FCPA Due Diligence

Caveat Emptor

Forget the emmys or that little election in November.  The event that we are all awaiting with bated breath is the DOJ issuance of FCPA guidance.  Noted FCPA expert Michael Volkov is making predictions on what the guidance will contain.  Among the predictions, Michael predicts a kinder, gentler DOJ approach to companies that acquire an FCPA problem as long as the target company is integrated into the acquirer’s compliance program.

So does that mean you can exclude FCPA from your due diligence checklist? As we say in the south, does a chicken have lips? Why do you think a public company’s stock drops when an FCPA investigation is announced.  The direct costs of defense?  Usually a pittance.  The management distraction factor?  Oh, it is bad, but companies adapt.  The looming DPA?  As burdensome and ineffective as a government mandated compliance program may be, it doesn’t account for the drop in value.  What is it then? 

Let’s dive into some finance fundamentals.  Value is derived from discounted cash flows.  The higher the discount rate, the lower the value.  What causes the discount rate to rise?  Uncertainty.  The higher the uncertainty that cash flows won’t occur as forecasted, the higher the discount rate.  Uncertainty can stem from government regulation, product obsolescence or competition.  If you have a product that will cure cancer, there is very little uncertainty as to the demand and the lack of competitors.  That will create enormous value with a given cash flow.  The same cash flow applied to a commoditized product will lead to significantly lesser value.

That brings us to our FCPA conundrum.  Do you think that sales people or management will be required to pay bribes to generate sales for the cure for cancer?  Not likely.  On the other hand, if you have a commoditized product with multiple competitors, all the participants might be tempted to engage in corruption. 

The reason you perform due diligence, irrespective of any DOJ enforcement forbearance, is you want to know if that revenue stream you are purchasing is at risk!  If it is, then you will either reduce your price or walk away from the deal.