Exposure Checklist Expanding In M&As

Risk managers at companies involved in mergers and acquisitions need to be part psychologist, part psychic and part Houdini. They need to understand and work with employees at the company to be acquired, look for potential exposures and somehow try to bring it all together.

Richard Inserra, assistant treasurer at Praxair, Inc., an atmospheric gas company based in Danbury, Conn., said a risk manager should have the same concerns with an acquisition that “you would with your own organization.”

Most important these days, he said, is assessing the threat of a terrorist act against the acquisition. “How vulnerable and how visible it is are factors,” he said.

He added that international exposures should be “looked at harder. If you are a highly visible Western company in an Islamic nation, or almost anywhere, you are more of a target than you were three months ago.”

Also important to consider in a recession is whether the company being acquired is laying off workers, he said. This could result in a higher volume of workers compensation claims or other benefits or medical claims.

One of the most difficult aspects of todays M&A environment is knowing what to look for, Mr. Inserra said.

“Its hard to look for something when you dont know what it is,” he said. “A lot of it is speculation and 'what-if' scenarios, but thats what a risk manager does–hes involved in speculation as to what the events could be. Terrorism is just another thing to think about nowadays. Add another item to the checklist.”

Paul Buckley, treasury director, risk management for Lucent Technologies Inc. in Morristown, N.J., said his concerns today are the same as they always were. Risk managers, he said, should be thinking about the needs of their company as well as the employees of the company being acquired.

“Sometimes someone acquiring a company automatically thinks that what they have is better than what the other company has, and therefore the other company should just step into line,” he said.

A little humility goes a long way to help the process along, he said. “The truth is that when your company goes to make an acquisition, risk management is not going to make or break the acquisition,” he said.

The decision to buy or merge has already been made, he said, so the job becomes, “how do I create the synergy that will get us the cost benefit that the acquisition was intended to get.”

Risk managers, he said, need a written strategy on how to go forward based on due diligence. The plan, he said, should examine each of the other companys programs and compare them with those of the acquiring company.

He said that too often the attitude from both sides is an unwillingness to cooperate, which can make it difficult for risk managers to gather the information necessary for the acquisition.

“You want the information as easily as you can get it,” he said. “If you make this into an adversarial relationship, then youll struggle to get the information and that is a huge waste of time.”

And when you do go to the company being acquired for information, “know why you need that information,” he said. “What happens in an acquisition is that you will typically get different people asking for the same information.”

What makes an acquisition successful is honesty and openness, and “making sure you have a strategy and a plan ahead of time, not on the day it gets announced,” he added.

One of the primary considerations a risk manager needs to be aware of in an acquisition is the potential loss of intellectual capital, he said. “As a risk manager, you need to be looking at the personnel risks as well. If youre not, youre not doing your job,” he said.

This is especially critical in the technology sector, he said. “You purchase a company, but what youre really buying in technology is what is in their pipeline of research,” he explained. “Youve got to understand that and youve got to know how to lock up those scientists going forward.”

He explained that the cultures of two merging companies could clash, causing key people to leave. “If I was looking at that, I would say to the due diligence team, how have you locked up these scientists?” he asked, suggesting that management use “golden handcuffs,” which means financial and benefit incentives to stay with the newly merged entity.

Mr. Buckley said a recession can make it more difficult for an organization that is no longer on top to attract and keep key people. Of his own company he said, “I wont say morale is low, but it is not where it was when we were trading at $80 a share. Retention of people today is not easy.”

What is needed during a recession is increased “recruiting and selling” of the company, he said. “Again, its always about the people, because if you dont have the people, then the rest doesnt count.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 19, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Exposure Checklist Expanding In M&As

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