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3 Common Risks to Avoid in M&A Financial Reporting

What news stories can we expect to see in the business section on any given day? Mergers, acquisitions, divestitures, and spin-offs — these major business transactions have been on the rise since a record-breaking resurgence in the M&A market last year. The energy industry topped the list with $338 billion in U.S. deals, and when oil prices plummeted in the fall, industry experts predicted a wave of spin-offs, mergers, and acquisitions over the next year in response to the turbulent marketplace.

The M&A momentum continues to build. Last week, Forbes reported that 56 percent of global companies intend to acquire in the next 12 months, “the highest appetite to acquire recorded in five years.” 

Of course, the fast track to growth comes with high stakes. Failure rates of M&A deals are staggering, with researchers at Harvard Business Review estimating that 70–90% turn out to be financially unsuccessful. Navigating a major organizational change requires agility and transparency, particularly when it comes to integrating and aligning financials. We’ve talked about how to maximize agility using the same planning and budgeting approaches central to successful acquisitions.

As for transparency, many stakeholders in a business transaction — banks, new investors, private equity groups, and public shareholders, to name a few — rely on transparent reporting. Internally, the finance department typically must scramble to produce accurate and timely financial reports in a highly dynamic environment. Despite the importance of these financials, they are often neglected among the many pressing demands of a reorganization.

Companies without the proper reporting processes in place risk the consequences of inaccurate financial reports: 

1. Material errors

When new consolidated financials contain errors that are discovered after reporting, material errors can result in restatements or — if serious enough — de-listing from public exchanges. Debt covenants can be called in, leading to a cash crunch.

2. Decreased auditability

Being able to trace final publish results to newly acquired source systems is critical. A lack of traceability has long-term ramifications, including increased audit costs. 

3. Missed deadlines

The adage that time kills deals is true of mergers and acquisitions, and consolidating financials can have a significant impact on the transaction timeline, particularly when reports need correction. Missed regulatory deadlines can result in penalties, fines, and lack of investor confidence.

Learn how five companies that merged into Forum Energy Technologies overcame the challenges of consolidating and managing their complex ­financial data. Download the Forum Energy Technologies case study.

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