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.
M&A Due Diligence Training
M&A Due Diligence Certification Workshop
The M&A Due Diligence Certification Workshop teaches a well-defined methodology that streamlines and improves the quality of pre-deal investigations. Due diligence teams learn how to efficiently get to the truth on what truly matters. We help them develop a sixth sense, an ability to spot key issues that an untrained eye would overlook.
Due Diligence Overview
M&A Due Diligence: 30 Common Red Flags
First 5 of the 30 Common Due Diligence Red Flags
- Does the company appear to manipulate reserve accounts in order to smooth or enhance its reported earnings?
- Is the internal audit team subjected to significant scope restrictions?
- Are a large proportion of monthly sales completed during the last few days of each month?
- Are any employees of such importance that their departure for any reason would jeopardize the existence of the business?
- Is there evidence of continual changes in accounting methods?
Pre-Close Data Sharing
Pre-Close Integration Data Sharing Rules
Table of Contents
- General Prohibitions
- Document Creation
- Information Exchanges
- Unilateral Sales Calls (Acquirer)
- Joint Sales Calls (Acquirer and Target)
- Unilateral Contract with Partners (Acquirer)
- Joint Contract with Existing Partners (Acquirer And Target)
- Research and Development
M&A Clean Teams: Competitively Sensitive Information
- Industry reports or analysis prepared by third parties
- General information regarding current products and services
- Historical aggregated financial data, including aggregate revenues
- Information regarding the organisation of systems and processes (e.g. "back office" systems and processes like billing, IT and accounting)
- General information on health, safety and environmental matters
- General information on corporate structure and the structure of management and personnel
- Information that is in the public domain
Clean Team ...
What is Gun Jumping and How to Avoid It
- Our companies are still operating independently
- All work associated with the M&A integration teams should be considered confidential
- Please do not share details of our integration work outside this team
- The M&A integration lead team will coordinate communications to both organizations as needed throughout the process …
Pre-Close Data Harvesting Rules To Avoid Gun-Jumping
Acquirer and Acquired Co. legal teams determine if the data requested is:
- Non-Sensitive: OK for integration team to review
- Sensitive: giving a business a competitive advantage or influence
As we get near to closing the deal, data will get declassified …
Antitrust Compliance Guidelines During Pre-Close M&A Integration Planning
M&A Integration Planning:
- Information Sharing
- Common Issues
- Practical Tips
- Exercising Discipline
Due Diligence Data Request Checklist for an Acquisition Integration
- Top 20 customers by business sales
- Revenue for past 3 years by source
- Sales: Rebates & Discounts
- Top 100 suppliers and the AP spend month by month last 24 months.
- Financial systems for reporting and transactions...
Sales & Operations Due Diligence
M&A Due Diligence Checklists - Sales, Marketing, and Operations
Comprehensive 95-page sales, marketing, and operation guide to conduct thorough, effective M&A due diligence.
One of the most difficult aspects in business evaluation is understanding and justifying forecasts of future revenues. Section I of this guide provides a micro-style analysis of marketing and sales. The section asks numerous specific questions about twenty-five company functions that, together, address the ability of a business to gain and retain profitable customers.
Sections II through VI help the analyst develop a macro evaluation of the ability of other functions and departments to deliver on marketing’s promises to customers and prospects.
Section VII acts as a strategic summary, where detailed facts gathered earlier can be consolidated into an overall perspective of the company and its relative position in the industry. The summary helps the analyst develop and support conclusions. The additional information gathered during the analysis may lead to ...
HR Due Diligence
M&A HR Due Diligence: Side-by-Side Comparison of the HR Programs
11-page comprehensive comparison of HR Programs of the Acquirer and Acquiree in 125 Areas.
The programs are grouped into the following categories:
- Defined Benefit Plans
- Retiree Medical Plan
- Defined Contribution Plan
- Health And Welfare Plans
- Career Development
HR Due Diligence Tool
9-page list of data to gather and assess HR
Identify potential synergies/opportunities in these categories:
- Management Team
- Compensation and Benefits
- Recruiting ...
M&A Human Resources Due Diligence Checklist
7-Page HR Due Diligence Checklist
- Number of full-time employees in business (Exclude part-time, contract, and temporary employees).
- Employee names, job titles, and compensation.
- Total number of employees exempt from overtime: sales, administrative, professional and executive employees.
- Total number of hourly full-time (nonexempt) employees. Seasonal variations? Skill levels within each group?
- Total number of employees classiﬁed as temporary. Circumstances and conditions employees considered temporary.
- Total number of contract employees.
- Use and total number of part-time employees.
- Signiﬁcant increases or decreases during the past year in employee categories?
