Refinitiv’s latest webinar takes a critical look at third-party risk in the acquisitions arena. In this first of a two-part series, we look at how third-party risk impacts the investment decision-making process.
- The webinar explored how third-party risk impacts the investment decision-making process.
- It also explained how to understand ways to improve your third-party risk management programme and make informed investment decisions.
- It is important for companies to conduct thorough due diligence on third party companies otherwise they could be liable for the actions of these companies.
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Acquisition due diligence and third parties
Acquiring a target company is a complex undertaking and one that demands thorough and robust due diligence to understand the potential risks and opportunities inherent within the deal.
For buyers, due diligence reveals the risk involved in purchasing another company by delivering key insights into the target, and further evaluates opportunities it brings to the table.
In the same way, due diligence benefits sellers by helping them better understand their buyers.
For acquirers, an important point to remember when conducting due diligence is that risk is not confined to the target company alone but extends to its entire third-party network. Acquiring companies must develop a comprehensive view of risk across supply, distribution, customer and other networks.
Failure to do so can have substantial implications as companies are increasingly held responsible – by regulators, but also by consumers – for the actions of their third parties.
Identifying viable opportunities
Any potential acquisition will bring additional risks to the table. These various risks need to be fully explored so that acquiring companies can make informed decisions about whether or not to proceed with a deal.
This means that thorough and robust due diligence is non-negotiable – but detailed due diligence is expensive and time-consuming, while resources are finite.
Available resources should be channeled towards the most viable potential deals, and identifying these deals is typically a four-stage process:
- Undertake an initial assessment of all potential opportunities available
- Select the most viable opportunities from this universe
- Analyse these to identify potential deals
- Move forward towards executed deals
While in-house resources can generally handle preliminary due diligence during the first two stages outlined above, the final two stages warrant more robust due diligence, which often requires input from external experts.
Understanding third-party risk to make better decisions
Once the most viable potential deals have been identified and resources have been allocated, the due diligence process can move forward.
This due diligence should extend beyond the acquisition target itself and should incorporate a thorough review of the target’s third-party network, including suppliers and customers.
Third-party risk can be placed into six broad categories: integrity, identity, financial, environmental, social and governance (ESG), operational and quality, and data and cyber. Any third-party risks that are concerning should be flagged for further investigation.
While all of these risks should be given due attention, integrity risk is often high on the agenda for many companies. This is borne out by the results of an online poll of Refinitiv’s webinar guests, the majority of whom agreed that integrity risk tops their list of third-party concerns when considering an investment, merger or acquisition.
Managing due diligence challenges
In any real-world scenario, limited resources, time constraints, a lack of access to data and many other challenges are likely to impact due diligence processes.
Five top insights for buyers to manage these challenges include:
- When selecting your due diligence sources, official and government records are crucial, but it is also vital to access broader business intelligence. The “word on the street” can deliver critical insights that may otherwise be lost and can help you form a more holistic view of the target.
- Leave no stone unturned but adopt a risk-based approach. This means first quantifying risk and exposure and then diving more deeply into areas of concern.
- Once you have completed your investment due diligence, price any concerns into your offer.
- Select your external advisers with care – they will play a key role in your acquisition and should complement your in-house expertise.
- Acquisitions are often long-term investments, so it’s important to remember that risks can emerge over time. What may not seem like a risk today could become a risk in the future.
And a final word from our panellists: while these guidelines can help you make more informed decisions, it is crucial to remember that every deal is different and that a one-size-fits-all approach will not suffice. Rather, each potential acquisition should be assessed on its merit.
Click here to access the full webinar.
