Acquisitions
Pilko’s experience advising on energy and chemical industry transactions during the last 20 years indicates EHS issues can represent 5 to 30 percent of the deal value and can be among the most challenging issues in a deal. Our experience also suggests buyers can create value by identifying EHS issues early and negotiating knowledgeably and effectively. Buyers can use EHS issues as a weapon for strategic advantage to create value (offensive) and protect against risks and liabilities (defensive).
For any contemplated transaction, Pilko recommends starting early by using Remote Sensing® to characterize the EHS issues and sensitivities of a particular target before approaching the target or before the data room opens. Knowing where to look and for what is key to generating actionable intelligence from the mass of publicly available information. This “knowledge” can strongly position a buyer to enter the deal process – whether an auction or a negotiated deal – as knowledgeably or maybe more knowledgeably than the seller.
Savvy buyers with strong deal leaders can use this knowledge to create competitive advantage and to assure alignment with its business objectives for the transaction. Techniques for gaining advantage include pre-empting an auction, moving faster than the competition, and creating leverage for those issues requiring negotiation.
Traditional buy-side diligence has focused on identifying EHS risks and liabilities to be allocated within the deal. Evaluating risks and liabilities is necessary but no longer sufficient for creating value. We recommend buyers use our Three Bucket® Approach to evaluate:
- EHS Risks and Liabilities
- Emerging Issues
- EHS Governance Practices
Emerging issues may affect the business (and business value) either positively or negatively and may affect either manufacturing or products. Executives commonly think of emerging regulatory issues, but businesses are affected by broader issues including climate change, evolving scientific and health data, and land use issues such as encroachment and changing community expectations. The buyer also needs to understand the differential impacts on the target company vs. its competitors. Leadership’s response to emerging threats or opportunities should focus on improving its position in the marketplace.
Evaluating EHS governance practices is necessary to help a buyer understand if appropriate processes are in-place for a well managed business and if current EHS performance is sustainable. Understanding the existing governance practices will enable the buyer, during transition and integration planning, to understand how the business will fit if being integrated into an existing entity or what EHS roles and services must be filled or improved if the business will be a standalone operating entity.
Throughout the deal process, strong teamwork and effective communication among the deal leader and cross-functional team participants are necessities for capturing value. Even seasoned negotiators need to be well briefed – not only on the significant issues, but the implications and strategies for addressing those issues.
When the deal is done, the final step in creating value is to actively manage the claims process under the provisions of the contract. Too often buyers drop this ball and fail to capitalize on a well crafted agreement.