Getting ahead of your Due Diligence

Due diligence is a critical phase in any merger & acquisition activity where a thorough investigation of the potential target company is conducted before the deal is concluded. This comprehensive process involves an extensive review of the company’s financial, legal matters, administrative, IT operations, software development processes and other key aspects.

This is a discovery process and set of best practices and recommendations that provide guidance on key risk mitigation needs along with opportunities for value creation. It identifies key integration or separation areas that could impact the value of the deal and evaluates all the disparate tech components within a company, and everything required to use that tech to uncover hidden threats.

The goal is to outline anything that could make for less profitable transactions. By investing in technical due diligence, companies can make faster, informed and value-based decisions that directly impact value creation.

It is in this process that the amount of technical debt is being carried is highlighted. This cost in technical debt needs to be offset from the value of the company. Technical debt can masquerade as legacy systems or mis-architected systems. 

Company policies – Are there company policies that are particularly important to your business? Perhaps your unlimited paternity/maternity leave policy has endeared you to employees across the company. This is a good place to talk about that, especially if there are international operations with different statutory regulations.

Executive profiles – A company is only as strong as its executive leadership. This is a good place to show off who’s occupying the corner offices. Write a nice bio about each executive that includes what they do, how long they’ve been at it, and what got them to where they are. It is also the time to potentially map where these executives would be accommodated in the new organization.

Here are some tips on how to get ahead of actual due diligence event in an mergers and acquisitions:

•           Start early and be prepared.

•           Identify potential deal breakers.

•           Conduct a thorough review of the target company’s financials

•           Review the target company’s contracts and agreements.

•           Review the target company’s intellectual property rights.

•           Review the target company’s compliance with laws and regulations.

•           Review all software licenses and adherence to open-source software licensing.

•           Understand cultural fit and operational readiness.

A poorly executed due diligence in mergers and acquisitions can lead to unwelcome surprises post-transaction, such as previously undisclosed litigations and liabilities or compliance fraud or labor law violations.

Failed mergers and acquisitions examples would be:

1)      AOL and Time Warner (2001) US$65 Billion

2)      Daimler-Benz and Chrysler (1998) US$36 Billion

3)      eBay and Skype (2005) US$2.6 Billion

 

Due diligence in mergers and acquisitions is essentially an effective way for buyers to protect themselves from risky business deals. As the process requires a great amount of communication between the two parties, the businesses are also able to form a working relationship.