Backdating Nibbles

The scandal hasn't had any obvious chilling effect on merger-and-acquisition activity.

The drawn-out saga of Hewlett-Packard’s purchase of Mercury Interactive earlier this year seemed certain to dampen merger-and-acquisition activity, as potential buyers pulled back from targets possibly contaminated by backdating. But the deals market has not been obviously affected; 2006 remains on track to surpass every year since 2000 in total M&A volume. (See “The Year of Living Strategically,” January 2007.)

The prominence of the HP-Mercury deal created the false impression that the backdating scandal would have a chilling effect on mergers. It “led people to believe that there would be a lot of companies in M&A transactions that had been involved in backdating scandals,” says Steven B. Stokdyk, a partner with law firm Latham & Watkins in Los Angeles.

That didn’t happen, says H. Rodgin Cohen, chairman of law firm Sullivan & Cromwell, partly because the problem seems to be limited to companies in particular industries.

In most cases, companies that engaged in backdating did so in a manner that any competent due-diligence effort would uncover, Cohen adds. “Unless the books were cooked, it shouldn’t be hard to find.”

This is not to say that companies shouldn’t worry about backdating in future deals. “Every few years a new issue comes along that boards and management get all worried about,” says Mark L. Sirower, who leads the M&A strategy practice at PricewaterhouseCoopers. “Right now, it’s backdating.”

However, rumored class-action suits against MSystems and its acquirer, SanDisk, could be the first of many such lawsuits generated by the backdating scandal. If backdating turns out to be more widespread than it currently seems, feat of legal costs could put a brake on the M&A gravy train.

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