With the warm days of summer upon us, news of yet one more takeover bid might seem like déjà vu. In late May, US medical-device
group Stryker confirmed that it was evaluating a bid for UK-based Smith & Nephew. Before that, GlaxoSmithKline announced a
major three-part deal to acquire Novartis' vaccines business. In June, Minneapolis-based medical device maker Medtronic announced
a $43 billion bid to acquire Dublin-based rival Covidien. The reality starting to set in is that 2014 stands to be a record
year for mergers and acquisitions with a blistering $3.51 trillion in deals estimated to be set by year's end.
What to make, then, of this frenzy of M&A activity, especially with so much of it happening in the life sciences and medical
device industries? Mergers not only help boost a company's book value but are also highly attractive to many US companies
in search of lower corporate tax rates abroad. Experts have remarked that with many companies facing expiring patents and
decreased revenues, the growing M&A trend in the pharmaceutical industry is unlikely to abate anytime soon.
It pays to be cautious
But companies in search of an "easy buck" through an acquisition may end up getting more than they bargained for. That's because
successor liability laws transfer a whole host of liabilities from the target company to the purchaser in an acquisition,
including criminal and civil liability stemming from past wrongdoing.
For example, a full decade after buying orthopedic device maker DePuy Inc. in 1998, Johnson & Johnson ended up paying $77
million in fines and penalties to the Department of Justice and Securities & Exchange Commission due to the subsidiary's widespread
bribery activity in Greece at the time of the acquisition. Expect the latest round of mergers to similarly arouse scrutiny
from U.S. government regulators, and those companies that have ignored compliance issues in their pre-acquisition due diligence
to suffer buyer's remorse later on.
Think compliance early on
Long before a deal is signed in ink, a company's compliance and legal team should be involved in the vetting process. One
reason why compliance should have a seat at the M&A table early on is so that they stay informed of upcoming deals in the
pipeline in order to marshal the necessary resources prior to the announcement of a takeover bid. Once it is determined that
the company is serious about acquiring a target company, the first step should be to assess the target's initial risk profile.
Asking certain key questions at the outset will help determine the target's risk level and the scope of any future due diligence.
» What, if any, compliance program already exists at the company? Having zero pre-existing compliance is certainly not fatal to the deal, but is a good thing for the acquiring company to
know in assessing risk.
» Does the acquisition contemplate a full share purchase or just an asset purchase of the target company? The latter will carry less successor liability for past wrongdoing.
» What laws is the target company currently subject to? The acquisition of a company does not create jurisdiction where none existed before.
» What is the ultimate appeal of the target company? Acquiring an expanded market share carries different risk from solely purchasing new technologies or patents.