Mike de Graaff spoke to SBC News to discuss the critical role of compliance in iGaming mergers and acquisitions, highlighting how thorough due diligence can protect operators from regulatory risks and ensure successful market expansion.
Mergers and acquisitions are a particularly useful tool in the arsenal of well-capitalised organisations looking to expand across the iGaming sector, as extensive activity over the last decade or so has shown.
Large plc operators seeking growth in new regions and markets without already possessing the requisite expertise or regulatory certification to compete effectively have found M&A particularly useful.
It’s easy to understand why. Newly regulated markets offer global operators new opportunities to expand quickly, obtaining local brands with the trust and confidence of players. And for the entrepreneurial operators selling, an exit via a sale offers the chance to be part of a global plc with access to much more cash.
Yet, it is not always a winning strategy – particularly when buyers take a scatter gun approach to multi-million dollar acquisitions, more akin to impulse buying in a supermarket than the serious transaction they are.
This is the warning issued by Mike De Graaff, Chief Compliance Officer at BetComply, a compliance consultancy firm that advises companies throughout the M&A process as just one aspect of its wider portfolio of services.
De Graaff recently appeared on an SBC Webinar, in which he highlighted the dangers of not completing a comprehensive due diligence process before completing transactions. He cited a high-profile case which resulted in a significant fine for a large plc for compliance failures attributed to a brand it acquired, and a subsequent lawsuit.
Speaking to SBC News, De Graaff assessed the whole M&A process and provided a guide for operators looking to acquire.
What does the buying process look like?
De Graaff noted that M&A is not a simple process, and that it is so much more than just a buyer and seller agreeing a price.
He explained: “A few key steps you need to take are: identifying a company to buy alongside its local presence and clean compliance history. Only then, can the many meetings and discussions on valuations and other terms take place.
“Only when both parties are interested can you enter exclusivity and start due diligence. Unfortunately, this process often happens far too quickly. Once that process has been done properly, then you can negotiate terms and agree on deal structure.”
Ok – so the terms are agreed, structure is approved, the “Is” are dotted and the “Ts” crossed. Job done; time to crack open the champagne? Certainly not.
De Graaff noted that the tough work is only just getting started, as the buyers need to seek regulatory approval in applicable jurisdictions, close the deal formally then begin to integrate operations, team members and compliance framework.
Is acquisition the correct choice?
Buying access to new markets certainly seems like the easier choice, but there are plenty of considerations that potential buyers must make.
“Certainly, there are pros to acquiring,” De Graaff said. “Firstly, you acquire immediate access to the market instead of getting the license yourself, and established infrastructure, brand recognition, sometimes even existing databases.
“But those acquiring need to pay close attention to the risks involved. There are high upfront costs and hidden compliance liabilities. Buying a company may be a good idea in theory, but there may be cultural mismatches or resistance during integration.”
BetComply’s compliance lead came back to that high-profile, real-life example.
“Acquiring companies face the reputational risk from historic non-compliance or ongoing investigations. You inherit everything, including the problems.”
Due diligence is crucial
As aforementioned, De Graaff lamented the lack of enhanced due diligence that he has seen in the iGaming industry.
In his view, this is leading to unnecessary or rather avoidable enforcement actions that could have been avoided if due diligence identified the issues.
“We see issues arising when the due diligence is not good or deep enough. The price is set based on a number of factors, when a player database is involved the largest factor determining the price is the size of the player database and the risk involved with them.
“If you buy a company and based a price on, for example, 50,000 active players with ‘X’ amount of LTD and base a price around that, you will be let down if it turns out that 30% of that player database is not compliantly handled.
“If you buy a company and they conveniently forget to tell you there is an AML investigation, turning into a multi-million euro fine after the acquisition, you’re not happy either.”
De Graaff issued a stark warning for those companies who think that historic breaches of regulation are not the responsibility of the current ownership group.
“Regulators now hold acquiring companies accountable for inherited failings. Many fines stem from compliance breaches that predated the acquisition. “We didn’t know” is not a valid defence anymore.”
How to complete due diligence properly
After identifying the gaps in the due diligence process across the industry, De Graaff was eager to point out how to improve the situation. Central to this, he said, is to get experts on board who intrinsically understand compliance issues to the most granular level.
“A lot of M&A parties involve the army of lawyers and accountants etc,” he noted. “To avoid issues like described above, involve people like us: compliance experts.
“Do a proper audit on the database and its processes. Skip the paper reality; find out what’s really there.”
BetComply offers its clients consultancy services for a range of business use cases in the iGaming space, one of which is M&A due diligence.
Setting itself apart from other providers is key for BetComply, and De Graaff explained that it’s the company’s immovable objectivity that makes it the partner of choice for any operator or supplier looking to acquire another business.
“We have a variety of experts, from technical compliance to regulatory compliance and legal, as well as financial expertise,” De Graaff added. “We come in when a buyer wants no surprises following the deal and to make sure the price is reflecting the real value. Essentially: we help you know exactly what you’re buying.”
The risks of finding out that a business comes with compliance baggage are too big; it can drain a business of cash and cause reputational problems. Simply, a company’s bottom line and the ‘army of lawyers’ give no sympathy for buyers’ remorse.
So to conclude his chat with SBC News, BetComply’s compliance lead offered a few words of advice around M&A activity. Aside from the basics such as getting on board a team of experts, he added: “Don’t just check if a policy exists — check if it works.
“If it seems too good of a deal, it’s highly likely there’s something wrong with it. And if the sellers don’t let you dig in the database, it’s because there is something there they don’t want you to see.”
Above all, though, De Graaff asserted that the biggest takeaway of any due diligence lessons is that it should be treated as seriously as possible.
As he concluded: “Treat compliance like a dealbreaker, not a footnote. Sometimes getting your own licence is slower but safer.”
