1. Introduction
Corporations that are looking to expand their businesses and grow their portfolio by acquiring
existing smaller companies face many challenges. There are so many aspects that corporations
must take into account like human resources, union contracts, finance, and information
technology issues. Another challenge that many don’t consider are the environment, health, and
safety issues that come with acquiring a new business. This is especially tough for corporations
that have very mature EH&S management systems. Usually the newly acquired companies do
not have an equivalent EH&S management system and don’t even meet their local compliance
standards. This is especially tough for American companies that acquire an international site. In
many cases, the regulatory requirements at these locations are minimal and don’t have an EH&S
staff person available or have the expertise to bring the site up tot compliance. EH&S acquisition
integration is what my project will be focused on. Through the use of case studies I will show
how it is done successfully and not successfully. I will also show how large corporations
manage the EH&S acquisition process, and also share my EH&S integration process and lessons
learned over the time that I have had my current position at Pratt & Whitney.
2. Due Diligence
The first thing that a corporation must do before they acquire a new company is follow a due
diligence process. This is usually done by both a corporation representative and an outside
contractor that completes the technical aspects of the due diligence process . The reason that the
phase 1 assessment is done by a consultant is due to the complexity of the report and the skills
that are necessary to complete all aspects. “Often a multi disciplinary approach is taken in
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compiling all the components of the phase 1 study, since skills in the chemistry, atmospheric
physics, microbiology and even botany are frequently required. Many of the preparers are
environmental scientists.1 This is such a common report now that the ASTM has a specific
standard on a phase 1 assessment, and who can do one. “Under ASTM E 1527-05 parameters
were set forth as to who is qualified to perform Phase 1 ESA’s. The new parameter defined an
Environmental Professional as someone with 1) a current Professional Engineer’s or Professional
Geologists license or registration from a state or U.S. territory with 3 years equivalent full-time
experience; 2) have a Baccalaureate or higher degree from an accredited institution of higher
education in a discipline of engineering or science and 5 years equivalent experience; or 3) have
the equivalent of 10 years full-time experience.”2 This is laid out in two separate reports that the
contracted company puts together. That phase 1 report consists of:
Depending upon precise protocols utilized, there are a number of variations in the scope of a
Phase I study. The tasks listed here are extremely common to almost all Phase I ESAs:
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Performance of an on-site visit to view present conditions (chemical spill residue, dieback of vegetation, etc) hazardous substances or petroleum products usage (presence of
above ground or underground storage tanks, storage of acids, etc.); and evaluate any
likely environmentally hazardous site history.
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Evaluation of risks of neighboring properties upon the subject property.
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Interview of persons knowledgeable regarding the property history (past owners, present
owner, key site manager, present tenants, neighbors).
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Examine municipal or county planning files to check prior land usage and permits
granted
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Conduct file searches with public agencies (State water board, fire department, county
health department, etc) having oversight relative to water quality and soil contamination
issues.
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Examine historic aerial photography of the vicinity.
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Examine current USGS maps to scrutinize drainage patterns and topography.
