Information asymmetries are a phenomenon that occurs when one of the parties involved in a transaction possesses relevant information that the other party does not have, thus creating an imbalance of informational power. This phenomenon can have a significant impact on various economic and financial aspects, influencing decisions and behaviors. In particular, information asymmetries are a central theme in mergers and acquisitions (M&A), where the valuation of a company, future expectations, and risks are closely tied to the quality and transparency of the information available to each party involved.

1. What is an Information Asymmetry?

In economics, information asymmetries occur when one party in a transaction possesses superior or more detailed information compared to the other. A classic example can be found in financial markets, where the buyer of a stock or security may not fully know the financial health of a company, while the management of that company has access to complete and confidential data. In these situations, the informed party can take advantage of their position, exposing the other party to risks or disadvantages.

Information asymmetries can be classified into two main categories:

• Adverse selectionIt occurs before the transaction, when one party has information that allows them to choose a more advantageous opportunity compared to the one that would have been available to the other party.
• Moral hazardIt occurs after the transaction, when one party may behave opportunistically or take risks, knowing that the other party is not fully informed or cannot adequately monitor their behavior.

2. Information Asymmetries in M&A Transactions

In M&A transactions, information asymmetries are particularly relevant. The buyer and the seller often possess different information about the health and value of the company involved in the transaction. These asymmetries can manifest in various ways:

• Inaccurate company valuationThe buyer may not have a clear view of the target company's value due to incomplete or distorted information. There may be unpublished financial data, undisclosed liabilities, contracts with customers and suppliers that are not immediately visible. In these cases, the buyer may pay an excessive price for the acquisition, underestimating the risks.
• Knowledge of legal and regulatory risksOften, the seller is aware of ongoing legal disputes or regulatory risks that could affect the company's value, but these may not be immediately visible to the buyer. The lack of information can lead to unwanted surprises after the transaction is completed.
• Unseen strategic factors: The buyer may not be aware of internal strategies, potential alliances, or upcoming organizational changes that could alter the company's direction in the short term.
• Divergence of motivations: The buyer may be less informed about the seller's true objectives, which could relate to selling due to financial difficulties, internal conflicts, or undisclosed business strategies. If the seller conceals relevant information, the buyer could end up acquiring an asset that does not meet their expectations.

3. Strategies to Mitigate Information Asymmetries in M&A Transactions

To address information asymmetries in M&A transactions, the parties involved, particularly the buyer, adopt various strategies:

• Thorough due diligence:Due diligence is a critical phase in every M&A transaction, during which the buyer examines every aspect of the target company. A detailed analysis of financial statements, contracts, intellectual property, and human resources is essential to reduce the risk of information asymmetries. However, even thorough due diligence may not be sufficient if the target company is actively concealing information.
• Warranty and indemnity clausesIn many M&A transactions, the parties agree on warranty clauses, where the seller ensures that the information provided is accurate, and indemnity clauses that provide for compensation by the seller in case issues arise related to concealed or incorrect information.
• Deferred payment contracts (Earn-Outs)This payment structure involves deferring part of the acquisition price, which is contingent upon achieving certain financial or operational goals. This solution helps reduce the risk of information asymmetries by tying the payment to the actual long-term value of the company.
• Interventions by consultants and external expertsThe assistance of external experts, such as auditors, legal consultants, and independent valuers, can help reduce information asymmetries. These professionals are able to gather and analyze information objectively, minimizing conflicts of interest.
• Transparency and communicationThe level of transparency from the seller is essential to reduce information asymmetries. Open and clear communication between the two parties can help build a trust-based relationship, limiting the seller's opportunities to conceal critical information.

In definitiva le asimmetrie informative sono una realtà nelle operazioni di M&A e possono avere un impatto significativo sul successo o sull’insuccesso di una transazione. Affrontarle richiede una combinazione di metodi preventivi, come la due diligence e l’utilizzo di clausole contrattuali mirate, nonché una gestione attenta e continua della comunicazione tra le parti. Se non adeguatamente gestite, le asimmetrie informative possono portare a una serie di problemi post-acquisizione, come perdite finanziarie, contenziosi legali e danni reputazionali. Pertanto, è fondamentale che entrambe le parti adottino una strategia olistica per garantire che la transazione avvenga in un ambiente di trasparenza e fiducia reciproca.

WA