52 Risks® Update : M&A Risks – can you ever do enough due diligence ? CFOs and Risk Management, Cyber Confusion in the Boardroom and more

The combination of central bank liquidity and the COVID-19 economic downturn will undoubtedly see an increase in mergers and acquisitions (M&A) activity over the balance of this year and in 2021.

Risk abounds in M&A activity. A Harvard Business Review article in 2016 stated that based on various studies “M&A is a mug’s game: typically 70%–90% of acquisitions are abysmal failures”.

Inadequate due diligence and overly optimistic financial forecasting are just two of the reasons for an unsuccessful transaction. History is littered with many failures. Some notable failures include Hewlett-Packard’s 2011 acquisition of the UK technology firm, Autonomy, and the acquisition by global mining giant BHP of Magma Copper in late 1995.

Autonomy was acquired by Hewlett-Packard for £8.4bn in 2011. In less than a year HP wrote down the investment by US$8.8bn (equivalent to £6.7bn).  Post-acquisition HP discovered accounting irregularities that had inflated earnings. During subsequent court hearings around the failed purchase, it was stated that HP had undertaken limited due diligence in a short period of time and that many aspects of the planned due diligence were not completed.

BHP’s 1995 acquisition of Magma Copper was even more catastrophic. BHP acquired the US-based copper mining group, Magma Copper, for A$3.2bn to become the second largest copper producer in the world. Magma Copper’s main asset was a relatively higher-cost copper mine and smelter in Arizona. At the time the acquisition was announced in December 1995, copper prices were US$1.25 per lb. Within two years, prices had nearly halved to US$0.65 per lb due to an oversupply of copper in the market. BHP subsequently wrote off the Magma Assets and the Arizona operation closed in early 1999. Total write offs were A$4bn, comprising the entire purchase price and an additional $0.8bn in closures costs. BHP stated at the time that the key issue was the inability of the Magma Copper operations to operate profitably with copper below US$0.90 per lb.

M&A Risk is one the key Strategic Risks in the 52 Risks® framework. In 2014, Forbes published a comprehensive guide to key due diligence activities in M&A transactions.

Highlights of last month for 52 Risks® were:

  • The critical role a Chief Financial Officer (CFO) plays in organizations is often not recognized. In a recent article for CFO Magazine, Anthony Stevens from 6Clicks and I wrote about the role many CFOs have in managing risk and shared a few tips on how CFOs can get their minds around overseeing risk management. As CFO Series research highlighted “..over half of CFOs surveyed … said that they were now responsible for enterprise risk management”.  Read the full article here.
  • Directors and executives are continuing to lose sleep over cyber security.  And quite rightly so – as it has the potential to severely harm and impair a business. Smaller, less well resourced businesses are particularly vulnerable given limited in-house resources spread across risk management, cyber security and IT generally. Whilst there are a wide range of cyber security specialists and resources now available, it can be daunting for boards with limited experience in the sector.

    I outlined in an article published last month, for the US board software group Diligent, how boards can cut through the jargon (and spin) and adopt a more structured approach to cyber security. I also have a crack at defining the commonly used and misused terms of cyber risk, cyber risk profile, cyber security and cyber resilience. The article (you can read it here) also has a list of free US, EU and Australian government resources, particularly suited for smaller businesses and organizations.

Peter Deans