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that they are separated along two dimensions: the amount of resource transferred
and the degree to which the acquired company is left independent or not. Data
has shown that over three-quarters of the companies studied had not attempted
to integrate resources significantly. It was concluded that this was due to the
inherently difficult nature of integration “ and hence risk “ and in terms of
acquiring good performing assets the instinct was not to ˜contaminate™ the good
work for risk of harming performance. The stark conclusion is that in the 1990s
in the UK most acquisitions were of a ˜purchasing asset™ variety involving little or
no transfer of resources between buyer and target.

The best option
Although evidence has revealed that only in a minority of cases does extensive
integration appear to occur, and several key changes do happen in all acquisi-
tion types. The most common changes are ones that are symbolically import-
ant, signalling progress to staff and the market. Management changes, financial
reporting changes and communication changes are all quick to occur. Changes
that are relatively easy to accomplish, and have high impact such as senior staff
movement, will be pursued first. Longer term (if at all), the more complex areas,
such as site rationalisations and IT systems, will be tackled. Accordingly, given
the focus on share price and City evaluation that drives much business strategy,
for instance, in the UK “ not least because of the share options link between
Part A “ Overview of Risk Management

senior management and company stock price “ acquisition integration tends to
focus on early indications of success which is a less risky and preferable
approach to a longer-term “ and more costly “ involved integration which may
take time to signal success.
As regards sustainable risk management, in the long run, the early win
approach may be detrimental to value. If the acquired target is not brought into
the wider corporate structure and is left to continue much as before, it is
unlikely that the acquirer will have accessed that premium that was paid for in
the deal. This may well be part of the reason for the number of divestments that
have to be undertaken.
The fact that the above study was conducted in the UK means that the
stock market impact on managerial action will inevitably be a major factor, as it
will be in the US as well “ that is jurisdictions with highly active and liquid
stock markets. It has been suggested by risk and market commentators that it
may be that in European or Asian countries, with more conservative bourses,
the focus on short-term delivery is less intrusive. Indeed this may facilitate
more measured analysis and implementation of integration. Some comparative
analysis would be useful. True value creation from acquisitions therefore
appears to be only pursued in a minority of actual instances “ a clear opportun-
ity for genuine wealth creation therefore remains.

Many texts exist on how to integrate successfully with descriptive guidance
along the following lines:

Communicate thoroughly with all employees;
Set clear objectives and initiate appropriate organisational change;
Have clear milestones;
Ensure normal business is not hampered; and
Act quickly to avoid losing momentum and enthusiasm.

There is evidence to suggest that post-merger synergy may not be a primary
objective at all “ competitive reaction, revenue capture for growth or other
strategic issues may actually dominate, and require that resource is only
expended on specific areas.
Whatever the case, merger activity in the UK has indicated that the integra-
tion issue is receiving more attention. For example, when interviewed about
the merger of Price Waterhouse and Coopers & Lybrand, the integration man-
ager noted a simple but insightful point about the ˜grubby details™: ˜The two
firms bill their clients and do their time sheets differently. It will probably take
two years to sort all that out, and it™s going to take a huge investment.™ This is a
realistic assessment of the kind of effort required and highlights the reality that
even with best intentions it is often very difficult in the short term to make sig-
nificant progress in certain areas “ a realistic and flexible evaluation of these
areas could ensure expectation about progress is managed.
Chapter 5 “ The relevance of due diligence 101

Cultural integration
Integrating the culture of two combining firms (often given high profile in
merging episodes both in the literature and by management) is very likely not
to occur much beneath the surface in the timescale of integration “ irrespective
of what literature best practice advises. In many instances even after several
years a parent culture tends to linger with many individuals. It might be better
to realise that the cultures will continue to have a certain flavour, and that this
is either acceptable, or if it is not a change-out of key staff may have to occur. In
any event, a fundamental review as to how important this is actually going to
be should be undertaken. If it seems manageable but resource consuming, this
fact should be reflected in the purchase price. Cultural issues are worthy of a
separate debate (preferably in a separate manual) and are considered to an
extent in Chapter 13.
It is clear that, if attempted, extensive post-merger integration will often be
a difficult and time-consuming task. It therefore would seem to make sense that
as part of a negotiated target price this investment in resource and time be used
to counterinflate premia for the target firm. This addresses in part the problem
of shareholder value return “ and in fact may be a salutary action to undertake
in terms of assessing how viable the wider acquisition or merger will actually be.

Role of lawyers
In-house lawyers are often key players in determining the strategy and
implementation of acquisitions and so it is important that they can provide
guidance to their colleagues on the importance of effective integration.
Furthermore, when advising on a transaction, both in-house and private
practice lawyers need to be aware of the buyer™s purpose for making the
acquisition, and integration will be a factor in this. This will influence the
due diligence, the transactional documentation and the negotiations. For
instance, the purchase of a service sector business, such as an insurance
brokerage, will involve a different set of legal analyses and transactions if
the personnel are not being acquired.

