Thursday, November 16, 2006

Mergers & Acquisitions Due Diligence, Part 3
In advising companies that are acquisition candidates, two of the questions that I most frequently receive are:

1. What should I expect from the due diligence process?
2. How can I best protect my confidential information while still moving the process forward?

I already covered #1 (see Due Diligence, Part 1) and Part A of #2 (see Due Diligence, Part 2). I’ll cover the Part B of #2 in this post, finishing with Part C of #2 in two weeks.

How can I best protect my confidential information while still moving the process forward?

As discussed previously, there are three actions that a company can take that will decrease the odds of wasting time and unnecessarily parting with sensitive information, while not overly encumbering the acquisition process:

A. Gauge the seriousness of the potential acquirer (see Due Diligence, Part 2)
B. Stage the flow of information (covered below)
C. Be on the lookout for warning signs (to be covered in the next post)

B. Stage the flow of information

Staging the flow of confidential information based on the overall progress of the transaction is one of the best means of protection. Early in the discussions, less sensitive information is shared, and as the potential acquirer progresses and shows that it is serious, more sensitive information is shared. It forces the potential acquirer to “earn” the most sensitive information, and limits the number of parties that will see the most highly confidential documents.

While an NDA provides the legal protection, this method adds practical protection. Implementing this method involves staging due diligence into at least four phases of information sharing, although there’s not necessarily a defined break point between each phase.

(1) The first phase consists of the high-level, pre-NDA information, such as a “teaser document” and information that is already contained on the company website.

(2) Following an NDA is more detailed information on all aspects of the company (see Due Diligence, Part 1 for details). This information is typically heavier on current and historical information than on forward-looking projections. Quite a bit of confidential company information is disclosed in this stage, but very little that is competitively sensitive.

(3) The next phase involves the most sensitive company information, including projections, customer information, and any other requests from the acquirer deemed too sensitive to share earlier in the process. The process should be far along and the acquirer clearly serious before sharing these “state secrets.”

(4) Finally, the accounting and legal due diligence, is frequently at the end of the process. This phase is last more for reasons of cost and the larger number of people involved than for confidentiality reasons.


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