Friday, December 10, 2004
Recent Trends and Changes in Merger and Acquisition Activities
In 2002, the United States adopted the Sarbanes-Oxley Act in response to the thenrecent scandals involving Enron, Arthur Andersen, Global Crossing, Tyco, WorldCom, Adelphia, and others. The Sarbanes-Oxley Act is very broad, covering, among other things, corporate responsibility, financial disclosures, corporate fraud, a new public company accounting oversight board, and auditor independence. The Sarbanes- Oxley Act is not only the most comprehensive federal lawmaking in the field of securities regulation in over 50 years, but it is also the most comprehensive Congressional lawmaking ever in the field of corporate governance. Although the Sarbanes-Oxley Act does not apply directly to merger and acquisition activity, it has affected the way in which all public companies - and all private companies who plan to go public in the next several years - approach transactions.
First, the Sarbanes-Oxley Act and recent corporate scandals in the United States have led to a much more cautious approach to financial reporting and methods of doing business, including the manner in which companies approach potential merger and acquisition transactions. In addition to making companies generally more risk-averse, these scandals have increased skepticism regarding the accuracy of companies. public filings. As a result, when acquiring a public company - or assets or a division of a public company - acquirors are performing more due diligence than ever before. Not surprisingly, companies also have increased their accounting due diligence of acquisitions involving non-public companies. Due diligence of such acquisitions is also made more difficult because many private companies do not have audited financial statements. In addition, there is a perception that the difference in scrutiny between audits of public and private companies has widened since the adoption of the Sarbanes-Oxley Act. This perception also has led to more intense accounting-related due diligence of acquisitions involving private companies.
Second, this generally increased level of caution has been reinforced by the provisions of the Sarbanes-Oxley Act that require CEOs and CFOs to personally certify the accuracy of their companies' financial statements. These certifications must accompany even quarterly, non-audited financial statements and, as a result, often apply to the financial results of acquired businesses prior to their being audited by the company for the first time. As a result, companies generally have insisted on doing more due diligence earlier in the transaction process and integrating businesses as fully as possible immediately after closing. These changes have led to both a greater emphasis on accounting due diligence and delayed the closing of transactions.
Recent Trends and Changes in Merger and Acquisition Activities
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