The experience and capability of the due diligence team is essential.
First, they have to possess training and expertise to be able to recognise
the important and the unimportant. Second, they need to have the
appropriate tools necessary to perform their tasks. The tools can include,
but not be limited to:
Internet research capability;
Legal databases “ especially for lawyers;
Tax databases “ especially for accountants and lawyers;
Industry perspective and data;
Access to company personnel;
Part A “ Overview of Risk Management

Access to all relevant regulations “ securities, government, environment; and
Appropriate computer and resource tools that support this work.
As legal risk management and ongoing due diligence continues to expand,
companies will rely on the information gathering that can sustain the enter-
prise, reduce the risk of business activity and reward the various stakeholders.
The plain facts are, however, that often mergers and acquisitions provide
such a strong momentum of their own that it tends to sweep aside all but the
most obvious of post-merger integration considerations. In order to realise the
objectives of good corporate governance and to achieve realistic purchase
prices, and fully access post-merger value, these aspects should be prioritised
before rather than after the event.
Risk and corporate organisational
areas: an overview
Risk and corporate
6 organisational areas:
an overview

This chapter considers the issues of choice of organisational vehicle bear-
ing in mind the trends and drivers that have been discussed in previous
chapters. In recent years there has been greater flexibility in the available
options, these depend upon the priorities and objectives of those setting
up an organisation. This is a vast subject that could be discussed in very
great detail and there are many texts covering the risks and opportunities
that are involved in setting up, for example, a company, which remains the
more likely choice for commercial projects or entering into a partnership.
Moreover the factors can vary depending upon the choice of location.
Therefore in this chapter the circumstances in the UK are selected as a case
study, having regard to the topical debate that has developed over the extent
of directors™ duties in the context of the Bill dealing with company reform
(see also Chapter 21). This area has also been considered in the handbook
Due Diligence and Corporate Governance (2004/2005) by L. Spedding.

The choice of vehicle and structure and liability in
It has been noted that in order to be fully effective, the management of risks
should be integrated across the business. In other words, the assessment and
treatment of individual risks arising in connection with one part of the business
should form part of a programme for addressing risks generally across the
organisation. This is because the effect of different risks can be multiplied if
they occur simultaneously. For example, the effect of the failure of IT systems
may be compounded if it coincides with the launch of a new product or service.
An effective risk management strategy should recognise and address those
Similarly, the management of risk must be integrated into the processes
and policies for managing the business as a whole. It should be used to inform
decision making alongside more traditional information such as financial
Chapter 6 “ Risk and corporate organisational areas: an overview 105

performance. The impact of risk management techniques will be undermined if
they are not consistent with the approaches and policies applied elsewhere in
the organisation. For example, a risk-based methodology for pricing projects
with potential long-term liabilities may have little effect if it is contradicted by
remuneration policies which reward short-term financial performance on the
part of particular individuals or units.
It should be emphasised once again, that the ultimate objective is risk man-
agement, not necessarily the elimination or reduction of risks. A systematic
analysis of risks and how they are currently managed in a business may indeed
indicate that risks are being overcontrolled. The operation of controls in a dis-
proportionate manner may have disadvantages, not only in terms of the incur-
ring of unnecessary costs, but also the loss of the flexibility to take advantage of
opportunities. This may be particularly relevant in situations such as competi-
tive tenders for new business, where an over-rigid set of controls may inhibit
the organisation from responding quickly enough to allow success.
Whereas certain aspects of this discussion assume that the reader is a larger
and more advanced business entity that has been in operation for some time it
is as well to recognise also the core decisions that must be made in the business
environment in order to establish a vehicle that suits the choice of operations.
Moreover, as is seen in other chapters, such as Chapter 11 regarding e-commerce,
it is important to recognise the legal status of any party that the business deals
with. A brief analysis of the advantages and disadvantages of the available busi-
ness vehicles is therefore useful at this stage of the book. This decision can be
one of the most important management decisions that can be made. The discus-
sion focuses on the circumstances in the UK largely in the context of a compari-
son that can be made under other jurisdictions. As a case study it should be
noted that practical issues, such as the appointment of a finance director at
an increasingly early stage and the appointment of non-executive directors
(NEDs), should also be considered as early as is practicable bearing in mind
recent trends and requirements. While the choices and decisions made may not
remove risk or liability (see below) they can mitigate repercussions.

Governance and the balance of interests
Regardless of the choice of vehicle and whether or not the organisation
operates in the profit or not-for-profit sector (see further below), as has
been mentioned earlier, one of the main drivers for risk management is the
trend toward increased regulation and operating standards. Indeed, it is
interesting to note that as the business world shrinks and the speed and
amount of information grows, transparency is the keynote of the day. This
is true of all businesses, whatever their size or place of operation.
Moreover the number of interested parties is on the increase as the use of
technology enables access to information in a much more cost-effective
manner. As this book emphasises it is advisable for small businesses also
Part A “ Overview of Risk Management

to take appropriate steps in risk management (see also concluding section
below). They must also bear the impacts of such matters as:
Data protection laws;
Product liability legislation;
Health and safety regulations;
Environmental requirements; and
Comprehensive EU developments (increasingly important with the EU
enlargement programme that has meant a union of 25 countries since
May 2004 and 27 since January 2007).

Risk management
As is discussed elsewhere in this book in more detail (see also Chapter 21) in
the UK a great deal of guidance has been prepared over the past 20 years or so
to encourage boards to take accountability seriously. The final guidance pre-
pared by the Internal Control Working Party of the Institute of Chartered
Accountants in England and Wales, chaired by Nigel Turnbull, entitled
˜Internal Control: Guidance for Directors on the Combined Code™ and produced
in September 1999 (available from www.icaew.co.uk) has notable impact for
risk management. This final guidance suggested that when determining pol-
icies relating to internal control, the members of the board should take into
account the following factors (taken from paragraph 17):
the nature and extent of the risks facing the company;
the extent and categories of risk which it regards as acceptable for the com-
pany to bear;
the likelihood of the risks concerned materialising;
the company™s ability to reduce the incidence and impact on the business of
risks that do materialise; and


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