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Corporate Transactions: Mind The Gap

A corporate transaction is a make or break event. Get the deal right, and a merger or acquisition can dramatically boost competitiveness, driving business growth. On the other hand, information asymmetry and the resulting botched deals may have devastating effects.

With evidence pointing to a 50% failure rate for M&A deals, it is clear that every effort must be made to get the facts right – including the legal and financial aspects typically covered by intensive due diligence.

However, hiring separate legal and finance firms carries pitfalls.

M&A requires qualified advice

Companies engaging in a corporate transaction rightly hire highly qualified professionals in both the legal and the finance and accountancy fields. On the legal side, consultants examine the legal aspects of a transaction, write a purchase agreement, and ensure all the legal ducks are in a row.

In the other camp are accountants who perform financial due diligence – examining the balance sheet, projecting revenue and profit trends and pinning down factors such as tax liabilities.

Needless to say, when a company hires a qualified legal firm and a qualified accountancy firm the advice it receives will be top-notch. Any immediate legal or accounting concerns will be clearly highlighted.

However, that leaves the client in the role of a project manager, communicating key M&A information between important partners.

A gap between legal and finance

When employing two separate firms a client must ensure every key element of the transaction is clearly communicated to consulting teams. What may appear of little importance to an accountant may be a red flag to a legal team, and vice versa.

Companies that engage in mergers and acquisitions often do not have the in-house expertise to adequately determine what information is highly pertinent – that crucial ability to pick out the red flags from the mundane facts.

Yes, in practice most companies would get both legal and finance on a conference call to hash out the complexities of a transaction, but the result is often countless billable hours that amount to little.

In essence, when using separate firms for legal and finance it is difficult to bridge the gap without extensive project management efforts.

What happens when information is lost in the advisory gap?

Legal and finance will each focus on their remit and could in the process uncover facts that are of interest to the opposite team. For example, accountants will accurately report tax liabilities and may find nothing unusual about what they report. A legal team, upon realising the extent of the tax reliabilities, may rightly respond by restructuring a deal. But there is no guarantee that a legal team will take notice.

In another example, a legal firm may find a point of concern that can only be fully explored via deep accounting due diligence that goes above and beyond standard procedures. The question is – will the legal firm adequately inform the finance team and co-ordinate the discovery process?

Where teams operate under separate roofs chances are that important information will either go lost or remain undiscovered. The risks are significant:

·        An incorrect valuation can lead to an investment that results in poor returns, or a low bid that means a competitor bid succeeds.

·        Unreconciled legal trouble may remain undiscovered, leading to profit-sapping legal action in the future, or disastrous legal consequences that nullifies the acquisition – or worse.

·        Post-merger issues may surface that undermine the transaction, causing frustrations for the staff of both companies with ensuing resignations and even a loss in the client base.

·        Skewed negotiations that favour one party over another, as a lack of communication leads to information asymmetry.

Large companies that regularly embark on mergers or acquisitions will avoid these pitfalls on account of internal expertise, but where a company hires distinct legal and finance partners there is a high probability that it will underestimate how big the communication gap is.

Bridge the gap: M&A advisory under one roof

Corporate transactions is a specialised arena – most companies perform these deals infrequently, sometimes only once or twice in their lifetime. It is difficult to acquire the necessary skills to effectively manage M&A alongside the legal and finance teams.

One way around this issue is to consult with a partner that provides legal advisory plus finance and accounting advisory under one roof. Ideally, your partner of choice will have a contingent of finance and legal staff that are permanently employed, with on-site expertise – rather than a virtual team of contributors.

Combining in-house legal and finance delivers the type of teamwork that ensures that essential legal and accounting parameters are noted, communicated and addressed.

As a result, M&A transactions are more likely to execute smoothly, with all parties on an equal footing, because key information doesn’t fall into the gap.

Legal and finance advisory from Fusion

At Fusion Consulting we draw on our internal accountancy, tax and law divisions to help our clients step through an M&A opportunity. From pre-deal planning through to due diligence and post-deal integration, Fusion Consulting’s in-house contingent of experts work together as team.

Fusion’s close teamwork ensures that crucial information is never lost in the gap.

If your company is currently examining a corporate transaction, consider getting in touch to see how Fusion Consulting’s in-house M&A expertise improves the probability of deal success. With countless deals behind us, our M&A team delivers the advice, insight and practical expertise that maximises deal outcomes.

We offer a free one-hour consultation where you can discuss any deal you are currently working on with one of our solicitors, accountants and business advisors.

Get in touch to book your session in now, completely free of charge. You can request a call from one our team here.

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