By: Kenny Ogilvie
In today’s ultra-competitive merger and acquisition environment, savvy dealmakers are seeking innovative ways to maximize their deal processes to obtain greater value. According to Pitchbook Data’s 2016 2Q M&A report, global deal volume fell from $540 billion in Q1 to $461 billion in Q2, with the number of completed deals declining from over 5,000 in 1Q 2016 to about 3,096 in 2Q 2016. Pitchbook Data attributes this decline to a decreasing amount of quality targets, and the premium transaction values still being paid by cash-rich corporate acquirers. Indeed, average valuation/EBITDA multiples have remained high at nearly 9X the past two quarters, compared to less than 7X in 2010 according to Pitchbook’s report.
Correspondingly, dealmakers are making less and less platform acquisitions, and have turned to more add-on acquisitions. According to Pitchbook Data, add-ons have accounted for over 57% of total private equity deal activity. As expected, the report also revealed that private equity firms are selling more to cash-rich corporate acquirers who accounted for 83.1% of PE-backed M&A exit value last quarter.
When assessing lower quality targets and integrating smaller add-on acquisitions, it is essential for dealmakers to cover all of their bases to ensure all risks are managed properly, including those associated with environmental concerns. Likewise, dealmakers must take the necessary steps to be prepared when divesting to corporate acquirers who are often equipped with expert environmental teams.
Many dealmakers are not aware though of all of the potential solutions available for preparing companies for integration and divestiture from an environmental perspective. Below are EHS Support’s recommendations for increasing value from an environmental perspective.
More than just a Phase I – Why thorough environmental due diligence is essential in today’s highly competitive M&A Market
First, as EHS Support’s Bruce Martin reported in our 1Q 2016 edition of M&A Insight, buyers are increasing due diligence activities prior to the exclusivity period. In fact, many of our clients, especially those who invest in “dirty” industries (e.g., industrial manufacturing, chemical businesses), are reaching out to us before they even submit a Letter of Intent, to review materials and perform high level environmental overviews of target companies. This not only allows them to make quick and informed “go” or “no-go” decisions, but also gives them the ability to be better prepared in management meetings from an environmental perspective, while also improving their position later on in negotiations during auction processes.
In addition, we at EHS Support recommend obtaining a thorough understanding of how all of the potential environmental liabilities and risks may affect business decisions within a deal as far in advance as possible. We believe it is imperative to go above and beyond a standard ASTM Phase I environmental site assessment (which really just lists potential concerns with no context) and really understand critical questions needed to evaluate business risks and support transactions such as:
- What is the actual extent of the environmental liabilities and what is the potential effect on the business in dollar amounts?
- In addition to investigation/remediation liabilities, what are the other material EH&S concerns in the transaction?
- Regulatory compliance and related capital expenditures
- Health and safety programs and culture
- Target company EH&S management systems (e.g., ISO14001) and sustainability initiatives
- What are the different mechanisms that can be used for protection within the purchase agreement and related transaction documents?
At EHS Support, we use a proprietary cost estimating model that seamlessly integrates EH&S issues in business and financial terms. This model has been built over 25 years using public and private data developed during acquisitions and allows for fast and accurate estimates and forecasts so our clients can feel well prepared when entering a deal from an environmental risk perspective.
How to increase value by managing environmental risks when integrating an add-on acquisition
After the purchase agreement has been executed, many buyers are unaware of the potential for adding value during the hold period through the use of environmental management. Such services include post-acquisition environmental compliance assistance, EH&S compliance auditing, permit transfer and permit compliance tracking, H&S program evaluation, development, & training, and sustainability program and process development. Below is a listing of just some of the benefits of performing environmental management post-transaction:
Compliance Audits and related services allow the buyer to:
- Identify actual or potential compliance issues before they become a problem
- Determine the root cause of compliance problems to prevent a recurrence
- Prepare for announced or unannounced regulatory compliance audits by Federal, state, or local regulators
- Provide independent eyes on the operations to voice an objective assessment
- Maintain a good corporate image in the community
- Avoid potential Notice of Violations (NOVs) and potential fines
- Institute best management practices to further protect your company from spill or release incidents
- Encourage a responsible culture within the company
- Prepare for new regulations in the pipeline that may impact operations and future compliance
- Reduce the risk of business and personal liability
- Identify ways to improve the efficiency and cost effectiveness of the compliance program.
Reported by EHS Support’s Amy Bauer in our 4Q 2015 edition of M&A Insight.
Buyers can establish or improve their H&S process and add value to a company’s bottom line, which:
- helps them understand occupational H&S regulations and tactics
- considers personal relationships, economic volatility and management concerns
- recognizes that they lack formal occupational H&S systems and resources
- considers issues related to their specific size and sector
Shared by EHS Support’s Monica Meyer in our 4Q 2015 edition of M&A Insight
How to manage environmental risks in preparing for a sale of your company – Especially to corporate acquirers who may have expert environmental teams
Recently, EHS Support has performed an increasing number of environmental evaluations for business owners and dealmakers preparing for divestitures of their companies. Performing sell-side environmental evaluations and summaries allows the seller to stay ahead of the environmental due diligence process and control the quality and flow of information of environmental matters provided during diligence. Likewise, in situations where we are representing a buyer, we have witnessed more sellers coming prepared with environmental reports ahead of the due diligence period. In these situations, it is important to review the seller-provided information for completeness and accuracy.
See how you can to stay ahead of the game from an environmental perspective. For information on how EHS Support can help you manage environmental due diligence, please contact Kenny Ogilvie, Bruce Martin, or Kaity Templin.