In 2016, the tech industry had a record total of 1,613 deals valued at $323B, including a number of high profile transactions such as Microsoft’s $26.6B acquisition of LinkedIn, Analog Device’s $14.8B acquisition of Linear Technology, and Oracle’s purchase of Netsuite for $9.3B. And the pace of these transactions is only expected to increase in 2017.
The EHS risks associated with these transactions cover a broad spectrum, and it can be difficult to determine the appropriate level of due diligence to meet changing internal and external stakeholder expectations.
Mergers and acquisitions are increasing across a variety of business sectors ranging from general manufacturing, to pharmaceutical companies, to transportation and beyond, and technology is no exception. Many publicly and privately held companies are striving for faster and more aggressive paths to global expansion, increased topline revenues, new market spaces, and returns for their investors.
Rapid Growth Means Rapid Change
With the technology industry growing so rapidly, successful companies must be prepared to engage in proper due diligence to both understand their potential exposure to EHS risks as well as identify factors influencing successful integration, whether the transaction is an acquisition of a competitor, bolting on a complementary business, or spinning off a division.
Unlike other sectors, many technology companies that are M&A targets are smaller emerging companies, and likely have not had the resources or desire to address EHS within a rapidly growing business. They may not even be aware of the EHS related issues or concerns the buyer may have, or of the variety of risk factors that are unique to these smaller tech companies, regardless of whether they are software companies or develop electronic hardware products.
Doing Your Due Diligence
Effective integration planning and implementation has been cited in recent M&A reports as the number one factor in ensuring that a deal is successful. As a result, EHS due diligence on the buy side must be effective not only in advising on downside risks (e.g., liabilities associated with poor health and safety programs), but also in capturing other EHS aspects of the business that affect post-acquisition integration.
Topics that should be evaluated to assess whether they are material to the deal could include:
- EHS management systems,
- human capital risks (e.g., social or cultural risks),
- capital expenditures for environmental decommissioning,
- EHS and operational permit evaluations for facility expansions (e.g., merging operations),
- health and safety programs,
- EHS triggers associated with lease exit provisions,
- sustainability programs,
- and more.
On the sell side, technology companies should prepare well in advance of an event, taking into consideration the same topics that would concern a buyer. They can then focus on building the necessary plans, documentation, systems, and human capital that will allow for successful negotiations, providing the buyer with a sufficient comfort level that EHS is addressed and well managed. This also leaves them well-positioned for scrutiny during due diligence, and sets them up for successful integration into the target business.
Beyond Contamination and Superfunds
EHS due diligence in all sectors, and particularly within technology, is no longer just about subsurface contamination and “Superfund” liability. Assets associated with technology companies are typically not manufacturing intensive, focusing more on human and brand capital than hard assets. While in the past, the Phase I ESA was the first thing people thought of when considering EHS due diligence, with its strict focus on subsurface soil and groundwater contamination issues, we must now think more broadly about anything under the EHS umbrella that will affect the future of the business and its ability to successfully navigate an acquisition or divestiture.
Due diligence is often about reducing uncertainty and avoiding post-acquisition surprises associated with capital expenditures required to fix EHS liabilities. However, satisfying investor concerns that the brand they are investing in is a good corporate citizen can be as important as managing traditional subsurface or compliance liabilities that carry direct costs.
A good due diligence program can be designed to look at these less-tangible aspects of a business and assist in advising on weaknesses or gaps from either a sell or buy position. Investor concerns are particularly important when considering raising capital through private equity (PE) or venture capital (VC), which comprised approximately 314 acquisitions, or about 26% of the technology deal market in 2016. PE Funds and their associated Limited Partners carry a significant amount of weight when considering where and how the fund money is invested.
Exploring and understanding the range of risks and expectations associated with the myriad types of transactions that are unique to the tech industry can provide valuable insights into ways that a company’s EHS function can bring value to the full transaction process and gain a seat at the table.
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