For many reasons a company may find itself amid major changes such as needing to grow by acquisition, or in need of divesting a subsidiary, business line, or division, or it may determine to reorganize through a corporate transaction (each, a “M&A transaction”). To make sure that M&A transactions go smoothly, performing a thorough diligence review is a must.
Getting your team together
Because M&A transactions often entail a considerable amount of corporate change, deployment of resources, people, and funds, and brings both significant benefits and challenges, the rare company, even among the largest and most savvy, will attempt a diligence process on its own. Depending on factors such as industry, complexity, and size the acquiring entity will pull together an experienced team of professionals, including lawyers, accountants, and other experts to aid in the evaluation process.
What is due diligence?
Once a letter of intent, a so-called LOI, is signed among the parties, the diligence process usually begins in earnest. The idea is simply to confirm what the acquirer believes to be true about the target that led the acquirer to the assumptions and models underpinning its decision to proceed. The idea as well is to understand fully, the operating, legal, and financial risks associated with acquiring a particular target. Due diligence is the process through which such confirmation is sought.
The process
A well-designed diligence process follows certain steps. These steps are driven by the specifics of the industry, the assets, the target itself, its legal and tax positions and risks, market conditions, competitor offerings and so on. The process begins with a good plan. Teams of experts must be organized and assigned to specific aspects of the diligence process identified in the plan. Timelines must be established, and information must be compiled and processed. Often a document data room is established for a given due diligence process. Such data rooms can contain many hundreds of documents.
Critical determinations
It is likely that a diligence team’s investigations will lead to an updated evaluation or even revaluation of the assumptions made by the acquirer relative to the target. This process may lead to additional or follow-up diligence, it may impact the agreed upon terms, including financial terms, of the M&A transaction. It may lead to additional covenants or representations and other changes in the agreements the parties are using to effect the M&A transaction. In extreme cases, it could result in termination of the transaction.
Ability to pivot
In the end an acquisition process is dynamic and is impacted in real time by the diligence undertaken and the state of the markets, including whether other bidders emerge or whether there is an auction of one type or another. The ability to evaluate new information and continually evaluate the transaction in real time and perhaps to pivot becomes paramount to a successful M&A transaction. It doesn’t hurt to understand both chess and poker.