ROLE OF ERM IN THE ACQUISITION PROCESS
Astro is growing through acquisitions and therefore has developed a method to systematically and efficiently screen investment opportunities. Exhibit 35.4 shows how AOL makes investment decisions through a layered investment risk funnel.
A first risk review of the opportunity pipeline is performed by the senior leadership team of AOL.
If that first hurdle is cleared, a second risk review is conducted. This review is led by the Business Development (BD) Team in conjunction with the ERM Team. As anyone who has ever been involved in mergers and acquisitions knows, a full risk assessment prior to an acquisition is almost impossible to carry out during the due diligence process, owing to the speed at which negotiations evolve and to their highly confidential nature. When in the process of making an investment, it is not the right time to be running risk workshops. This being said, AOL's ERM Team has established a number of key activities to be carried out during the preacquisition portion of the process, as we see in more detail in Exhibit 35.5. The result of this second risk review is either an approved investment proposal or a rejection of it.
A third risk review is performed by the BD Team during the negotiation period. After the negotiation, if the acquisition offer is accepted and the contract is signed, AOL's ERM Team enters the most important portion of the process, the
Exhibit 35.4 Making Key Investment Decisions
focus on implementing its ERM Framework: the operationalization phase, or the Monitor and Review panel of Exhibit 35.5.
During the Preacquisition portion of the process in Exhibit 35.5, the ERM Team uses a set of guidelines to determine a preliminary risk profile of each of the potential target companies. The word preliminary is important here. The initial evaluation will include issues related to political and regulatory risks,
Exhibit 35.5 Overview of ERM's Role in AOL's Acquisition Process
partner management, skills, expertise and human resources, operational influence, the company's business model, its strategy, growth plans, operations, and cultural fit. From the initial assessment come the preliminary key risks and existing risk treatments or mitigation plans required for the potential target. Once this preliminary risk profile has been obtained, the BD Team will then identify the potential acquisition's funding structure, management fees, and return on investment, as well as exit strategy options. These analyses and scenarios are then put to the test or confirmed further. Finally, the preacquisition activities conclude with a "go/no-go" recommendation to the board of directors. If the board of directors approves the investment proposal, the approval will normally have recommendations and stipulated conditions that need to be met for the acquisition to proceed.
During the monitor and review phase, the ERM Team will further develop the preliminary risk profile using the strategic objectives approved by the board of the investee company as a starting point. Based on these objectives, the ERM Team will also use specific financial and nonfinancial targets set by management to undertake their assessments. The risk profile provides further evidence as to whether the current targets can be met under existing business conditions. It is then reasonable to assume that the strategic objectives, as well as the financial and nonfinancial targets, may be adjusted once the board of the investee company is fully apprised of the risks associated with the business. Designated directors from AOL who are on the board of the investee company will work with management to make the necessary adjustments. The adjustments made are normally to ensure that objectives are reasonable and adequately robust to meet set performance targets.
AOL's ERM function adopts a consistent methodology and has an established risk dashboard and reporting templates for all companies within its portfolio. It also has developed appropriate and effective mechanisms for its implementation and use. The initial risk-based strategy review is followed by regular annual reviews over the life of the investment. Finally, AOL's ERM function has oversight and regularly monitors the risk management process of the investee company.
The postacquisition stage is concerned with the execution of an appropriate exit/divestment strategy. In the preacquisition phase, potential exit strategies are identified. In the monitor and review step, these strategies are constantly reviewed and relevant triggers determined and tracked. These are indicators or metrics with thresholds set so as to trigger the consideration of exit strategy options and eventual execution of one of them – terminating the investment. The divestment process starts when the monitoring of triggers has resulted in the decision to execute an exit strategy. The ERM Team contributes to the escalation of the recommendation to divest, through management and to the board of directors of AOL, with a focus on the risk/return aspect of the recommendation. Once the decision has been obtained from the board, where required, the ERM function helps the divestiture team to set the negotiation guidelines, assess the risk profile of potential buyers, and manage sensitive confidential information until the divestiture is closed.