The M&A Risk Game

The risk management process in M&A happens through a set of synchronous activities.   Diligence is happening at the same time the contract terms are being negotiated.  Integration planning happens whilst both sides resolve pre-close covenants and approvals.  The buyer makes sure that even if something is missed in diligence that the deal contract serves as an insurance policy.  The seller makes sure that the buyer can’t easily tank the deal.  The buyer tries to hold off on giving the most critical details of the business until it has a firm, binding commitment to move forward.  It’s a dance that certainly gets better with practice.

IBM knows this risk first-hand, having done over 100 deals themselves in the last 5 years alone.  Having the tools and knowledge before entering the deal arena is very helpful in facilitating the risk allocation dance between buyer and seller.  Here are few obvious ways we think risk can be contained:

•    Enhance the buyer’s visibility into critical issues and risks with tools by which a buyer can escalate these issues to principles in the deal negotiation process
•    Provide reporting that flag risks or issues linked to specific representations and warranties in the merger or purchase agreement – giving the buyer the insight to ask for tighter terms or request additional information from the seller prior to moving forward
•    Ensure that you have a persistent view of a deal – meaning that risks identified early must be monitored throughout the entire deal lifecycle (and into integration) with a detailed record of prior attempts at resolution to avoid rework or wasted effort
•    Factor in deal learnings from deal to deal, such that risks endured on one transaction can be avoided on the next
•    Make sure the team is asking the right questions and getting answers that you, the buyer, can live with and still maintain deal value.

Net, net, the M&A process should be about risk sharing.  We help our clients make sure that they do not take on a disproportionate amount of risk allocation.  With the right amount of M&A Expertise and the M&A Technology to manage the process, risk can be contained. 

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