leaders. The way that companies approach EHS compliance, worker safety, risk management, and sustainability provides valuable insight into a company’s EHS culture. Failing to understand and overcome the cultural differences separating two companies can have disastrous consequences for EHS — increased frequency and severity of health and safety incidents or environmental releases, larger and more frequent enforcement actions, and even fatalities. The merger frenzy that is occurring this year will require an increasing number of companies to identify and overcome cultural barriers or risk the future success of their EHS programs.
Even when cultures align, a lot of work still needs to be done to meld two companies into one. Which company’s policies, programs, and written procedures will prevail? Who will be in charge of individual programs and the overall organization? What IT systems will be used for EHS going forward? How will EHS data be migrated from the old company to the new one?
Consider the experience of a mid-size company that purchased a petroleum export terminal in another country. The acquirer retained an environmental consultant to assist with updating the facility’s written programs and procedures, which were required by the environmental operating permit. The acquirer believed that the transfer process would be a simple matter of changing the company names in the existing documents and submitting them to the regulatory agency for approval. In fact the task was much more complicated. Far from being objective documents, the written procedures were a reflection of the seller’s EHS program, which had a different tone and philosophy than the acquirer’s EHS program. Furthermore, many of the procedures referenced corporate programs that had no equivalent at the acquirer’s company. Rewriting the facility’s procedures to meet the acquirer’s expectations and developing new programs to support those procedures consumed more than 1,000 labor hours over six months.
Another emerging trend in the current M&A market is that many large deals this year have been announced without conducting any pre-sale environmental due diligence. In other cases, companies have conducted only preliminary screening for material EHS liabilities or have delayed their environmental due diligence until after closing. Some companies that forgo environmental due diligence may be responding to the accelerated pace of deal-making, for example in the healthcare sector, where the period between announcement and closing can be as short as one week. Other companies may have assumed that EHS liabilities can never be material to a deal in their industry.
Unfortunately, this practice deprives EHS leaders of valuable baseline information on the target’s history, programs, and compliance, which is needed to prepare effective post-merger integration plans. Lacking detailed plans for Day 1, Day 100, and Day 1k, many EHS integrations are directionless, inefficient, and ineffective. EHS leaders must ensure that they acquire sufficient baseline information on their acquisitions to fully understand material liabilities, compliance deficiencies, and required capital investments.
Deal-making activity thus far in 2015 is proceeding at a potentially record-setting pace, meaning that ever more companies will be drawn into unanticipated company transitions. Whether their companies are involved in an acquisition, divestiture, or spin-off, EHS leaders must ensure their programs continue to deliver strong results. To accomplish this, EHS leaders must start with an understanding of the baseline conditions and EHS cultures of the parties involved in every transaction. With this knowledge, integration plans that address legacy issues, current performance, and future aspirations can be implemented at the new company.
About the Author
Michael Bittner, CPEA, is the Director of post-merger integration (PMI) services at Ramboll Environ, a leading global environmental and health sciences consulting firm. Michael leads a team of consultants that provides clients and legal counsel with the strategic advice, technical assistance, and temporary staffing needed to overcome the EHS challenges associated with mergers, acquisitions, divestitures, and spin-offs. He has published several articles on the challenges of post-merger integration, is a former member of the Auditing Roundtable’s board of directors, and also serves as editor of the EHS Journal, an on-line magazine for EHS professionals.
Other Post-merger Integration Articles in the EHS Journal
- After the Deluge: Designing EHS Organizations for Post-Merger Companies by Scott Nadler and Michael Bittner
- EHS Post-merger Integration for Spin-offs by Michael Bittner and Walt Shill
- EHS Leadership: I’m being acquired…now what? by John D’Agostino and Donna Wiley
- Post-merger Integration Challenges in the Agrichem Sector by Michael Bittner, Kristine MacPhee, and Ashley Armstrong
Photograph: Rubik’s Cube 1 by Maxime Perron Caissy