Sellers Could Suffer Price Erosion for Sarbanes Slip-Ups

Restructuring companies may face severe penalties in the mergers and acquisitions market if they put for-sale signs on divisions that don’t meet Sarbanes-Oxley requirements. The non-compliant unit could draw fewer bidders than the seller wants and create a less-spirited competitive environment that might translate into a disappointing sale price. If the seller ignores Sarbanes-Oxley demands, warn two transaction services partners at PricewaterhouseCoopers, rest assured that the buyer won’t – especially if it is being asked to fork over a huge sum for a large operation. That means that shrewd bidders not only will demand squeaky clean numbers and pristine operations but also proof that the seller has installed the tight control systems required by the federal disclosure and ethics law, which celebrated its first anniversary in July. Even though the SEC has deferred the deadline for installing controls into next year, veteran transaction pros James Flanagan and Mike Wathen urge sellers to act as if the requirements are already applied, in view of the potential for loss of value. “I may not know who the potential bidders or buyers might be,” Wathen says. “But if I put something on the market that’s hairy and scary, something that isn’t buttoned up from a control standpoint, I will probably narrow the universe of prospective buyers to people to whom the business is not particularly material.” That translates into bidders who don’t believe that the offered divisions are truly important to them, and basically want to buy on the cheap. Flanagan, who heads PWC’s transaction services group, advises that the bigger the deal the more demanding the buyers will be. From the bidder’s viewpoint, he states, the “key risks include what the controls are, whether they are in place and operating, and does the seller have the confidence in making these assertions? Is it material enough to worry about or will it just have a tiny impact with regard to its black-hole potential?” Bidders for divested businesses are getting tougher, Flanagan notes, because their boards, in line with tighter scrutiny across all actions on the corporate landscape, “are starting to ask about the control environment.” “They want to know more than just the cash flows and their sustainability,” he says. “Now people are asking about the control environment. Are there risks and problems and are we going to live to regret this?” Most sellers haven’t yet “come to grips” with the Sarbanes-Oxley overhang on divestitures, Flanagan adds, but he expects controls to be a hotter issue in the next few months as sell-offs increase and buyers learn how to use it to their advantage. “In fact, sellers may be asked to rep (represent) to the control environment,” he says. “That was not something that they historically had been asked to do.” Wathen urges sellers to balance the playing field by inaugurating controls with teeth at the division and subsidiary level in advance of the actual legal requirement. “Smart sellers will take the time to make sure they know what they are putting on the market so they can avoid delays and inevitable value shrinkage,” he states. Copyright 2003 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com