Publié le 14 février 2024

Prevent, detect, and respond to legal, regulatory, and integrity risks in the pre-transaction process.

 

 

 

 

What is the issue and why does it matter for your organization?

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Organizations can only operate in their markets if they have a solid reputation and are trusted by their counterparties and stakeholders. Any event that causes reputational harm can significantly impact their business. The “Reputational Risk” organizations face is defined as the risk of negative public perception, loss of trust, or damage to an individual's or organization's reputation, which can result from events or actions that are perceived as unethical, irresponsible, or harmful and may lead to adverse consequences such as a loss of business, customers, or value. In 2012, the World Economic Forum stated that more than 25% of a company's market value is directly attributable to its reputation. In an article published in the Journal of Business Ethics by Springer, it is reported that reputational damage has the potential to lead to substantial financial loss, amounting to approximately 80% of share value.

The role of Reputational Risk in M&A transactions

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This reputational risk plays a pivotal role in merger and acquisition (“M&A”) transactions. Acquiring a target company means taking over its assets and operations, but its reputation in the market is also purchased, including its regulatory transgressions (e.g., breaches of Anti-Money Laundering or Anti-Bribery and Anti-Corruption regulation) or its sanctions violations. A company could easily lose its trusted position in the market by acquiring a company with a tarnished reputation.

Mitigating this risk means incorporating Reputational Due Diligence (“RDD”) into the M&A pre-transaction process, alongside traditional due diligence domains such as financial risk, tax, legal, and operational. The reputational due diligence process involves a thorough investigation into the target company's reputation, assessing potential risks and benefits that may impact the overall success of the merger or acquisition.

Reputational Due Diligence can help to:

  • identify and mitigate hidden risks that may affect the acquiring company’s reputation. Uncovering issues such as ethical concerns, regulatory violations, or negative public perceptions early in the process allows for risk mitigation strategies to be implemented before finalizing any deal;
  • understand the target company’s past and current regulatory compliance;
  • preserve brand value;
  • understand the target company’s ethical culture and workforce; and
  • gain insights into the target company’s customer and supplier relationships, and how it is perceived in the market.

Failing to execute Reputational Due Diligence can expose acquiring companies to:

  • compliance risks, leading to legal and financial implications;
  • political ties within the target company that may create social risks, triggering public backlash and financial instability;
  • infiltration of organized crime;
  • unanticipated issues like unfair labor practices which could draw negative media attention, causing customer boycotts and legal disputes; and
  • undisclosed political affiliations which may subject the acquiring company to international sanctions, resulting in operational limitations and significant financial losses.

Reputational Due Diligence is, as a result, not just a precautionary measure, it is a strategic imperative in the world of M&A transactions. If due diligence reveals activities that could expose the purchaser to additional reputational risks it might necessitate a re-evaluation of the deal, potentially leading to a new valuation, restructuring or even reconsideration of the entire transaction. This represents a critical opportunity to re-assess and adjust the acquisition costs to align them better with the expenses required for risk mitigation measures. In the complex realm of mergers and acquisitions, prioritizing reputational due diligence is an investment in long-term success and sustainability.

How KPMG can help

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As experts in the fields of Forensics, Third-Party Risk Management, M&A Transactions, Corporate Intelligence, Compliance and Law, and with a specific focus on the pre-transaction phase, KPMG can support your organization in preventing, detecting, and responding to Reputational Risks by means of pre-transaction Reputational Due Diligence.

We have a wide array of experience with conducting background searches into target entities and individuals and can establish company profiles with a focus on Ultimate Beneficial Owners and key executives. Our expansive subject matter expertise and critical judgment facilitates the processing of the information gained from sanctions, PEPs, and press databases, as well as court records. KPMG further offers proprietary screening solutions which ensure a review against all major sanctions lists and press databases, bringing in automation and allowing for an accurate and efficient screening process. We can execute enhanced due diligence and dive deeper into any target organization. Our approach is customized to focus directly on the risk domains deemed most pertinent and relevant by you (e.g., sanctions and export compliance, ESG, and cybersecurity risk, among others).

Together with you, we can see to it that the pre-transaction process not only captures financial and/or legal risks, but also uncovers reputational threats so your organization can make a fully informed transaction decision.

Case Study

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The client, an English, mid-market, Private Equity Fund, wanted to conduct Reputational Due Diligence on acquisition target based in Belgium, with a branch in South America. By means of pre-transaction Reputational Due Diligence we uncovered several adverse media items related to the South American subsidiary company.

Our specific, in-depth analyses discovered that the South American branch was allegedly committing waste crime and its CEO had previously been found guilty of corruption. Subsequently, we compiled the findings into a summary report. Our due diligence report, including proposed mitigation strategies (e.g., inclusion of specific contractual clauses in the Sales Purchase Agreement (SPA); self-declarations to be signed by all corporate executives; requiring the selling party to take self-cleaning measures), was presented to the client. Based on the report, the client decided to move forward with the acquisition implementing the mitigation suggested strategies. Based on our report they were in a stronger position to negotiate the terms and conditions of the transaction.