Reputational Analysis, a Key Tool to Corporate Transactions
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April 11, 2022
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The M&A market is booming. In 2021, according to Refinitiv data, 63,000 M&A transactions were completed worldwide, up 24% from the previous year, and the value of these transactions exceeded 5 trillion euros.
In Spain, there was also record growth, with more than 1,500 transactions, 40% more than in 2020, reaching a total volume of more than 90,000 million euros. But amid this boom in corporate transactions (which also extends to other strategic agreements, such as joint ventures) there are also many projects that for several reasons end up not being completed. Hence the importance of due diligence processes, which companies perform before undertaking such a transaction to ensure that everything is in order on the other side.
Hidden Problems
A due diligence is a standard procedure that is normally carried out to ascertain a company's financial and legal situation. Less frequent, but increasingly important within the business world, is to commission a reputational due diligence, which analyses the existence of potential hidden risks such as inappropriate trade relations, negative press references, controversial political connections, or vis-a-vis third parties, bad-reputation managers, involvement in cases of fraud or corruption, international and regulatory sanctions, litigation, debts… It is, in short, about trying to anticipate potential risks that may affect the reputation of the subjects involved in a transaction.
The reputational due diligence entails searching for and analysing the wealth of information provided by the Internet and other sources, such as public or restricted access databases. In addition, they have incorporated advanced data analysis techniques (Data Science & Analytics) in recent years, confirming the trend that technology plays a key role in this type of services.
At the same time, the traditional analysis of information is supplemented by consultations with industry experts, financial analysts, and other sources, which provide a customised knowledge of different sectors and geographical areas and, in turn, maintain a wide network of contacts.
But as important or more important than getting the information about the counterpart is to deal with it properly: to filter it (by separating the wheat from the chaff in a context jammed by fake news), to objectify it as per the messages sources, to analyze it in an integral way, to cross-reference it, to try to corroborate it and reach conclusions that can help the client make an appropriate decision on the risks of the transaction in question. In addition, the analysis needs to be tailored to the customer's sensitivity. For example, large multinationals are often overly sensitive to the risks arising from the participation of politically exposed persons in the Board of Directors.
Much attention must also be paid to what is happening around the world. The paradigmatic case nowadays being the invasion of Ukraine, which obviously multiplies the reputational risks of some corporate transactions. However, other minor or low-profile issues should also be taken into consideration when investigating the public perception of a potential partner.
Meet Your Travel Companions
Reputational analysis bridges the information gap catering for the need, in a world as complex as today, for companies to know in depth who their potential travel companions are. The final aim is for the client to be able to decide on the transaction with full knowledge of all the circumstances, either by going ahead with it, setting up appropriate conditions or, as a last resort, aborting it.
The latter option is not just a mere working assumption. Sometimes, a reputational due diligence causes the negotiations of a transaction, however advanced, to grind to a halt. At FTI Consulting we have some recent examples of transactions that did not get closed, such as a potential joint venture in the infrastructure sector that was not carried out because of the counterpart's connections with the armed forces of an African country, or the acquisition of a gambling industry multinational that was also cancelled because of the involvement of one of its main managers in a money laundering case.
Interest in reputational due diligence has grown exponentially in recent years. We have seen an increase in reputational due diligence activity in North America and EMEA over the past five years. Finance and infrastructure are among the industries with the greatest demand, and there has also been a growing interest in activities linked to the coronavirus pandemic, such as health or leisure (hospitality and catering), one of the most affected sectors.
The increasing demand for this type of service arises, in addition to the boom in corporate transactions, out of the economic globalization and the growing importance of regulatory matters, given the exposure of companies to get sanctioned both by local policies and by foreign countries in which they operate. The incorporation into the Spanish Penal Code of corporate criminal liability and the increasing obligations in money laundering and financing of terrorism forces companies to exercise extreme caution and ensure that reputational risks arising from agreements with other companies are under control.
To quote the British philosopher Sir Francis Bacon: “knowledge is power.” Reputational due diligence helps companies wield this power.
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Published
April 11, 2022
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Managing Director