Executive Summary
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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.
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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.
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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.
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Due diligence should start from the inception of a deal.
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Areas to probe include finance, management, employees, IT, legal, risk management systems, culture, innovation, and even ethics.
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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.
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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.
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