How Important is Due Diligence to the M&A Process?

There are several key phases of the mergers and acquisitions (M&A) process:

• Growth/Portfolio strategy
• Due diligence
• Integration planning
• Integration execution
• Project management
• Change management

The due diligence phase examines a potential M&A target to validate the prospective deal’s value proposition; identifies material future matters that may affect deal valuation; discovers potential synergies and opportunities for structuring the transaction and assessing their impact; reviews current policies and processes to identify factors to consider in integration planning; analyzes the market and target to assess the players in the industry and emerging long-term trends; identifies potential risks and negative synergies; and facilitates an understanding of the target’s underlying value to influence the structuring of the deal and financing, particularly when large bid-ask spreads exist due to significant risks and uncertainties.

Why focus on due diligence?

Conducting a thorough due diligence effort for an acquisition is more important than ever. With the increase in corporate litigation, shareholder activism, heightened scrutiny of boards of directors and more disclosure obligations, companies can’t afford to make a mistake in the acquisition and assume unexpected liabilities. At the same time, acquisitive companies may not want to lose out on targeted acquisitions by overburdening a potential target with diligence requests that could derail a deal. Therefore, a due diligence effort must be carefully planned and executed so it can be conducted efficiently with the least amount of unnecessary intrusion.

What should be the focus of due diligence efforts?

In M&A context, due diligence traditionally has been defined as the legal, financial and operational analysis a buyer undertakes to validate the seller’s presentation for the company, focusing primarily on identifying the buyer’s risks if they acquire a company. Increasingly, experts have challenged this risk-focused approach as too narrow in scope.

The most critical element when planning a due diligence effort is for the diligence team to understand the business objectives behind the acquisition. This understanding will help the team prioritize the diligence efforts and determine what information is important to review, and what can be skipped. A top business objective should be to determine the targeted sources of value in deals, which are often categorized as either combinational or transformational.

Based on the above, what are some due diligence best practices to consider?

• Speed is a critical driver of success. Identify key decisions and don’t give up. Research suggests that organizational and people issues are essential to the success of most acquisition integrations. Proactively address the following issues:
  • Culture assessment/alignment
  • Leadership assessment
  • Talent retention
  • Benefits and compensation rationalization
• Identify the M&A value drivers. Perform this task early in the process and translate them into an M&A vision and scorecard.
• Start detailed integration planning during due diligence. The primary deliverable of due diligence should be the 100-day plan; therefore, the 100-day plan should not be focused as much on figuring out “what to do,” but more on how to realize the targeted synergies and deal drivers identified during due diligence.
• Drive accountability. The senior management team must remain accountable for the success of the deal and for achieving the targeted synergies. Success can’t just be delegated to an integration project leader and his or her team.

You can read more on this topic in Protiviti’s Guide to Mergers and Acquisitions and by exploring these tools on KnowledgeLeader:

Due Diligence Checklist

Financial Due Diligence Report

Acquisition Process Flow