HR Due Diligence Information Request Checklist
8-Page HR Due Diligence Checklist:
- Organization charts and a description of management structure, including principal functional areas, headcount by area. and reporting relationships.
- Job descriptions for all major job categories and minimum education, experience, and skill levels required for each.
- Current pay ranges and recent increases.
- List current personnel (including lists of officers and directors) with hire dates, current annual salaries, bonus targets (if applicable), commission targets (if applicable), years of service with the Company, site location, highest educational degree, and prior experience ...
Human Resources and Legal Due Diligence Checklists
178 HR and Legal Due Diligence Questions
Checklists for each of these categories: Employees, Unions, Compensation and Benefits, Retirement Plans, 401(k)s, and ESOPs, Culture, and Legal and Regulatory.
1. Does this business have a human resources department? If yes, how is it staffed and what are its responsibilities? To whom does the senior human resources executive report? Are human resources personnel involved in signiﬁcant business decisions?
2. What is the number of full-time employees? (Exclude part-time, contract, and temporary employees.) Subdivide the total by country and business unit in which they are employed. Request lists, if needed, ...
Financial Due Diligence
Financial M&A Due Diligence
13-slide PowerPoint presentation on M&A financial due diligence and objectives.
Financial Due Diligence Request List
Excerpt from 4-Page Financial Due Diligence Request List:
- Quarterly income statement for most recent two quarters
- Financial projection for next four quarters
- Amount of forecast guaranteed by contract
- Most recent business plans
- A copy of tax returns for the last four years
- All tax distributions made
- Past two years’ audit results
- Last four years of financial statements
- Detailed analysis of each balance sheet account
- Debt instruments, indentures, loan agreements and agreements on documents relating to lines of credit ...
What Should You Do When Synergy Estimates Are Inflated?
"Map synergy activities to integration work streams. You may find the synergies are not tied to a work stream and accountabilities are not assigned. Verify responsibility, timing, amounts, and CTA ... Review gaps with senior management. Bad news never gets better with age ..."
IT Due Diligence
Information Technology M&A Due Diligence
Information Technology M&A Due Diligence 21-slide PowerPoint Presentation.
M&A IT Due Diligence Checklist
Excerpt from IT Checklist
- Systems for which management is dissatisfied. Corrective measures taken or planned
- Employees with exceptional skills in writing software, developing systems, or troubleshooting problems
- Systems manual maintained, up to date, and followed
- List of all information systems utilizing computers and their function in the business. Type of machines, software, their age, number, and location of units
- Backup and disaster recovery procedures and programs
- Level of difficulty anticipated to integrate the company’s databases into the buyer’s systems
- Policy on the issuance of mobile IT equipment to employees. List of all mobile equipment and to whom it is issued
- New information systems scheduled to be added or to replace existing systems
- Systems that use third-party software and custom-built solutions. Third-party systems under maintenance contracts
- IT employees responsible for system support and security. Security systems and practices are in place to protect the systems ...
Culture Due Diligence
How to Perform Culture M&A Due Diligence
41-slide PowerPoint presentation on how to perform culture M&A due diligence.
How to Perform Culture M&A Due Diligence: The 5 Stages
- Understanding the Deal Logic
- Getting Organized
- Data Gathering Tools and Techniques
- Analyzing the Data
- Operationalizing the Data
Operating Style Analysis (Part I)
- What aspects of the way your organization operates contribute most to its success/effectiveness?
- What characteristics of the way your company operates most hamper or interfere with its ability to compete?
- List the company’s operating strengths. (What does it do best?)
- What would you identify as the company’s operating weaknesses? (Where is the company most vulnerable or least effective?) ...
Operating Style Analysis (Part II)
1. Spending Habits: Frugal or Free Spending
Comments regarding this issue: __________________________________________
2. Decision-Making Process: Deliberate or Expeditious
Comments regarding this issue: __________________________________________
3. Power and Authority ...
Cultural Due Diligence Assessment Results
1. How do people feel about being merged/acquired?
The corporate perspective is different from the field’s perspective. Here at headquarters the questions are, “Is there room at the inn?” and “Will I go to Atlanta?” In the field, people are wondering if they will have to work for less money. Some are angry that it came to this. Did the CEO and the SVP just sell us out? People’s emotions run the gamut from “How could you do this?” to “What took you so long?”
It’s no shock that we merged, but people are set back on their heels that it is this acquirer...
Cultural Due Diligence Assessment
15 culture assessment questions to identify strengths, weaknesses, and wild cards.
- How do people feel about being merged/acquired?
- What would be your (or others’) major concerns about being acquired or merged?
