Companies that do not priorities managing risk at the beginning of a Merger and/or acquisition will be surprised. Five years ago nobody was looking at the risk/liability of pension funds affecting the value of companies. Inevitably that became an unnecessary surprise. How about those backdated options? Surprised?!?!? The next avoidable surprise: foreign exchange. The merger of two companies has netting or grossing effects with respect to currency. This can today be avoided but has not been the focus nor received the attention by corporations or even their advisors.
Recently we had a client who came to us very early on in the acquisition process. The foreign exchange exposure was defined and it turned out that there were natural hedges that would reduce the cost of the acquisition. Additionally, the exposures flushed out international cash that could be used to pay for part of the deal as it was cheaper than raising additional debt. On the other side of the perspective a different company had a net investment and when spinning it off it created a loss from foreign exchange that was completely unexpected. The key task of integration is to expose and analyze predictable risks, address them and execute decisions related to them.
Easier said then done? Not worth doing before a deal closes? Let's take the example of RWE of Germany buying American Water Works for billions of Dollars. Should they hedge the US Dollar acquisition given that they have Euros to spend? What do you think?
