Recent global events, including the breakout of war in Europe and the increase in trade-based sanctions, have demonstrated how geopolitical risk events can quickly disrupt national economies and business operations. As Christopher Mason and Ian Oxnevad of Infortal Worldwide explore, the world of MSA is not immune from the same geopolitical risk pressures, raising the stakes for would-be investors and dealmakers.
Globally, MGA investment is down significantly in 2023 due to a wide range of economic and geopolitical factors affecting companies worldwide. As savvy MGA investors seek to deploy investment reserves in Q4 2023 and into 2024, it will be important to ensure that any related MSA due diligence processes also include geopolitical risk analysis based on sound intelligence.
In an era of tight credit and supply chain flux due to tensions around China and Russia, geopolitical risk intelligence is critical for establishing an accurate valuation and ensuring a smooth post-deal integration process. Issues like inflation caused by government overspending or risks of losing market access due to war could rapidly invalidate an organization’s valuation model. Similarly, national spikes in crime can drive away in-person consumers, just as an electoral shift can create corruption risks that can quickly sap a company of profitability.
So, how can you account for geopolitical risk during the MSA due diligence process? It starts with gathering the right intelligence.
The world of collecting intelligence, so often romanticized in spy movies, is readily available to companies in comfortably less melodramatic forms. In fact, conducting due diligence based on open-source intelligence (OSINT), in conjunction with the clarity of in-country, boots-on-the-ground assessments, offers would-be MSA investors an ability to gain a true understanding of the risk profile of any international MSA deal.
Far too often, MSA liabilities come to light only after the ink has dried.
As famously reported in the Harvard Business Review, 70%-90% of MSA deals fail. MSA failure can come in many forms, and the proper level of due diligence is paramount to the success of a deal. For international MSA due diligence, this requires careful consideration of the potential for geopolitical risk events to impact the deal, particularly when weighing FCPA risks.
Regarding FCPA enforcement, Deputy Attorney General Lisa Monaco recently announced a new safe harbor policy for voluntary self-disclosures connected to MSA deals. According to the new policy, the DOJ seeks to incentivize acquiring companies to “timely disclose misconduct uncovered during the MSA process.” Importantly, you
can’t disclose what you don’t know. Understanding FCPA risks in foreign jurisdictions requires a deep level of due diligence based on local intelligence.
While international MSA can bring more risk into the equation, the DOJ also recognizes that “companies are on the front line in responding to geopolitical risks.” The agency does not want to discourage companies with “effective compliance programs from lawfully acquiring companies with ineffective compliance programs and a history of misconduct.” With the right approach, companies can mitigate geopolitical risks and reap the benefits of international MSA. In fact, the right intelligence discovered during the MSA due diligence process can come to the rescue and help your company avoid ending up in the crosshairs of an FCPA enforcement action.
This was recently the case for a French aeronautics company, Safran S.A., which acquired two companies operating in China that knowingly bribed government officials to land lucrative contracts prior to the acquisition. Upon discovering the issue through its post-acquisition due diligence, Safran was able to take immediate action and self-disclose the illegal activity to the DOJ. Safran clearly understood the geopolitical risks inherent in doing business in China and de-risked by thoroughly vetting its new acquisitions. This further demonstrates the importance of understanding local cultural and business norms to be able to perform the requisite level of due diligence.
Ultimately, Safran received the DOJ’s 16th FCPA declination, preserved its reputation and avoided costly penalties. The DOJ opted to go down the declination path based on several factors, including the fact that Safran disclosed the compliance lapse, mitigated the compliance risk, cooperated with the feds and disgorged its ill-gotten gains.
Checklists drive MSA due diligence, particularly during the operational due diligence phase. Checklists keep the deal team on track and help ensure that the proper level of diligence is applied. However, many firms fail to adequately account for geopolitical risk considerations despite having a robust due diligence checklist in place.
While current regulatory and political factors are often considered during the operational due diligence process, it is important to further understand and anticipate the likelihood of new or emerging geopolitical events affecting future business operations. This requires looking well beyond the four walls of the target company under review.
Heading into the operational due diligence phase, it is a best practice to establish a line item on your due diligence checklist to ensure that your team has considered any relevant geopolitical risk factors that can affect your valuation or post-deal integration process. This is where your team should map out the geopolitical risk profile of the deal that can impact future operations and assess whether this should affect the overall valuation of the deal.
Robust integration management is an extremely important element for ensuring long-term deal value and profitability. For international MSA deals, integration also needs to account for the potential effect of geopolitical events on future operations.
This can come into play through either direct or indirect exposure. Direct threats can come in the form of the seizure of assets or nationalization of your company, while indirect threats can include unanticipated impacts on supply chains or sudden increased regulation. Local social dynamics can also significantly impact the integration of operations across workstreams. Accordingly, it is important to continue to examine geopolitical risk exposure even after the deal is finalized.
