Importance of Due Diligence in M&A
Complications from poor due diligence make it the granddaddy of all merger mistakes. It wipes out more market cap than any other lapses in the entire acquisition process. Given its unrivaled destructive power, the due diligence process is the phase in M&A where improvements will make the most dramatic impact on financial results.
Faulty strategic thinking, executive hubris, incompatible cultures, and badly planned integrations get a bum rap. They receive an undue amount of blame for poor M&A performances. Ineffective due diligence is the true culprit behind most acquisition failures. Shoddy homework on the front-end of a deal negatively impacts practically everything that follows it. So much rides on the due diligence process. The information collected and analyzed informs the decision to acquire, the terms and structure of transaction, and the post-acquisition plan. When acquirers miss red flags that signal serious danger, they enter deals unaware of what they are actually buying. Therefore, they are more likely to overpay. In cases when the premiums paid are too high to be recouped, a merger is dead. It has failed even before the ink dries on the deal.
Due diligence teams must operate with limited information in a tight timeframe. And if they slip up in a crucial area, they could be haunted by the mistake for years. There are no do overs in due diligence.
