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Mergers & Acquisitions: What a Bargain!

Corporate skeletons can make for costly surprises. This article outlines a framework and recommendations for each stage of an acquisition to safeguard the integrity of the transaction and the future stability of the combined business.

Barry Faudemer
Baker Regulatory CEO

The M&A landscape of Jersey Financial Services Businesses

Since January 2022 there have been over 50 mergers of Jersey financial services businesses with no sign that the trend is cooling off.  Authors of The M&A Failure Trap  cite a 70-75% M&A failure rate from their studies of 40,000 deals over 40 years 1 and UK based research institutions quote similar figures.  Beyond financial analysis and strategic fit, one of the most critical components for a successful merger or acquisition is rigorous compliance and thorough due diligence.

This article explores what happens when M&As go wrong. We outline what due diligence should be at the heart of every financial services M&A deal. We take a look at safeguarding both the integrity of the transaction and the future stability of the combined businesses. In essence, let’s find the skeletons and bring them out in the open to remediate, or fully disclose to the purchaser.

What lies within

M&As can fail because of unidentified problems lurking within the client book of the acquired business. Issues such as incomplete documentation, overlooked compliance violations, inappropriate client risk ratings and overdue client reviews which are not identified and attended to during the due diligence period, can quickly escalate into more serious issues post-acquisition.

Pre-acquisition cost cutting and staff attrition caused by an unsettled environment can destabilise a target business resulting in loss of experience, corporate knowledge and potentially some of the client base.

The perils of regulatory misses in M&A

A review of historical public statements issued by the JFSC reveals multiple similar examples of skeletons being discovered post-acquisition with the acquiring business being left with a hefty bill for remediation and if mismanaged, the potential for regulatory sanction. Whilst a great deal of attention will be applied to the financial health of the target company, evidence points towards the risk emanating from the insufficient assessment of the culture and the robustness of the control framework, resulting in AML skeletons or systemic issues lurking in the closet. Post acquisition clean ups are a huge drain on resources at every level of the business. When the focus should be on growth and development, aligning and integrating the businesses, resources are being diverted to exiting toxic clients and remediating deficiencies accompanied by an increased risk of client litigation and regulatory oversight.

So, in an industry where regulatory scrutiny is intense and the stakes are high, here are some recommendations as to what should be on the radar for those in M&A mode.

Before

  • Ensure thorough due diligence is undertaken by experienced individuals to adequately assess the regulatory risk, financial crime risk and client risk.
  • Obtain a clear picture of the governance, compliance and operational vulnerabilities of the target. Both parties benefit from clear understanding of the situation.
  • Identify if any systemic failures have resulted in a toxic book of business that could prove a drain on future resources and assess the level of remediation required as well as potential future liabilities. For vendors, proactively addressing and disclosing such issues can build trust and potentially preserve valuations.
  • Obtain evidence that legacy issues have been appropriately remediated and the root cause of the problem identified and rectified.
  • Assess and identify training and development needs. Start early to identify how existing employees can be supported to meet future needs.

During

  • Acquisitions, whether it is a book of clients, a local firm or international business, require a lot of resources. Create and maintain a detailed plan encompassing every work stream, deadline, resource and known challenges.
  • Regularly communicate with all stakeholders including the regulator and employees.
  • Comply with the terms of the Purchase Agreement.

After

  • Undertake a systematic, timely and thorough periodic review and risk assessment of each client using the established process to identify issues.
  • Record and actively manage compliance, operational and governance issues identified in the due diligence process.
  • Create and complete induction and training plans for new employees.
  • Communicate with stakeholders.
  • Consider the regulator, shareholders, insurers, legal advisers, employees, group and the media.
    Remediate issues promptly.
  • Marry the cultures, agree strategies and use the best from each business.

Baker Regulatory Services have decades of practical experience of dealing with M&As with the highly skilled individuals capable of identifying the skeletons in even the cleanest of cupboards. We recognise the importance of confidentiality and will treat any discussion on providing support for a potential M&A in the strictest confidence. Please contact Barry Faudemer or Zoe Dixon-Smith to discuss how we could be of assistance.

Footnotes

  1. Fortune, ‘We analysed 40,000 M&A deals over 40 years.  Here’s why 70-75% fail’ (13 November 2024) We analyzed 40,000 M&A deals over 40 years. Here’s why 70-75% fail | Fortune

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