are you getting what you pay for? 5 - insights for executives

Of special interest to Chief audit executives M&A executives

Are you getting what you pay for?Internal audit can add critical value to the mergers and acquisitions (M&A) life cycle

Insights for executives5

What’s the issue?For years, many organizations suffered poor M&A results because they did not have the proper deal processes in place. Organizations have since made many improvements to deal value. Yet, despite these improvements, M&A transactions remain one of the most risk-heavy initiatives any organization can undertake. Involving internal audit in post-acquisition activities and the M&A life cycle can help leadership and the board mitigate the numerous associated business risks.

M&A transactions remain one of the most risk-heavy and strategic initiatives any organization can undertake.

The Chief Executive Officer (CEO) of a global technology company was on a buying spree — something that always made Sachi, the Audit Committee Chair, nervous. After all, she had seen the CEO take these kinds of risks before, with varying levels of success.

The last acquisition had gone more smoothly than others, in large part because the company’s Chief Audit Executive (CAE) had been involved in implementing the post-acquisition integration plan. This time, Sachi wanted the CAE involved right from the beginning. She wanted the internal audit function playing a role in every relevant component of the strategic transaction. And she wanted the process audited — from start to finish.

2 | 5 Insights for executives

Why now?According to EY’s April–October 2012 Capital Confidence Barometer, a survey of senior executives from large organizations around the world, global confidence in the economic recovery is markedly more optimistic. Fifty-two percent of executives now think that the global economy is improving. In fact, companies are looking to grow — 52% cite growth as a primary focus, the highest response since the survey began in April 2010.

This optimism is feeding an increased appetite for acquisitions. Emerging market investment appears particularly enticing for the following sectors: financial services, life sciences (including health care), consumer products, oil and gas, and technology.

On another positive note, the likelihood of closing M&A deals is expected to be greater than it was six months ago. This is encouraging, as 31% of companies plan to divest assets and 31% look to acquire.

52% of executives now think that the global economy is improving.

Emerging market growth, valuation, the complexity of the control environment and increasing regulatory pressures are urgent issues on which internal audit can provide critical input and strategic value early in the M&A life cycle.

38%

46%

51%49%

52%

Apr 10 Oct 10 Apr 11 Oct 11 Apr 12

% focused on growth

7% 8%

44% 40%

49% 52%

Oct 11 Apr 12

Which statement best describes your organization’s focus over the next 12 months?

Survival Maintain stability Growth

Which statement best describes your organization’s focus over the next 12 months?

35 Insights for executives |

How does it affect you?A seller’s financial statements are only as good as the risk and control environment beneath them. Without internal audit’s involvement, the acquiring organization will not know whether the control environment has sufficient rigor and the acquisition is properly valued.

Organizations often underestimate the challenges associated with the integration of a newly acquired company. Internal audit can highlight:

• Potential finance, IT, HR or operational risks

• Gaps in the integration project management plan

• Opportunities for additional synergies that would boost the acquisition’s return on investment

• The impact the acquisition and integration may be having on other parts of the business

• Potential gaps in the combined internal control structure

Without internal audit’s insight, costs could include a loss of opportunity, additional investments to fix the missed risk and control issues, and more.


What’s the fix?There are six key areas where internal audit can play a crucial role in an organization’s M&A life cycle:

1. Strategy. An organization may have a target in its sights, but before it makes

a move, internal audit should assess the corporate strategy process, assess the risks to the organization and assess the business case process. This will help the organization determine from the beginning whether the acquisition target aligns with the organization’s corporate growth strategy.

2. Due diligence. During the due diligence process, internal audit can assess the

valuation process, the risks and internal control environment, corporate governance and the synergy validation process. These assessments will enable the organization to determine whether the price is right, to provide early insights on any risk or control issues that may be lurking beneath the financial statements and to uncover what kind of synergies the acquisition target offers to improve the buyer’s return on investment.

