All Eyes On Reputation
31 May 2017
With so many important issues to consider during the complex and often lengthy process of completing a merger, joint venture or acquisition it’s easy to overlook the necessity for specific and standalone reputation due diligence.
The importance of reputation due diligence is not limited to identifying the right business partner, culture and values; it is essential to limiting your exposure to tangible and material risks which can crystallise into direct financial loss in addition to causing reputational damage.
If you do not fully and properly engage with this process these risks are likely to be overlooked and can cause substantial harm once the deal has been completed; for example companies in the US can be left vulnerable to successor liability. In this instance, the acquiring organisation may be held responsible for any sanctions and liabilities as a result of actions committed by the acquired company prior to the deal, not to mention the inevitable fallout from a reputation perspective.
While sanctions may be avoided it does not mean that there will not be financial or reputational consequences. According to reports, ahead of their $2 billion purchase of virtual reality developer Oculus VR, attorneys at Facebook had just one weekend to conduct due diligence.
Two months later, Oculus (now Facebook-owned) was sued for $2 billion by Zenimax Media, which claimed that a former employee stole trade secrets when he left the company and that Oculus knew this when they hired him and used these trade secrets to develop their products. Earlier this year a jury in Dallas ordered Oculus, it’s founder and former CEO together to pay $450 million in damages. Oculus plans to appeal and, depending on the outcome of this, Facebook is on the hook for damages awarded against Oculus; likely to be in the region of $300m in addition to the significant legal costs incurred.
In addition, to this substantial financial loss, Facebook has also suffered significant reputation damage related to its failure to conduct proper due diligence and becoming embroiled in nasty litigation around the theft of trade secrets. This also resulted in Mark Zuckerberg having to testify under oath.
Tying the reputation of your business and its success to that of another is inherently challenging and risky. Financial and commercial issues are often the main focus of due diligence. This is natural as a deal isn’t going to get off the ground if the price isn’t right and the target business is not a commercial asset. Not going beyond this limited due diligence to properly address reputation risks can completely undo the highly negotiated commercial and financial terms as Facebook and others have found out.
Consideration needs to be given to understanding the ownership of the business structure, those individuals that operate behind complicated ownership structures and how they have conducted their business in the past. It is essential to properly understand the culture of the target company: what is its vision, what are its values and are these compatible with our own? How effective are the firms controls and does the senior management provide adequate oversight of the business?
Undertaking proper and targeted reputation due diligence in addition to financial and commercial due diligence will help organisations to mitigate the risk of buying and taking on unknown legacy issues. When it comes to reputation, these issues extend beyond the company or individual and includes those entities which you purchase and bring into your organisation and with whom you form partnerships.
The resilience of your reputation must therefore be considered in these terms, with companies and their executives demonstrating that they have taken all appropriate steps to protect this valuable asset while growing the business.Receive our monthly newsletter