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  • Delivering sustainable solutions in a more competitive world

    EHS Due Diligence AssessmentsAdding Value, Managing RiskEHS Due Diligence AssessmentsAdding Value, Managing Risk

    Taipei, TaiwanAgora Hotel

    Taipei, TaiwanAgora Hotel

    Mark ErringtonMark ErringtonAsia Pacific Practice Leader M&A Due Asia Pacific Practice Leader M&A Due Diligence Advisory Services ERM GroupDiligence Advisory Services ERM Group20 September 200620 September 2006

  • 2006 Business Integration Forum 2

    International PerspectiveERM Forums - October 2005 - June 2006

    October 2005Seville, SpainOctober 2005Seville, SpainApril 2006

    Scottsdale, Arizona

    April 2006Scottsdale,

    ArizonaJune 2006Shanghai,

    China

    June 2006Shanghai,

    China

  • 2006 Business Integration Forum 3

    Context: Similar to peers from AP, different to peers in North America/Europe Business climate a year from now

    -40%

    -20%

    0%

    20%

    40%

    60%

    80%

    100%

    CompanySales

    YourBudget

    YourStaffing

    CompanySales

    YourBudget

    YourStaffing

    Column 5up a lotup a littledown a lotdown a little

    Beijing 2005 Phoenix 2006

  • 2006 Business Integration Forum 4

    Significant challenges and changes in your company in the next three years

    1. Increased pressure to apply common EHS standards to all operations globally

    2. Increased pressure on companies to be held responsible for supplier behavior

    3. Regulatory change and inconsistent enforcement of regulations in Asia4. Increases risks associated with global low-cost strategy5. Dealing with plant safety issues6. Being responsible for more and working with less resources

  • 2006 Business Integration Forum 5

    National GovtRegulators

    Purchasing

    Localcommunities

    Local GovtRegulators

    Board/CEO

    Suppliersin Asia

    Joint venturepartners

    Linemanagement

    Humanresources

    Customersin Asia

    Customersoutside Asia

    NGOs

    Other Local Govt Officials

    Finance

    GlobalEHS

    Legal

    Commercial Focus

    Civil Society Focus Government Focus

    Corporate/Financial Focus

    EHS Team

  • 2006 Business Integration Forum 6

    In summary

    Many issues to manage

    Budgets are getting cut back, staffing is decreasing

    Constantly evolving EHS regulatory environment

    High public profile of EHS issues Inconvenient Truth

    Litigious culture EHS is class action territory - Erin Brockovitch

    This is very risky stuff

    EDD sit along side all other types of Risk Management Due Diligence you would do on a transaction (Financial, Commercial, IP, IT, Human Capital)

    EHS liabilities touch all parts of a company

  • 2006 Business Integration Forum 7

    The Business Case for EHS Due Diligence

  • 2006 Business Integration Forum 8

    The Business Case for EHS Due Diligence

    Just Closing the Deal Doesnt guarantee success

    60% of merged companies fail to meet expectations and provide lower than average shareholder returns

    Executives are left figuring out how to mitigate the liabilities

  • 2006 Business Integration Forum 9

    The Business Case for EHS Due Diligence

    ProfileHigh profile (CEO to the supermarket)Corporate EHS functions under pressurePublic relations NGOs, media, even Hollywood, class actions

    Financial Risk ManagementProper valuation of the assetAdequate reserves for contingent liabilities (FRS12, Fin 47)Appropriate representations, warranties, indemnitiesEstablish baseline conditions at entrance to ownership/leaseSatisfy a lending syndicates risk thresholdsManaging post merger costs

    Business ContinuityCompliance assurance Fines, prosecutions, legal actionsProduction assurance Shut down costsAchieving the optimum value from indemnities

    Exit Strategies Vendor DDRealising value from redundant real estate assetsCreating a low liability business:

    to maximise value of non-core asset sales and ensure a clean exit or for further capital raising

  • 2006 Business Integration Forum 10

    Deal Stage OngoingOperations

    Post M&AIntegration

    Activity

    Integrating EH&S Issues into Business Planning and Performance

    Pre-M&APlanning

    Benefit

    M&AAssessments

    Risk Management

    Operating Efficiency

    Risk Management

    Operating Efficiency

    Further improvements in efficiency & management of long term

    risk

    Using M&A assessment to plan, prioritise, integrate EHS systems and develop strategy

    Using M&A assessment to plan, prioritise, integrate EHS systems and develop strategy

