By Renato Cirne and Steven Neuman*
Despite the adverse effects of the coronavirus crisis, Brazil experienced a sharp recovery in M&A last year, with a record of 1,200 announced transactions, substantially more than the historical average of around 800 transactions.
No end of April 2021, 509 deals were announced or closed, making it clear that Brazil continues to offer attractive investment opportunities for local and foreign investors. With an increase in potentially distressed or high-risk deals in the offering block, however, pandemic or compliance-related “skeletons” that remain hidden during the due diligence can have a potentially devastating impact on investors.
During due diligence As part of an M&A transaction, most buyers work to understand the financial projections and from past revenue, potential obligations being assumed as part of the business, such as problematic contracts with high-risk suppliers and/or third-party consultants, as well as potential conflicts of interest.
Appropriate due diligence and the application of techniques of business intelligence The improved ones aim to close any information gaps so there are no costly surprises when the transaction ink dries.
For example, while basic due diligence can uncover outstanding litigation involving the target company, a deeper step would identify the specific government official set to hear the case and predict the chances of a favorable outcome based on the official’s background. THE business intelligence would go a step further to provide insight into any relationships the government official may or may not have directly related to the target company, as well as any affiliated parties to the potential target.
As Brazil has historically been involved in high-level international anti-corruption investigations, investors increasingly demand meaningful insights into what basic due diligence can provide.
More experienced negotiation teams are now focused on identifying past company management relationships, any links to cartels, potential export trade control issues, and any past compliance issues. Especially if the investment originates outside Brazil or affects another foreign jurisdiction (assets or liabilities), in-depth due diligence and the application of techniques of business intelligence improved are essential.
what to look for
While countless data sources abound in our hyper-connected digital age, it’s still difficult to distill these volumes of information into useful and meaningful insights. Data analysis can help strategically identify red flag transactions or off-the-curve points that should be selected for further analysis.
In addition, data analytics should be used to cross-check data points to identify any potential conflicts of interest – linking board members, shareholders or even management spouses to Politically Exposed Persons (PEPs), for example. This information can be used to make data collection efforts for an assessment of business intelligence more productive.
Clearly, basic pre-investment due diligence simply does not reveal potentially questionable patterns of behavior that can often turn into onerous legal and reputational issues for the buyer in the future. Both Brazil’s Clean Company Act and the US Foreign Corrupt Practices Act (FCPA) establish successor and third-party liability for acts of corruption, making it crucial that companies considering investing in Brazilian companies take an approach more holistic due diligence to prevent fraud, business failure or reputational damage.
Only when due diligence is taken to the next level, questionable issues can be addressed – and often explained – without negatively impacting transaction ROI.
*Renato Cirne is a founding partner of GB3S Consulting and yes Renato Cirne Advogados e Steve Neuman is a partner at StoneTurn, a global consulting firm, specialist in global compliance and investigations