Friday, December 01, 2006

Mergers & Acquisitions Due Diligence, Part 4
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?
and
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 Parts A and B of #2 (see Due Diligence, Part 2 and Due Diligence, Part 3). I’ll finish with Part C of #2 in this post.

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 (see Due Diligence, Part 3)
C. Be on the lookout for warning signs (covered below)

C. Be on the lookout for warning signs

Throughout the process, it’s key to continually evaluate the potential acquirer in a number of areas. Most important is overall trust. If they have been honest and straightforward in the negotiations, that’s a good sign for their integrity overall.

While the seriousness of the acquirer was previously discussed in #2A, it can be even better judged as the process continues. See if their actions are those of a serious acquirer: how big is the team, how much time are they spending, and are they spending cash to evaluate the transaction (e.g., investment bankers, attorneys, accountants).

An experienced acquirer should understand the staging of information previously described in #2B. If they are unreasonably frustrated at having to wait, that could be a red flag.

Does it feel like they’re just fishing for information that’s not critical to the deal but could be important to a competitor? The focus of the due diligence can vary depending on the acquirer, but everything should track back to understanding the business, assessing its value, and avoiding risk.

Which groups from the potential acquirer are involved? Typically, there is mostly corporate-level involvement early in the process, and more operational people and specialists later. Think about the groups at the potential acquirer that are the biggest competitive threat, and if there is a disproportionate number from those groups, make sure you understand everyone’s role as it relates to the M&A process.

There is obviously a lot more involved in running a productive due diligence process, but the topics in this post and the previous ones cover some of the important basics regarding expectations and protection.

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