Blog Post

What is M&A Due Diligence? A Fresh Perspective for GCs

December 3, 2019

Between 70-90% of corporate Mergers and Acquisition (M&A) deals result in failure, depending on which reports you read. And yet according to the latest Harvard Law School M&A report, total deal volume in 2017 made it the fourth busiest year on record for M&A activity. For General Counsel (GCs), those numbers making for nervous reading; the likelihood of you playing a major role in M&A activity is increasing, even though the risks are greater than ever.

GCs are involved throughout the deal, from the initial searches for an acquisition target or considering offers from potential suitors, to closing the deal and completing the post-close integration. This means the stakes are high. You are risking not only the finances of the company, and the employees’ jobs, but also your own reputation.

The most important part of any M&A? The due diligence. This is where the foundations of any possible union can be assessed and risks properly understood. And there are methods to mitigate risk while due diligence is carried out.

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However, due diligence is not restricted just to M&A activity. Many organizations conduct due diligence to better understand new jurisdictions for potential expansion, to scope out new markets or customer segments or simply to better understand their own internal processes. But for the purpose of this article, we are focused on M&A due diligence because this is the most common and bares inherent risks for GCs.

What is M&A Due Diligence?

Due diligence is a thorough appraisal of a business before any M&A. The process involves the most critical realms of business, including strategy and vision, operations and assets, finance and legal aspects. For each of these organizational segments, a GC must understand everything from compliance, to contractual obligation to corporate governance and beyond, and any repercussions these could have on their own company. When carried out properly, due diligence allows for optimal decision-making and a smoother post-deal transition.

The success of the M&A, as well as the value that the team leader brings to the company, is dependent on proper timing, expertise, and leadership during the due diligence process. Oversights can be detrimental to both the investment and the reputation of the companies involved. Cutting corners here is not worth the risk.

Traditional Approaches to M&A Due Diligence are on Their Way Out

If you want to close the deal quickly, while keeping up with regulations and ensuring frictionless integration, old approaches to due diligence won’t work. Traditional fact-checking focuses on near-term finances and scenarios; the process typically neglects to determine a strategy for ensuring post-integration success. A traditional M&A due diligence method also fails to properly assess the softer side of why company integrations fail – company culture, vision, and philosophy.

It’s time to reach beyond tradition. According to strategy+business magazine, a critical component of a best-practice due diligence process is that of strategic due diligence. The process aims to not only investigate the financial and legal processes of the M&A but also anticipates issues that may hinder it while focusing on the long-term success of the transaction. It answers questions such as: What are the immediate challenges of post-merger integration? How will the competitors react? What will be the long-term impact on the market?

As well as asking these more strategic questions, culture also receives too little attention until due diligence is almost complete according to McKinsey. And yet company values and culture can be the deciding factor of whether the combining two companies achieve the synergy they are after post-merger. Although examining and understanding company culture may seem out of the realm of a GC during due diligence, it now plays such an important role in the success of an M&A that it must form part of the process. It’s a GCs role to evaluate the deal’s likelihood of success, and in a global world, it’s easy to find companies doing similar things, trickier to find those whose culture, from CSR to HR, vision to working practices, matches yours.

The First Step to Ensuring a Smooth M&A: Consult an Outside Expert

One of the first elements to successful strategic due diligence is setting clear procedures for every step of the process that follows a definitive objective. That’s where an outside consultant with strategic due diligence expertise can help. A trusted advisor can offer the procedural guidance necessary for deal evaluation and subsequent successful integration.

Most importantly, the right expert can actually get under the skin of the organization, putting feet on the ground and having an intimate knowledge of long terms goals, cultural aspirations as well as the more traditional financial and legal details.

Asking for help is not only OK here, but often vital for the health of the transaction — and the post-transaction wave.

A third-party expert may be beneficial to your company during an M&A in the following ways:

  • Outsourcing some of the legal processes allows the deal to be completed more quickly
  • Third-party eyes often see things that companies too close to the deal are unable to observe
  • An outside consultant has done many M&A deals before, they have experience and knowledge to see pitfalls and opportunities before they arise
  • The third-party may offer expertise outside of the specialty of your own legal team
  • The expert has a thorough knowledge of market regulations and laws and is able to implement them throughout the transaction
  • A third party should continue as a strategic guide for how to move forward post-deal to ensure integration success
  • An expert will free up the team’s time for strategic work while alleviating pressure and adding transparency to the process

Equipped with the proper resources, you and your team can prepare the company for integration long before the deal is set on paper while ensuring the success of the M&A in the long term. If you are willing to take on M&A risk for the sake of your company’s brighter future — then it’s worth assessing those risks correctly to set yourself, and your organization up for the potential rewards.