    Understanding and quantifying EHS risks during due diligence

    Understanding and quantifying EHS risks during due diligence

    Identifying internal and external stakeholder needs, linking EHS & business goals

    Identifying internal and external stakeholder needs, linking EHS & business goals

    Ensuring compliance

    Managing riskContinuous

    improvement

    Focused transaction

    management system

    Early warning alarm and

    negotiating tool

  • 2006 Business Integration Forum 11

    Risks you need to look for

  • 2006 Business Integration Forum 12

    Traditional EHS Risk Issues Site History contaminating industries, previous reports EHS prosecutions - accidents, pollution incidents, regulator interviews Site Setting Neighbours, sensitivity and vulnerability (geology and hydrogeology) Housekeeping Processes and Material Use Chemical Use and Storage Aboveground storage tanks and belowground storage tanks Contaminated Land soil and groundwater, spills Solid and Liquid Waste - duty of care Waste Water WWTP discharges, storm water run off, septic tanks, dry drains Air quality - dust, noise Utilities - Water supply wells Hazardous materials - asbestos-containing materials (ACM), PCBs, lead, radon, radiation, sources Biological contaminants mould, e coli, cryptosporidium, anthrax Healthy and Safety - injury and illness logs, worker exposure Legal third party claims, worker claims, property blight

  • 2006 Business Integration Forum 13

    Non-Traditional Financial Risk Issues

    EnvironmentalGreenhouse gas emissionsCarbon tradingWEEEROHSDeferred maintenance & trainingCompliance

    Social/EthicalEnvironmental justiceWorking conditionsDisplacementChild laborWorker health & safetyEquitable wages

  • 2006 Business Integration Forum 14

    Some Sources, Pathways, Receptors

    SurfaceSource

    Leaching/Percolation

    Groundwater Transport GroundwaterMigration

    Inhalation ofIndoor Vapors

    Ingestion,Absorption, &InhalationfromSurficial Soils

    Inhalation ofAmbientVapors &

    Particulates

    SubsurfaceSource Vapor Intrusion

    IngestionofPotable Water

    FishLarvae Shellfish

    Fish

    Buried waste

  • 2006 Business Integration Forum 15

    How to determine the problems

  • 2006 Business Integration Forum 16

    EHS Assessment - Interactions

    EHS Due EHS Due DiligenceDiligence

    FinancialFinancial Contingent liabilitiesContingent liabilities Valuation inputsValuation inputs Cash flow sensitivity analysisCash flow sensitivity analysis Indemnification valuesIndemnification values Performance assurancePerformance assurance EH&SEH&S

    Facility statusFacility status Liability validationLiability validation Forecasted budgetsForecasted budgets BenchmarkingBenchmarking Voluntary corporate Voluntary corporate

    commitmentcommitment Program risksProgram risks Corrective actions plansCorrective actions plans Performance planningPerformance planning--actionsactions EH&S IntegrationEH&S Integration

    LegalLegal Historical indemnityHistorical indemnity Deal indemnity termsDeal indemnity terms Corporate risk Corporate risk Insurance recoveryInsurance recovery

    Executive Management/BoardExecutive Management/Board Strategic compatibilityStrategic compatibility Strategic risksStrategic risks Catastrophic riskCatastrophic risk

    Plant ManagementPlant Management Operational constraintsOperational constraints Corrective actionsCorrective actions Performance assurancePerformance assurance

  • 2006 Business Integration Forum 17

    Levels of Assessment (Phased)

    IntelligenceIntelligenceGatheringGathering

    DatabaseDatabase Environmental Environmental

    ReportsReports Aerial PhotosAerial Photos Agency File Agency File

    ReviewsReviews Covert DriveCovert Drive--bysbys

    and Inspectionand Inspection

    Due DiligenceDue DiligenceScreeningScreening

    Focused Focused questionnairesquestionnaires

    Telephone Telephone InterviewsInterviews

    File Room File Room ReviewsReviews

    FullFullDue DiligenceDue Diligence

    Site VisitsSite Visits ComplianceCompliance Operational Operational

    CapacityCapacity

    Level of EffortLevel of Effort

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  • 2006 Business Integration Forum 18

    Get you advisors involved early

    Before: We are being called upon long before due diligence begins:Strategy for Vendor Due DiligenceInitial stages of planning acquisition approach (esp VCs)

    During: We sit along side the other key advisors at the centre of dealsData room review & costing of potential liabilities at 1st and 2nd roundInitial Site Visits (esp for Financial sector)Full Phase 1 covering E, OHS, Process Safety, Business Integratio