A corporate transaction is a make-or-break event. Get the deal right, and a merger or acquisition can dramatically boost competitiveness and drive 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.

To find out more, contact Alex Jarosz for a free consultation.

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 aspects are carefully considered.

On the other side, accountants are responsible to perform financial due diligence including the examination of the balance sheet, projecting revenue and profit trends and pinning down other factors such as tax liabilities.

Bridging the gap between legal and finance

When employing two separate firms, a client must ensure every key element of the transaction is clearly communicated to all 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.

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 issues, 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 teams will focus on their respective remits 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 the findings. A legal team, upon realising the extent of the tax liabilities, may rightly respond by restructuring a deal, although there is no guarantee that a legal team will be aware or 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?

What are the risks?

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 nullify 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 separate legal and finance partners there is a high probability that it will underestimate how big the communication gap is.

The solution

The answer 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. To find out more, contact Alex Jarosz for a free consultation.

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