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Examine chain-of-title for Environmental Liens and/or Activity and Land Use
Limitations (AULs).3
The first is a called a phase 1 report that looks at a high level of environmental & health/ safety
issues that the company has at their site or various sites depending on the acquisition. The
analysis, often called a Phase I ESA, typically addresses both the underlying land as well as
physical improvements to the property; however, techniques applied in a Phase I ESA never
include actual collection of physical samples or chemical analyses of any kind. Once that report
is completed the acquiring corporation’s legal team reviews the report and decides whether a
phase 2 is necessary. Phase 2 Environmental Site Assessment reports are sometimes required
when a Recognized Environmental Condition (REC) is found during the Phase 1 Environmental
Assessment process. Phase 2 Environmental Assessments consist of collecting soil samples to
screen for chemical or metal contamination. This sampling is conducted by drill rig, hydraulic
push, hand auger or backhoe, depending on site specific conditions. Phase 2 Environmental
reports can also include sampling of groundwater and surface water. This testing is
recommended when there is a significant potential for the existence of an environmental liability
that can affect the value of a property. Environmental liabilities are costs associated with
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regulatory-mandated cleanup, disposal of regulated-waste and civil liability. Civil liability
occurs when the contamination has migrated offsite or tenants sue over exposure to hazardous
materials.4 This is a common question and there is not a simple answer. The ASTM standard
describes a recognized environmental condition as the presence or likely presence of any
hazardous substances or petroleum products on a property under conditions that indicate an
existing release, a past release, or a material threat of a release of any hazardous substances or
petroleum products into structures on the property or into the ground, ground water, or surface
water of the property.5 The term includes hazardous substances or petroleum products even
under conditions in compliance with laws. In general, previous uses that can typically create the
need for a Phase 2 Environmental Study include: gas stations, dry cleaners, machine shops,
manufacturing, hazardous waste storage, etc. Further analysis into the specific site details during
the Phase 1 Environmental process will determine, if any of these previous uses have created a
significant potential for a release or if a known release has occurred. Expertise in soil and
groundwater contamination is required in order to make good judgments in regards to these
matters. Many corporations will automatically require a Phase 2 Environmental investigation for
a property that has had any of these environmentally-sensitive uses. These studies can range
from Limited Phase II Environmental Assessments to full Phase II Environmental Studies, which
include installation of groundwater monitoring wells with extensive testing. As part of the due
diligence process for real estate transactions, a more limited study should be conducted as a
screen initially to determine if there is a severe problem. If this is the case, further site
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characterization may be required or this can help the buyer decide if he wants to go forward with
the transaction.6 A phase 2 is usually done if the acquiring corporation sees some liability issue
with the phase 1 report. The phase 2 report will focus on those liability issues from the phase 1
report. Once the phase 2 is completed the acquiring corporation will review and decide on any
conditions that they would like to put on the deal. This is usually done with reserves that are set
aside for future liabilities that may present themselves after the deal is complete. If the lab
results from the soil, water or groundwater samples indicate a significant problem, need further
delineation or if cleanup is required by an agency or by the responsible party, a site
characterization, risk assessment or remediation may be required. The remediation or cleanup
typically has to occur until verification samples are less than federal, state or local cleanup
standards. In some cases the owner or occupant wants to completely remove all contaminants to
non-detectable, if it is feasible.
One case of integration due diligence process done well is UTC Fire & Security. “UTC first
entered this segment I July 2003 with the acquisition of Chubb, a world leader in security and
fire prevention services. In April 2005, UTC acquired Kidde Plc., a leader in fire detection and
suppression, and joined with Chubb to form UTC Fire & Security, now the number two player in
the global fire and security industry. After more than 60 acquisitions in 35 countries through
2010, UTCFS is providing services to over 1 million customers, with approximately 46, 000
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employees.”7 What UTC fire security focused on first was to get a sense of compliance of the
new acquisitions. “During the due diligence for the GE security acquisition, EHS obtained
information for the use in compliance audit planning and permit registrations. Within 3 weeks of
closure, 25 compliance audits had been conducted and eighty three permits had been assessed.
Within 60 days, all compliance audit findings had been closed – some with short term mitigation
actions while more robust, long term solutions were developed.”8 This was a very complicated
process due to the number of acquired sites, but also the number of people and departments that
were involves in the acquisition. “This accomplishment was the result of cooperation between
multiple business functions. The team recognized the immediate contact with and attention to
GE businesses would facilitate the integration of the company into all business processes
concurrently.”9 UTCFS did a very important thing and involved executive level management
and formed a acquisition integration that involves all aspects of the company. “WHQ senior
management visited specific locations the day of the announcement to welcome the GE security
employees and present the vision of UTCFS, including our EHS culture.”10 The acquisition did
not always go smoothly and there was one site in particular that had some extensive
environmental contamination. UTCFS did the right thing and cleaned the site up even though
they did not contribute to the environmental contamination. “With the Kidde acquisition,
UTCFS inherited a facility in Ranson, West Virginia that dated back to the 19th century and had
impacted the area. The site was decommissioned and the surrounding area and buildings were
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remediated. The site was donated to the town for a brownfield development project to help
revitalize the area. UTCFS provided a grant for support.”11
A good example of a poor due diligence process is the famous New York circuit court case of
New York v. Shore Realty Corporation. Shore realty was a small real estate company that
purchased a 3.2 acre property for condominium development. There was a phase 1 assessment
done on the property that came up with some significant environmental risk, but shore realty
management decided to ignore the risk. “Five large tanks in a field in the center of the site hold
most of some 700,000 gallons of hazardous chemicals located there, though there are six smaller
tanks both above and below ground containing hazardous waste, as well as some empty tanks on
the property.”12 The management of the shore realty felt that they could not be held responsible
for the cleanup of the hazardous waste since Shore Realty did not generate or produce the
hazardous chemicals and waste on the property. “at the time of acquisition Shore Realty knew
of that hazardous waste was stored on the site and that cleanup would be expensive, though
neither Shore or management had participated in the or transportation of the nearly 700,000
gallons of hazardous waste now on the premises.”13 This is the case that is precedent for the
national CERCLA law. This law authorizes the federal government to clean up Superfund sites
using federal money, but go after responsible parties for reimbursement, or issue an injunction in
federal district court to force a responsible party to clean up any site or spill that presents a
danger to the public welfare or environment. Shore Realty failed to realize their responsibility
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when they bought the property knowing that there were significant environmental hazards on the
property. The management and environmental experts at Shore Realty should have realized that
it was too big of a risk to acquire the property and passed on it. “In October1984, the district
court held Shore Liable under CERCLA for the state’s response costs abd issues an injunction
under th estate nuisance law directing Shore and management remove the remaining hazardous
waste stored on the property.”14
3. Integration
Once this is all agreed upon the deal is done and the hard work begins. One of the issues with the
due diligence process is confidentiality and not all the right players are usually involved with the
decision making process. This is done at the executive and legal levels. All they are going on
are the phase 1 & 2 reports, and the advice of the EH&S Vice president. Executives have a
30,000 foot level view of the acquisition, and can’t see the real EH&S issues of the acquisition
as a trained day to day EH&S professional can do by spending time with the acquisition
leadership and local EH&S professional. Usually the decision to acquire the new business is
made for financial reasons unless there are strikingly large environmental or safety issues from
the reports. This is where the EH&S compliance manager or EH&S acquisition integration
manager gets involved and starts the internal process of EH&S integration with the new
company. The first area that the integration process will focus on is compliance. The new
company will undergo a compliance audit at the newly acquired site or sites. This can be a
complicated process depending on the acquisition because of the different country laws and
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regulations that need to be considered during the compliance audit process. This is either done
by the compliance department of the acquiring company if they have experience in the area or
they will have a contractor in the area do it so that there is some expertise in the compliance
audit. Once the compliance issues are identified a corrective action is put together to address all
findings with timelines and owners attached to each. This is what the main focus is on in the
first 6 months of the integration.
Along with the compliance audit the EH&S integration
manager will have a meeting with the newly acquired company management and outline the
EH&S management system and expectations of the corporation. There is also a training plan
that is put together for the different levels of management within the company to bring them up
to speed on the EH&S management system. This needs to be done in small doses as to not
overwhelm the new management of all the requirements, goals, and expectations that come with
the EH&S management system. This is also a good time for the integration manager to see how
committed the management team is to implementing the EH&S management system and
correcting the compliance issues that are found during the compliance audit.
Once the compliance corrective action plan is closed out the integration site has to implement
the acquiring corporation’s EH&S management system. The first thing to do is develop an
implementation plan using the existing company requirements of the acquiring company. There
are four stages of integration that I will go into detail in the project that each integration site goes
through. The four stages are preparation, cooperation, integration, and implementation.
Preparation – If the EH&S professional have been keeping up with his or her work and doing it
properly this is the easiest step. The EH&S professional has already been filling out report,
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permits, and keeping up with the EH&S programs at the site on a day to day basis. Once you are
notified that the company is be acquired by a larger corporation you will need to do some
additional preparation. “First, remind your manager of the issues you see as the most significant.
Is a wastewater treatment plant overloaded? Have you still not tested the underground tanks?
Has some groundwater cleanup been inactive for the past 5 years due to budget problems? Is
there something you suspect that you have not been able to investigate?
The buyer’s
representative will find out anyway. Now is the time for you to be cooperative.”15
Cooperation – This stage is very important because the EH&S professional of the site will be
building a relationship with the acquiring corporation’s EH&S representatives. This is also the
stage that the acquiring EH&S staff will be reviewing all kinds of EH&S information at the site .
“Every aspect of what you do now or have done will be scrutinized. Why? The intent of the
party considering the purchase of your company is to identify any material liabilities associated
with environmental, health, and safety issues. Advisors to the buyer (and frequently also for the
seller) review existing information and conduct interviews and site visits to identify potential
liabilities.”16 Another thing to consider is the confidentiality of the deal especially if you the
acquiring company is public. So do not share any information with any unauthorized employees
or media. Sharing information could be a deal breaker. It is also important to share information
in a timely manner. “Do not become the choke point for the transfer of information. During the
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process, responding to the needs of the deal is probably your most important job . Your standard
responsibilities may need to be given a lower priority.”17
Integration – Once the deal is complete the local EH&S professional has to concentrate on
integrating the existing business into the new acquiring company. This is not easy due to the
acquiring company usually looking at cost reduction.
“The deal has been predicated on
expectations of reduced costs, increased efficiencies, and the better bottom line. You have to
quickly deliver your contribution to making this work. The typical marching order is “let’s do
more with a little less.”18 This also where the local EH&S professional gets to know the EH&S
culture of the acquiring corporation and how supportive the management is of the EH&S
management system and the EH&S initiatives that the site has. This is a tricky time due the
acquiring corporation may not be as supportive as the former company and the local EH&S
professional may have to consider finding another corporation to work for. “The level of
management commitment to environmental policies will allow you to set priorities for carrying
out your responsibilities to the new organization. Identify the systems that avoid noncompliance
is the way for the new organization to establish accountability for environmental results.”19
Implementation – This is the last stage of the acquisition process. Once you have completed
the first 3 steps there is the implementation stage where you implement the new company’s
EH&S management system. “Managing EHS risks and opportunities in the new company is no
doubt a daunting task. The new company has a different array of stakeholders, risks, and
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challenges.”20 There is also new assessments using the new company’s tools and learning what
the new management wants to see from the EH&S professional or manager. “Typically, tools
such as life cycle analysis, value chain analysis, or stakeholder needs assessment are used to
identify emerging risks such as those related to resource consumption (land, water, biotic,
energy), human health, product safety, or waste. Once you have identified these risks, you must
assess their relevance to the company.
Will they impact raw materials acquisition,
manufacturing, distribution, or sales and service, or end of life decisions?”21
There is no standard way that each corporation integrates their new acquisitions in their EH&S
management system. There are several similarities though. 3M is large corporation that has
been following the same integration for every acquisition that they have acquired since 2010.
The roadmap can be summarized using the following building blocks:
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The 3M acquisition policy stated that the integration process is complete by fulfilling these
specific criteria from the integration plan:
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All applicable facility scorecard items have been activated
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Initial assessment completed and documented into ATS. (3M database)
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All high risk items have been closed out in ATS.
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EH&S integration roadmap developed, implemented, and completed
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EH&S integration team agrees with closure.
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