Ensuring environmental compliance in mergers and acquisitions (Part 3)
Over the years, we've seen a lot of companies either merge with others, acquire smaller companies or be bought out by a larger organization. M&A's are complex, and there are a lot of pitfalls that businesses run into during the process, of which environmental liabilities are among the most common.
It's important to note that as a Certification Body, we are not lawyers, nor can we provide legal advice. What we can do is provide you with an auditor's perspective on ensuring compliance with all of the applicable environmental regulations your business faces through due diligence. This article will help you understand what you should be looking for regarding all things environmental if you're in the process of merging with or acquiring another business.
Instilling sound environmental due diligence
What does it mean to practice sound environmental due diligence? The crux of it is to be able to identify and, where possible, quantify the most important environmental risks and liabilities. In the context of a merger or acquisition, this allows the buyer to more accurately ascertain the potential costs to be incurred in a transaction beyond just the stated price. You have to understand these risks before you make a purchase so you can develop a plan for mitigating or removing them.
A study by PricewaterhouseCoopers found that roughly 80 percent of M&A's did not create shareholder value, with the lack of due diligence on the part of the buyer as the main reason why. M&A's can be valuable, particularly when they allow you to leverage sustainability initiatives to increase company value.
What an acquirer needs to know before making a purchase
One of the first things an acquirer should ask is, "Are you ISO 14001 registered?" If the business isn't registered, is it at least compliant? There is a distinction between being registered and being compliant: To be registered, the business needs to have been approved by professional ISO auditors from an accredited third-party certification body. Compliance simply means the company has audited itself according to ISO standards.
Getting a history lesson
As an acquirer, you'll want to know as much as possible about the history of any property you will be receiving as part of a purchase. For example, you might think you're getting a sparkling clean office building, but if it's built on an old mercury production plant, you could be in for some legal issues. You should note that ISO 14001 registration and compliance won't help you with this. ISO only looks at business systems. You have to do your own research into the history of any property you aim to buy to avoid possible environmental noncompliance.
Look at the records
As auditors, our motto is always "trust, but verify." That should be your motto as well. A big part of practicing sound environmental due diligence is looking for the records - both physical and digital - that will give you the data and insights into the environmental risks you need to make a good decision. For example, the company to be acquired may be in compliance with air pollution standards today, but could have been out of compliance for the five years prior. The data will show that.
A critical pitfall that an acquirer might run into is that the company to be bought has all of its data in "silos." What this means is that access to environmental data is often restricted to just a few individuals in that department. The data is scattered and inaccessible. The legal team may have no awareness of the existence of that information, simply because the business has no way to share data among all stakeholders. Look beyond what the legal team has and make sure that nothing is being hidden from you that could adversely affect the merger or acquisition.
For more on environmental compliance and meeting ISO 14001 standards, please see our On-Demand Webinars under the Environmental/Health & Safety tab.