Growing Demand For Pre-Deal Audits Slows M&A Activity

In the aftermath of bad investments and troubled loans, both corporate buyers and their lenders are looking to accountants to do more upfront audits as part of pre-deal due diligence. This is slowing down the already low level of activity in mergers and acquisitions.

Commenting on the trend, Gregg Polle, global co-head of mergers and acquisitions at Salomon Smith Barney, told Reuters, "It used to be that often times you signed deals stipulating that audited financials needed to be prepared later. Now often times it's a requirement before they consider signing a deal at all."

Key reasons why pre-deal audits are in demand:

  • Stricter corporate governance. "It's partly a result of boards of directors being much less likely to take risks that they might have taken before, and management not being willing to stick their necks out to endorse a deal they are not completely comfortable with," said Spencer Klein, the head of M&A at McDermott, Will & Emery. "People are trying to do a lot more up front to be comfortable and make sure nothing comes back to bite them."

  • Corporate reform. Legal experts say the Sarbanes-Oxley Act is also indirectly influencing the demand for upfront audits. While the new law does not specifically require audits before a deal is signed, it does require audited statements shortly after a deal is closed. "You are trying to do more of it in advance because you really aren't going to have that much time before a deal closes," explains Ernest Lorimer, a partner with Finn Dixon & Herling.

  • Tighter lending policies. Because they face growing portfolios of troubled loans, lenders are growing more cautious. "Banks that are providing the bridge commitments historically have not necessarily required audited finances," explained Mr. Polle. "Sometimes they wanted them, often times they could get comfortable without them. Now what we're seeing is they ... want to see an audit before they extend the bank credit."

The recent Qwest telephone book sale is cited as an example. After the bidders were narrowed down to two, both potential buyers insisted that Qwest run a full audit on the telephone book unit, delaying the sale by up to three weeks.

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