There are many reasons why your company might consider engaging in a merger with or an acquisition of another company. You might want to diversify your product or service offerings, increase your production capacity, claim a greater market share, access the other’s company’s resources, talent and Intellectual Property, and reduce your overall financial risk. However, the M&A game is chock full of risks, and the annals of business history are full of disastrous endeavors that seriously damaged the acquiring company.
Here are just a few suggested by CBInsights:
- Google and Motorola — Google already had a huge share of the cellphone market with its Android OS, when it acquired Motorola for $12.5B in 2012. Only two years later, Google sold the company to Lenovo for $2.9B. Softening the blow slightly, Google retained many of Motorola’s patents and its research facility.
- Bank of America and Countrywide — Whether it was bad luck or failed due diligence, BofA spent $4B to acquire the mortgage giant in 2008, right before the housing bubble burst, precipitating the Great Recession. Countrywide’s liabilities wound up costing BofA about $40B, which is why The Wall Street Journal eventually called the acquisition as “the worst deal in the history of American finance.”
- Hewlett Packard and Autonomy — HP laid out $11.1B to acquire the European data analytics company with an uncertain strategy for exploiting its assets. Again, due diligence failed, and HP’s team failed to discover that Autonomy had fraudulently inflated the company’s value. Eventually, HP wrote of about $9B in losses on the deal and sold off Autonomy’s assets.
There are many reasons why mergers fail: poor strategy, clash of corporate cultures, and outside forces, such as sudden changes in technology, rendering assets obsolete. But failures due to poor valuations and outright fraud are 100 percent preventable. The acquiring company must perform its due diligence, which includes engaging a forensic accounting expert to uncover inflated performance figures and undisclosed liabilities.
A recent article by Thomson Reuters lists some of the warning signs of fraud, which include:
- Excess inventory
- Increased accounts payable and receivable in contrast to declining or stagnant revenues
- An unusually high number of voided discounts for returns
- Lack of sufficient documentation in sales records
- A large number of account write-offs
- Increased purchases from new vendors
It’s not always easy to know whether you’re dealing with sloppy accounting or deliberate manipulation. A skilled forensic accountant can look at the company’s controls to determine whether company processes provided an opportunity for an officer to commit fraud.
When a forensic accounting team discovers irregularities, your company must reconsider its offer, especially if your strategy was to leave the acquisition’s management team largely intact. In many cases, an acquiring company has no choice but to withdraw an offer, although it’s sometimes possible to salvage the deal by reworking the price and adjusting other terms.
Contact Breon & Associates in Harrisburg and Williamsport
Breon & Associates performs forensic accounting services for mergers and acquisitions. We help our clients learn the truth so they can make a fully informed decision. With offices in Harrisburg and North Central PA, Breon & Associates provides business, accounting and tax services throughout Pennsylvania. Call us at 1-888-516-8476 or 717-273-8626, or contact one of our offices online to schedule an appointment.
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