M&A down in 2012: Boards show caution

Some of the lack of activity may be due to the growing liabilities companies expose themselves to when making acquisitions.

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A report issued this week notes that merger and acquisition activity fell sharply in 2012, resulting in the fewest acquisitions since 2009.  Dow Jones VentureSource reported that, ‘Throughout 2012, 403 M&As raised $37.4 billion, a 24 percent decrease in M&A activity and a 23 percent decrease in capital raised since 528 M&As garnered $48.4 billion in 2011.’

While this lack of M&A activity can be attributed to many things, including market uncertainty generated by the presidential election and the ‘fiscal cliff’ drama that dragged on for months, some measure of it must be due to the realities of growing liabilities companies expose themselves to when making acquisitions. It appears corporate boards could also be paying greater attention to the governance standards of acquisition targets, with many boards thinking twice before signing off on large M&A deals.  

In one of the biggest stories of 2012, several news organizations reported that the U.S. Department of Justice is investigating Hewlett Packard’s $11.1 billion acquisition of Autonomy in August of 2011 and its subsequent $5 billion write-down of the company last year.  Now the HP board is under extreme scrutiny for approving the deal, and both HP and Autonomy are pointing fingers. HP’s claim that there were ‘serious accounting improprieties, disclosure failures and outright misrepresentations’ by Autonomy set the stage for a nasty conclusion to this matter that could result in fines and possible jail time for board members and top executives from both companies.

Clearly, the thoroughness of the due diligence process will be among the governance issues discussed in the wake of this acquisition mishap. While some are blaming the write-down of Autonomy on accounting improprieties, others are suggesting that part of it may be attributed to the miscalculation of earnings projections. As Wally Brockhoff, M&A partner at Lathrope & Gage warned Corporate Secretary readers last July, when conducting M&A due diligence, ‘You have to assess what a company generally looks like in terms of what it has done in the past, and then look at the future environment it will have to operate in,’ he said. ‘ We tend to focus on the piece of the target company we’re adding on instead of considering what it looks like once it’s combined with the buyer.’

Let’s hope that decreased M&A activity in the short run is only a sign that companies are taking more time to be more thorough with their due diligence process – making sure acquisitions are a true fit that will result in long-term growth for the new, larger entity.  That approach is much better for investors and all stakeholders involved.