Importance of M&A Due Diligence

M&A Due Diligence is critical

M&A due diligence is critical. M&A negotiations can be far easier for the acquirer if the deal team has done a detailed due diligence. Many deals have protracted negotiations because the acquirers find it increasingly difficult to get answers to the vital due diligence questions asked by the Finance committee and the Board.
Since most of the information needed for a detailed due diligence is historical in nature, the acquirer should have all the information readily available. Inspite of the detailed and intensive process, the due diligence should be finished within a stipulated timeframe.
A detailed due diligence will be essential to structure transactions, how to maximise opportunities and identify key risks inherent in the transaction. The most important part of a Due diligence is to identify synergies – both short term and long term to drive deal value.

M&A Due Diligence can protect your deal

• A part of the Due Diligence process – Financial and Legal Due Diligence is done by the external consultants. The job of the consultants is to provide a detailed report to the acquirer on what is really going on in the target organization.The consultants should not focus only on the target company but also parties that are related to the target organization.
• In case of acquisitions involving private companies, most of the information is not available in the public domain.In such cases it is difficult for the deal team to do a competitive analysis.The deal team generally goes by the information that is provided by the seller.In many cases, there might be a competitor whose recent moves can be detrimental to the business the acquirer is looking to buy.To avoid such situations, it is imperative that the deal team has an excellent understanding on the competitive landscape and the underlying market of the target organization.When the deal team has a good understanding on the recent market developments, then it can ask the right questions to the target management at the time of concerns.
• The deal team should be diplomatic and professional in asking questions to the target organization or to their bankers.In many cases, the deal teams hesitate to ask tough questions as they do not want to put the target management in an embarrassing position that might lead the target company to speak to other buyers and can increase the risk of deals getting terminated.This mentality adopted by the deal team is wrong and will definitely backfire because the acquirer is going to miss out on a lot of key information.Most of the target companies present as little information on its business to the acquirer.Hence it is imperative that the deal teams ask the right and relevant questions that can have an effect on the long term value of the deal.
• The exclusivity period for Due Diligence is agreed by both the seller and the buyer in the term sheet.When the Due Diligence goes beyond the stipulated timeframe and the reason for this delay is caused by the buyer, then the seller can go and talk to other buyers.In many cases, the delay can also be caused by the seller especially when its disclosure schedules does not include all the relevant contracts/agreements.
• When the market is strong and valuations are high, then the delay in due diligence can be the reason for the buyer losing the deal to its competitors.When the delay for the due diligence closure is due to the seller dragging their feet, then it is a huge indication to the buyer that there is something going on which is fundamentally not good for the buyer.
• It is important that the buyer, seller and their management teams be as honest and transparent to each other when looking to address operational and other concerns going forward.

Evaluating the Management team during M&A due diligence

• The management team of the target organization is critical to the success of the deal.Unless the acquirer looks to replace the management team of the target organization, the buyer will rely on the target company’s management team for executing the deal synergies.
• When the acquirer looks to either replace or augment the existing management team because they are not available in the integration and execution phase, then it will have a negative effect on the deal.The acquirer would have to hire a new management team which is a time consuming activity and this delay can prevent the business from responding to the market/customers in a timely manner.The competitors will take advantage of this situation and the acquirer stand up to lose on multiple opportunities.
• Hence without a strong management team upfront and a strong leader managing that team, the acquirer will not be able to achieve the deal synergies.Hence Due Diligence needs to include governance and understanding of how the target organization conducts business both at the management level and at the board level.

Key Takeaway

A detailed M&A due diligence can make a M&A transaction successful and help the acquirer make a quantum leap in market presence by filling in gaps in its product/service portfolio thereby improving profitability and other performance metrics.