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Chapter 5 | Due Diligence

Even for companies with reasonably effective due diligence processes, the pace of global change and cross-border cultural realities require review of existing practices. Taking the time to consider three key areas around best practice improvement can greatly increase the efficacy of a due diligence project.

Midaxo_Due Dilligence Diagram
1. Understanding the Why

By hurrying to evaluate a target, organizations can easily miss the essential first step that is the ultimate harbinger of success: understanding the why. Due diligence should only commence when the reason for acquisition (or investment) is clear and the rationale for target pursuit is compelling. Deal teams should therefore consider the following questions:

  • Does the deal accelerate corporate objectives and align with the overall strategy?
  • What revenue and/or cost benefits are actually realizable?
  • How is the target/deal specifically beneficial to the broader strategy, goals or mission? 

As clarity around these questions is gained, M&A teams should undertake a soft transaction “sense check” on a target. This step is a basic business review and should be viewed as a prerequisite to any additional planning and due diligence. Here, deal teams are considering financial, market, management and corporate structure basics to determine if the target is fundamentally suited to deliver in the affirmative on the question of why.  

Understanding the why and undertaking a basic diligence process can help a company steer-clear of value-destroying deals. And while areas such as post-merger integration are generally blamed when deals fail, it is useful to consider whether the deal should have even been pursued in the first place.

2. Establishing Assessment Priorities

The due diligence process should help determine a “go” or “no-go” decision. For every organization and every target, the specific areas of emphasis in this phase of a deal change. That is, not all areas of diligence are created equal and the required level of detail and areas of focus to suitably address risks and opportunities inevitably shift from deal to deal. 

By way of example, when an organization’s objective is deriving value from a target’s technology, specific technology-related due diligence should be prioritized. Organizations should perform deeper dives here to assess the stability, extensibility and validity of the target’s technological capabilities (with the original target evaluation criteria in mind). A technical assessment of this nature may cover the following:

  • Expandability and scalability
  • Lifespan
  • Costs to operate and support
  • Support methods and stability
  • Company dependency on the technology
  • Risks
  • Planned initiatives
  • Capital investment required
  • Software licensing and ownership of all technologies
  • Nature of IP and ownership
  • Infrastructure requirements

In the above case, if technological issues are a primary concern, it is better to understand the implications earlier in the process rather than later, when people and money resources have been wasted on less-critical evaluations.

3. Building Execution and Reporting Capabilities

Few steps play a more important role in deal success than how an organization coordinates the execution of due diligence workstreams. Regardless of deal size, there will be commercial, legal and operational due diligence efforts competing for attention and resources. Firing off generic information-gathering requests to targets or internal stakeholders and expecting complete, accurate and timely responses is a sure way to slow deal progress.

Organizations need to regularly review their execution capabilities and plans for communicating deal progress. A starting place for many organizations is by improving the tools used to drive due diligence information gathering and the resultant document management. Here, the use of a virtual data room, or VDR is recommended.

A VDR is a software solution that acts as a central hub for communication, task-assignment and progress display. By implementing a VDR, M&A teams reduce the deal-stalling that comes with endless email relay, disconnected question and answering, un-trackable stakeholder tasks and accountability gaps.

While comprehensive checklists bring new levels of deal thoroughness and help surface pre-deal risks, checklists alone are not indicative of efficiency. The VDR functionality of a Smart M&A Platform helps the deal team link due diligence findings directly to integration activities, use partner resources effectively and move through diligence categories more systematically. Practically, organizations need to scrap the old model of disconnected data repositories and ad-hoc Excel files. Using a Smart M&A Platform reduces buy and sell-side workloads and represents one of the most significant growth-points for due diligence excellence.

Moving deal activity out of email and static Excel-trackers also results in sharing and reporting gains. The VDR functionality of a Smart M&A Platform delivers confidential, easy access to files and task or project status reports. With administrative controls, deal teams can provision access to the right person for the right thing. Automation improvements, such as email alerts, support modernized exchanges with stakeholder audiences that don’t clog up the to-do list. And a Smart M&A Platform means no software has to be installed and ease of use.