Professional Documents
Culture Documents
by Scott Moeller
Executive Summary
• There is an urgency for companies to conduct intensive due diligence in financial deals, both before
announcement (when it should be easy to call off the deal) and after.
• Traditional due diligence merely verifies the history of the target and projects the future based on that
history; correctly applied due diligence digs much deeper and provides insight into the future value of
the target across a wide variety of factors.
• Although due diligence does enable prospective acquirers to find potential black holes, the aim of due
diligence should be this and more, including looking for opportunities to realize future prospects for
the enlarged corporation through leveraging of the acquiring and the acquired firms’ resources and
capabilities, identification of synergistic benefits, and postmerger integration planning.
• Due diligence should start from the inception of a deal.
• Areas to probe include finance, management, employees, IT, legal, risk management systems, culture,
innovation, and even ethics.
• Critical to the success of the due diligence process is the identification of the necessary information
required, where it can best be sourced, and who is best qualified to review and interpret the data.
• Requesting too much information is just as dangerous as requesting too little. Having the wrong people
looking at the data is also hazardous.
Introduction
This is not your father’s due diligence.
Due diligence is one of the two most critical elements in the success of an Mergers and Acquisitions
(M&A) transaction (the other being the proper execution of the integration process) according to a survey
conducted in 2006 by the Economist Intelligence Unit (EIU) and Accenture. Due diligence was considered
to be of greater importance than target selection, negotiation, pricing the deal, and the development of the
company’s overall M&A strategy.
But not even a decade ago, when due diligence was conducted in financial transactions, the focus was
almost always limited to financial factors, pending law suits, and information technology (IT) systems. Today,
those areas remain important, but they must be supplemented during the due diligence process by attention
to the assessment of other factors: management and employees (and not just their contracts, but how good
they actually are in their jobs), commercial operations (products, marketing, strategy, and competition—
both existing and potential), and corporate culture (can the companies actually work together when they’re
merged?). But even these areas are now mainstream when due diligence is conducted. Newer areas of
due diligence are developing rapidly: risk management, innovation, and ethical (including corporate social
responsibility) due diligence.
The 2006 EIU/Accenture survey also found that although due diligence is considered as a top challenge by
23% of CEOs in making domestic acquisitions, this rises to 41% in the much more complex cross-border
transactions, which make up the majority of financial transactions, even in today’s depressed markets.
Case Study
Case Study
Conclusion
According to the EIU/Accenture survey, only 18% of executives were highly confident that their company had
carried out satisfactory due diligence. This is probably due to the lack of attention given to this critical aspect
of a deal, or to the view that it is merely a box-ticking exercise conducted by outside advisers.
In short, the probing of a wide variety of due diligence areas should provide a counterbalance to the short-
termism of traditionally limited financial and legal due diligence, helping acquirers to understand how markets
and competitive environments will affect their purchase, and confirming that the opportunity is a sensible one
to undertake from a commercial and strategic perspective, especially in cross-border deals.
Making It Happen
Key factors in conducting informative and timely due diligence are:
• Identifying the critical areas to probe: financial, legal, business, cultural, management, ethical, risk
management, etc.
• Identifying the most important information to collect in those areas, as there is never enough time to
look at everything in as much detail as one might want.
• Identifying the right sources for the desired information.
• Identifying the right people to review the data: this should include those who know most about that area
and also those who will be managing the business post acquisition.
Due diligence should not be a mere confirmation of the facts. Bridging the strategic review and completion
phases of any merger or acquisition exercise, the due diligence process allows prospective acquirers to
understand as much as possible about the target company, and to make sure that what it believes is being
purchased is actually what is being purchased. The due diligence process digs deeper before the point of no
return in consummating a deal.
Notes
1 Adapted from Fell, Bruce D. “Operational due diligence for value.” Emphasis no. 3 (2006): 6–9. Online at:
tinyurl.com/d7w36t
2 Ibid.
See Also
Best Practice
• Acquisition Integration: How to Do It Successfully
• Coping with Equity Market Reactions to M&A Transactions
• CSR: More than PR, Pursuing Competitive Advantage in the Long Run
• Mergers and Acquisitions: Today’s Catalyst Is Working Capital
Viewpoints
• Viewpoint: James E. Schrager
Checklists
• M&A Regulations: A Global Overview
• Overview of Tax Deeds
• Planning the Acquisition Process
• The Rationale for an Acquisition
• Structuring M&A Deals and Tax Planning