Review of Acquisitions

AuthorFrank B. Friedman
Pages349-368
Chapter 7:
Review of Acquisitions
Mergers and acquisitions have always been a critical issue for envi-
ronmental managers. The growth in this area in recent years has
been phenomenal. Some have stated that it reminds them of the mythical ra-
pacious corporation entitled “Engulf and Devour”in Mel Brooks’ film Si-
lent Movie. This chapter deals primarily with some of the liability exposure
issues in such combinations, but mergers and acquisitions test all of the
management skills discussed in this book, including common sense. If you
are told, for example, that a facility doesn’t have groundwater problems, yet
has been using solvents for the past 70 years, you should be inquisitive. If
there is a lack of good management systems and clear lines of reporting,
there are strong possibilities of liability exposure. There may be significant
environmental issues, which perhaps even the company is not aware of. The
dynamics of the deal and the credibility of the people may be just as impor-
tant as the traditional “due diligence.”
There are many pressures on the deal. Merger and acquisition proposals
have a high failure rate. Even fewer are additive to shareholder value. “Only
17% of the major deals made during 1996-1998 increased shareholder
value. In fact a study by KPMG International showed that 53% of 700 deals
actually reduced shareholder value.”1Do these failures show up immedi-
ately or on someone else’s watch? Does the time span for the deal allow for
intense review and can strong consultants, either inside or outside, limit the
lack of intense review? Have consultants or in-house staff come in with too
low a number because they don’t want to kill a deal? Conversely, have in-
side people been too conservative in their numbers? Is there any real answer
to “the Chairman or the CEO wants the deal?” If it is an international deal,
how do you overcome cultural barriers? There is either an irrational fear of
American laws or total disbelief in many cases. Environmental manage-
ment systems will allow improved understanding of risk, but many compa-
nies are so decentralized that major risk decisions are made at too low a
349
level. These are just a few of the factors that go beyond the issues of “due
diligence.” Another is the “Green Arthritis” syndrome, which is discussed
in Chapter 12, which assumes that today environmental progress has be-
come ossified and environmental managers are afraid to take chances.
Another area that is usually not fully considered in the merger and acqui-
sition area is the people. Sometimes the environmental manager does not
have control over personnel decisions. Many times, however, the challenge
is in merging divergent cultures. New blood often is very useful in your own
organization—breaking up the mind set that we have always done it this
way, and we will continue to do it this way. At the earliest possible time I
have always met with my counterparts in the organization being acquired to
work on a smooth transition and build allies. This is very critical for a
smooth and seamless transition. The people are a resource along with the
customers and facilities. This value is not often recognized since much of
the justification of mergers is cost reduction and synergy which means staff
reductions. Sometimes these decisions are made “by the numbers” rather
than through a close look at needs and business objectives. As noted by
Dick MacLean: “Don’t assume that the deal makers understand the nuances
of EHS. They may view EHS as just another service function and apply this
logic to the restructurings. If anything, this is encouraged by the manage-
ment consultant brought in to work out the details.”2
The following discussion, which focuses on the technical and legal as-
pects of reviewing mergers and acquisitions, is not all-inclusive. It should,
however, along with other material referenced, make you aware of the pri-
mary issues of concern. If you are inexperienced, get help. If you are experi-
enced, don’t assume that you have seen it all.
As stated previously, reviewing acquisitions is one of the most impor-
tant responsibilities of today’s environmental managers and environmen-
tal counsel. Sellers, purchasers, and lenders must be aware of potential en-
vironmental liability arising from these transactions. Both managers and
lawyers put their jobs on the line in estimating the environmental exposure
of acquisitions.
For example, the scope of liability for past disposal actions is extremely
broad, and the current owner of a facility from which there is a release or
threat of release is strictly liable without regard to causation.3The determi-
nation of “owner” or “operator” is also extremely broad, in some cases viti-
ating traditional concepts of corporate liability. There is no clear definition
of these terms under either CERCLA4or RCRA.5One federal court of ap-
peals decision held that a corporate officer could not be found liable under
CERCLA unless the plaintiff could show, using the traditional corporate
veil protection, that the named individuals were the alter ego for the corpo-
ration.6This ruling came even though EPAhad filed an amicus curiae brief
350 Practical Guide to Environmental Management

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