Reading for Lecture 4.

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The Due Diligence

I. The Due Diligence: Execution;

II. The Due Diligence: Closure; III. Common Due Diligence mistakes;
IV. Key takeaways.

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The Due Diligence: execution

The aim of the Due Diligence and its whole execution is to confirm the target's representations, validate its valuation, probe any legal, regulatory and compliance concerns, and affirm expected synergies and integration plans. In substance, the key questions that the acquisitions team needs to address during the process are:
(1)are there any problems with the target that would force the buyer to abandon the deal, at any price;

(2)are there any issues that should occasion a change in the structure, terms, or price of the deal.
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The Due Diligence: execution (contd)

Main actions undertaken by the acquisitions team during the Due Diligence: Do the targets financial statements accurately reflect the companys financial condition;
Would the integration of operations with those of the target have any adverse effect on profitability;

What is the target companys outlook in terms of its customer base and concentration, its competitive positioning, and its ability to preserve or increase its margins;
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The Due Diligence: execution (contd)

Is the target company exposed to any significant and unexpected regulatory, governance, or liability risks; Are there any issues associated with long-term sustainability (e.g., availability of raw materials, environmental factors) that could affect the targets future operations;

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The Due Diligence: execution (contd)

Have future costs (for example, underfunded pension liabilities) been factored into the acquisition value;
What is the quality of the companys management team; Who are the targets key, value-creating employees, and whats the outlook for retaining them;

Are there any clashes of corporate culture that could adversely affect integration of the target with the Buyers business;

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The Due Diligence: execution (contd)

If the M&A is cross-border, are there cultural, legal, tax, accounting, employment, merger-control, corruption, or environmental challenges that will present real roadblocks to the deal.
To better address and have a quick response to the above issues, the Acquisitions team will regroup every day to wrap-up about the status and enlighten about the red flags.

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The Due Diligence: closure

If the Acquisitions team has red or yellow-flagged the deal, this information can serve as the basis for a lowering of the bid, modifications of the representations and warranties required from the target, and changes in the agreement that deals with post-closing adjustments and damages;
If the target has met the expectations and the deal has been green-flagged by management, the members of the due diligence team pivot into integration planning mode.

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Common due diligence mistakes

D.D. teams may wrongly identify the risks associated with the acquisition; D.D. teams may get so focused on their individual functions that they miss the big picture;
They may overlook the soft but important element of the targets corporate culture;

Team members may disclose expected synergies with the target company (leading them to, for example, increase their asking price to capture that value);

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Common due diligence mistakes (contd)

The team may rely solely on the virtual due diligence, and never put boots on the ground; The team may be so focused on spotting risks that they overlook opportunities;

Executives may be so in love with the deal that they ignore risks identified in due diligence and move ahead anyway.

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Key takeaways
Know exactly what youre buying; Due diligence is a detective game, so you need real detectives on your team; Look for deal-breakers and deal-amenders; Think of due diligence as the first phase of the integration; Analyze carefully both the financial issues and the cultural issues; Dont fall in love with the deal.

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