3. Deal approval and close. Before the organization signs on the dotted line, internal audit

can review the deal approval process to confirm that short- and long-term goals are defined before the deal closes. Internal audit can also assess and monitor the valuation process leading up to the close to determine the possible impact of any changes in the risk and control environment, changes in anticipated synergies or changes in key personnel.

4. Integration. Internal audit should be part of the integration team representing

the internal audit function and to promote the use of leading practices throughout the integration. Internal audit should assess the integration design and planning processes, integration project management, and integration execution to help mitigate transaction risk and “value leakage” through the integration life cycle.

5. Transaction value assessment. As an independent party, internal audit should lead a company’s

effort to conduct a look-back review of each significant acquisition. Internal audit should conduct these reviews 18 to 24 months after integration and focus on realized value and the associated root causes that resulted in exceeding or falling short of transaction expectations.

6. M&A program management. Throughout the M&A process, internal audit should form a part of

the program management team so that it can assess and monitor program management activities and provide key insights. Internal audit can also audit program management activities to highlight process gaps and areas of future improvements.

Look-back review

Due diligence Integration

Deal approval and close

Strategy

Audit M&A program management process

During key leverage points in the M&A life cycle, internal audit should act as advisor to the program management team so that it can assess and monitor program management activities, review controls and provide key insights, while maintaining independence and objectivity.


What’s the bottom line?Most organizations understand the value internal audit can bring once a deal has closed. What they do not often know is the value internal audit can provide before the transaction process is even under way.

Strategically, internal audit can determine an organization’s readiness for a merger or acquisition. During due diligence, the function can alert the organization to potential risk, control, governance or regulatory issues that would cause the organization to overpay. Prior to deal close, internal audit can help prevent deal value leakage. From a post-acquisition perspective, having internal audit involved in critical components of the integration can

preserve organizational synergies and ascertain proper control monitoring of new or changes in processes. Finally, throughout the M&A life cycle, internal audit can audit the management of the program to promote the use of leading practices throughout each stage of the deal.

Internal audit provides a critical perspective to M&A deals that many executives may not consider. Without that perspective right from the start, the organization could find out far too late that it paid too much for its acquisition — or that it has to spend a significant amount of money to fix issues that internal audit could have identified and helped the organization avoid.


Want to learn more?

For related thought leadership, visit www.ey.com/5

The answers in this issue are supplied by:

Blair D. MumfordTransaction Advisory ServicesErnst & Young LLP+1 713 750 5231 [email protected]

Brian M. SchwartzAmericas Internal Audit LeaderErnst & Young LLP+1 410 783 [email protected]

Most organizations understand the value internal audit can bring once a deal has closed. What they do not often know is the value internal audit can provide before the transaction process is even under way.


We want to hear from you!Please let us know if there are subjects you would like 5: insights for executives to cover.

You can contact us at: [email protected]

EY | Assurance | Tax | Transactions | Advisory

About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US.

About EY’s Advisory Services Improving business performance while managing risk is an increasingly complex business challenge. Whether your focus is on broad business transformation or more specifically on achieving growth, optimizing or protecting your business having the right advisors on your side can make all the difference. Our 30,000 advisory professionals form one of the broadest global advisory networks of any professional organization, delivering seasoned multidisciplinary teams that work with our clients to deliver a powerful and exceptional client service. We use proven, integrated methodologies to help you solve your most challenging business problems, deliver a strong performance in complex market conditions and build sustainable stakeholder confidence for the longer term. We understand that you need services that are adapted to your industry issues, so we bring our broad sector experience and deep subject matter knowledge to bear in a proactive and objective way. Above all, we are committed to measuring the gains and identifying where your strategy and change initiatives are delivering the value your business needs.

© 2013 Ernst & Young LLP. All Rights Reserved.

SCORE No. BT0348ED None

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

ey.com/5

are you getting what you pay for? 5 - insights for executives

Documents