mergers and aquisition

Due Diligence: Increasing the Profitability of Mergers and Acquisitions

A merger or acquisition (MA) transaction has three critical phases or steps. Prior to the MA, preliminary due diligence is done, while portfolio assessment and strategy are completed during the transaction itself. When the transaction is closed, integration and implementation are accomplished.

One of the significant factors in determining the success of a merger or acquisition (MA) is the strategic evaluation of an organization’s real estate portfolio during the preliminary phase. If this is accomplished at the earliest possible time in the process, it will help organizations involved have the necessary resources available after the MA is complete. After all, real estate typically represents the second- or third-largest asset and expense in many organizations.

With a focus on the preliminary due diligence phase, this article aims to explain the importance of strategic real estate management in an MA and what processes are involved in making it successful.

The Preliminary Due Diligence Phase

Initiating due diligence early while an MA transaction is in its infancy phase will help organizations maximize the value and opportunities that their corporate real estate properties provide. Thus, it is essential to develop and use toolsets to enable organizations to manage an MA transaction while leveraging their real estate properties as a shareholder value creator and strategic resource.

According to Area Development magazine, an effective toolset in improving due diligence is to have the right real estate professionals into an organization’s MA team. Bringing them early on in the first stage enables them to perform research, provide reliable data, and make informed assumptions. This way, they can perform property and portfolio reviews, quantify potential risks and problems, and identify high-level opportunities.

Given the analysis that real estate advisors, lawyers, appraisers, and other real estate professionals can provide, organizations can make accurate portfolio assessments. They can, therefore, identify potential asset use, approximate values, and lease expiration.

Another crucial part of the first phase is environmental due diligence. It allows organizations to determine any potential risk of environmental contamination in a real estate property.

What Is Environmental Due Diligence?

Environmental due diligence is the process of assessing corporate real estate properties in connection with an MA transaction. The Environmental Protection Agency (EPA) is the federal regulating body that provides standards for this process.

The process of environmental due diligence helps organizations, as investors, to evaluate whether there is a potential risk of environmental contamination in a land. This will help them know if they’ll be subjected to potential environmental liabilities in the future.

Investors will often sign an agreement to acquire a property on an “as-is/where-is” basis even before conducting due diligence.

There are three options that organizations can take if a property has too many environmental liabilities or it doesn’t meet investor requirements:

  • Additional diligence may be required
  • Investors can renegotiate the terms of the transaction
  • The transaction may be terminated.

To determine environmental liabilities, environmental due diligence focuses on five factors.

  • The presence of hazardous construction materials in onsite structures
  • The risk of subsurface contamination that may become hazardous soil vapors and intrude into onsite structures
  • The risk of hazardous substances attaching or contaminating other corporate assets that will be moved to the site
  • The risk of groundwater or soil contamination because of the property’s previous or current use
  • The need for compliance with environmental requirements such as using hydrocarbon remediation technology, obtaining proper permits, and more

Environmental Due Diligence Processes and Reports

Investors can gain protection from environmental liabilities if environmental due diligence is properly done. While the EPA regulates the process, the law, particularly the Comprehensive Environmental Response, Compensation, and Liability Act (CERLCA), dictates who will be held liable in an environmental due diligence case.

According to the Corporate Finance Institute, the process of environmental due diligence is accomplished in three phases.

Phase 1 is generally called the Environmental Site Assessment (ESA), and it involves the evaluation of a site’s past and current activities to determine if it’s causing environmental pollution. Phase 2 involves the collection of suspected contaminants. Finally, Phase 3 involves an inquiry about the possible remediation activities that can be done on the property.

Leveraging Environmental Due Diligence

Environmental due diligence offers liability protection for investors in an MA transaction. For an acquiring company, it ensures an organization is getting the best value for its investment. For an acquired company, it ensures they’ll still be able to mitigate potential issues that may arise because of the assessment.

Considering these benefits, make sure to perform due diligence early. It will preserve property value and protect an organization from costly environmental liability.

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