In today's regulatory structure, target companies may have dozens or hundreds of environmental liabilities. Buyers should quantify these liabilities during M&A due diligence because they can add significantly to the ultimate cost of an acquisition. A painful example of these costs is a $4 billion Superfund bill that one company faces because of a chemical firm acquisition it made in New Jersey. Although using environmental liabilities as part of a walk-away threat may be rare, environmental liabilities can deflate acquisition profitability and distract from future merged operations. However, factoring environmental liabilities into the acquisition price can be difficult because generally accepted accounting principles (GAAP) allow balance sheets to carry only portions of the cost to closure; oftentimes, environmental risk expertise is not necessarily in a buyer's sweet spot; and other business issues usually take precedence in the due diligence process.
Environmental liabilities come in two forms: operating and legacy. Operating liabilities are generally well defined and include air or wastewater treatment for permit compliance. Legacy liabilities can be less well defined, particularly for complex acquisition target companies. There are many uncertainties in existing projects, and new projects can arise unpredictably. Uncertainties for an M&A buyer to consider include: