Lawyers who handle mergers and acquisitions traditionally have worried about financing and corporate governance laws and perhaps antitrust implications.
But more and more, their No. 1 concern is the potential environmental risk. "It can happen and it does happen that deals can be killed because of environmental problems," says New York lawyer Margaret Murphy. "Fortunately, that's not the typical outcome."
Murphy, of White and Case, is one of the new breed of lawyers who are making the pollution liability aspects of corporate acquisitions a speciality.
It is her job to see that it remains the atypical deal that comes undone because of worries that the buyer may get stuck with a massive bill for cleaning up soil or groundwater contaminated years before the sale.
Because "the liabilities go with the business," she said, "a buyer is going to want to know what problems it's buying."
Even if the buyer is willing to chance it, the lender behind the deal almost certainly won't. Banks and other financing sources now routinely insist on an environmental assessment of any property they are going to put money on.
Albuquerque lawyer Pete Domenici Jr. late last month closed a deal for a client selling a chain of 13 gasoline stations. Environmental concerns were the biggest stumbling block in the arrangements, largely, he said, because the new owners must provide insurance against leaking from underground storage tanks -- and no such insurance is now on the market.
The lawyer had to estimate what the insurance would cost when it becomes available and subtract that amount from the expected cash flow generated by the property to arrive at a reasonable purchase price.
In selling a gasoline station, of course, owners know that there are underground storage tanks and that they pose a potential environmental problem. But in fact pollution worries are present in almost every company acquisition today, no matter have benign the business seems.
Philip A. Birsh, senior vice president of Kidder, Peabody & Co., said, "People don't believe they have environmental problems until they try to sell their company."
One example from Murphy: "The likelihood that there would be underground storage tanks at a convenience store site is significant."
Advisers tell companies looking for a buyer to first contract for a detailed environmental analysis. They will have evidence in hand that the site is clean -- or be able to map out a plan of attacking the problem before a worried buyer discovers it on his own.
Domenici says it is hard to get cleanup contractors to give a firm price for a job, but if one can be hammered out, the seller can usually strike a bargain if he is willing to reduce the offering price by the cost of the decontamination job recommended by the contractor.
If the reduction seems to be too much, the seller can demand full price but promise to pay the cleanup bills when they come in, perhaps putting a cap on the total reimbursement.
Every deal is structured differently. Murphy has found, she said, "There's just no rule of thumb. It's just whatever the parties can negotiate."
In some cases, the sale goes through, but the seller promises to have the cleanup done after the change of ownership. Part of the purchase price is held in escrow until the decontamination work is completed. But, lawyers warn, this can lead to lots of controversy over just what constitutes a completed cleanup.
Even better, said Stephen Poltorzycki, coordinator of environmental reviews for the consulting firm Arthur D. Little & Co., is for the seller to do the environmental investigation first and then do the remedial work necessary. That way, he says, sellers can control costs; "You can clean it up at wholesale and sell it at retail."
He tells clients to pare costs by avoiding an emergency atmosphere: "You can do it cheaper if you can do it over a longer period of time. The best way to sell it is if it's clean, and if you are thinking about selling it in the future it makes sense to do an environmental investigation right now."
Curing soil contamination over time can be done at a reasonable price, he says, but if there is water pollution it is likely to be a much more expensive undertaking. But there are deals that never go through because the unknown liability is just deemed too high.
Birsh still chafes over one that fell through because of a few lost barrels. On the block was a family-owned printing company that routinely disposed of containers in which inks and other chemical compounds came to the plant.
It had records of just where the barrels had gone, but was missing documentation on about a dozen of them -- probably because workmen had used them for stools or cut them in two to make barbecue grills.
The resulting uncertainty was enough to make the potential buyer -- one of the 100 largest companies in the country -- scuttle the deal. Daniel B. Moskowitz is a Washington editor for Business Week newsletters.