Kick-back Fraud in M+A transactions

News that German authorities investigate up to 30 employees of Bayerische Landesbank in connection with the takeover of Hypo Alpe Adria raises an important but often neglected point with regard to Merger and Takeover transactions. We do not even want to delve into the fact that many are value-destroying at least half the time. This has been proven in many academic studies and any experienced investor will have watched in disbelief when supposedly smart managements engage in deals that make no sense for one of the two involved parties. While better corporate governance will help to alleviate many weaknesses of the merger process little attention has been paid to a darker side of this process. As the abuse is incredibly difficult to prove not many instances of outright fraud have come to light over the years. Of course, situations where incumbent management of the takeover target or one of the merged companies is promised attractive new terms in the combined business do not pass the smell test. The practice that option and share awards to management are 'crystallised' and can be cashed in before their nominal due date can also be considered to be a questionable inducement to go ahead with a business combination. Passing on explicit bribes such as hard cash is even more difficult to detect but can never be excluded as long as decisions about major transactions are often made by a small circle behind closed doors. Only the restriction of all decision making to the full body of shareholders - and even then in a process subject to strict regulation - will prevent Merger and Takeover deals from being influenced by corrupt practices.
(28/02/2011)