KPMG International

Impact - a survey on environmental due diligence

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Courtesy of Courtesy of KPMG International

Untitled Document

Environmental due diligence (EDD) has become an important feature of an increasing number of merger and acquisition (M&A) transactions. Interestingly, however, it is not automatically included in the approach many companies take to transaction evaluation, even in sectors at the greatest risk from health, safety, social and environmental (HSSE) issues.

For some organizations, simply starting to consider HSSE issues can significantly help reduce the risk of unpleasant post acquisition surprises when they undertake an M&A transaction.

Those undertaking EDD often find the transaction is influenced by the HSSE findings, with valuation and/or contract adjustments and even deal breaker outcomes being cited by approximately half the interviewees. However, companies do not always identify all the material issues. One third of companies interviewed indicated that they have been impacted by material HSSE issues post transaction. A key explanation is that the landscape of HSSE risk is evolving, and the manner by which these risks can impact business performance is expanding into areas not always covered by a traditional EDD exercise.

Legal and financial (capital and operating expenditure and liabilities) consequences of HSSE issues remain fundamental to most EDD investigations. But HSSE issues now also impact other business performance variables such as sales, operations, customer relations and reputation – each of which can directly impact the key transaction ‘check points’ of: sale and purchase agreement; valuation model (and assumptions); deal breaker evaluation; acquisition accounting; post acquisition action planning; and exit strategy (where applicable).

While some companies have made the transition towards a more commercially oriented EDD process, others are part way through the transition, having adapted their assessment process to take account of the business performance issues, but not yet altering the EDD scope.

One of the critical success factors is for companies is to have a commercially driven scoping and assessment approach which integrates EDD findings into the legal, commercial and financial due diligence assessments, underpinned by robust technical competencies. The survey data indicates these are the companies which are suffering fewer material issues arising post acquisition and in the long run are more likely to have their M&A succeed.

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