- What are the defining characteristics of your company? (What’s distinctive? What differentiates you from other organizations in general? From the competition?)
- Describe the company’s core values. (What does it believe in?)
- What do outsiders not know/realize about this company?
- What are its idiosyncrasies?
- What are the unwritten rules around here?
- What aspects of the culture are most important to people here? (What do they hold sacred?)
- Where in the organization do the dominant subcultures exist?
- What are the company’s negative or undesirable cultural attributes? (What aspects of the culture need to change? ...
M&A Culture Assessment
Listed below are a number of cultural dimensions and indices that are organized across a continuum.
Step 1: Review each cultural characteristic and place an A in the column that most closely represents your perception of the Acquirer’s culture.
Step 2: Place B in the column that most closely represents the Acquired Company’s current culture.
Step 3: Calculate the absolute difference between each rating to determine the largest culture gaps ...
M&A Organizational Culture Checklist
Organizational Culture Checklist covers questions for:
Customers / Community
Cultural Integration: The "X Factor" in Merger Success and Failure
Organizations have grown far more sophisticated and skilled in their ability to execute the integration process. The one area where companies still struggle, though, is in merging disparate cultures. This is the black box of integration, the most complex problem that executives encounter in M&A ...
Post-Merger Integration Risks and Problems
Answers to these questions:
- What are factors that increase post-merger integration risks?
- What is usually the most dangerous phase of M&A integration?
- Do some acquirers and consulting overcomplicate M&A integrations?
- How can you tell if a merger integration is being mismanaged?
- What are the most common causes of M&A integration problems?
- What is gun jumping?
- What guidelines should be followed to prevent gun jumping prior to close?
- Which is easier - making the deal or making the deal work?
- What are the problems caused by poor communications during an M&A integration?
M&A Integration Risk Impact/Mitigation Template
Risk: Agreement delayed / production dates push into busy season
Potential Impact: Integration work competing with regular work at busiest time of the year for sales, production, and fulfillment.
Mitigation Plan: Make decision on transferring production into 2022 and fulfill all else from west coast
Potential Cost Impact: Rent costs for Company A, delayed realization of production efficiencies ...
Risk-Based Preacquisition Due Diligence Review Template
The value of every business and the buyer's realized return is ultimately determined by the amount of cash flow the business is expected to generate and by the amount of risk of those cash flows occurring. Every review item described in this template is intended to be used to help prospective investors develop a sense of expectations regarding a target business' ability to generate cash flows and to sharpen the understanding of the degree of risk to which those cash flows are subject.
What is the #1 Cause of Merger Failure?
The webinar reveals:
- Why culture incompatibility makes a good scapegoat
- What failed marriages have in common with failed mergers
- How cultural diversity can be an asset, not a liability
- What successful deal makers do when major integration problems are anticipated
- How high premiums increase the likelihood of large shareholder losses
- Why most companies do not hire outside consultants to conduct cultural due diligence
M&A Integration Risk Management
Risk Assessment Questions
- What are the most sensitive areas of the business that might be prone to disruption?
- Are major IT system integrations required to realize synergy benefits or operational efficiencies?
- Are there any key managers or salespeople that might leave as a result of the deal?
- Are there any past business practices that are incongruent with the Newco’s (or acquiring company’s) business strategies (for example, credit standards for new customers)? …
What Questions Should You Ask to Determine Performance Management Risk?
Differences in performance management between two companies can cause conflict and harsh feelings. Questions to assess this risk:
- Is there a standardized performance management program?
- How often are employees evaluated (e.g., monthly, quarterly, annually)?
- What are the rewards for exceptional performance? Consequences for poor performance? ...
The Case for Leadership Due Diligence in M&A
Traditionally the merger due diligence process has focused on legal and financial issues—e.g., contractual matters, litigation points, economic and fiscal considerations, etc. Obviously that’s an important exercise.
But when mergers fail, as they too frequently do, the odds are it reflects a sloppy job of soft due diligence.
There is powerful logic in favor of systematically assessing the competencies of key players in the new organization. You should not automatically assume that people who have been successful in a pre-merger environment will perform with the same effectiveness under a new regime and in a different corporate setup. People’s strengths often become weaknesses during a merger transition period ...
Pre-Close Leadership Assessment
Leadership Qualities Rated
Understands overall business goals; maintains or increases financial performance and market share through the application of sound business principles and knowledge.
Demonstrates the ability to grow our business in both current customers and the marketplace; knows and understands customer needs and anticipates opportunities.
Works across internal, external and geographic boundaries to deliver customer value; partners with individuals at all levels and in all functions to ensure that organizational objectives are met ...
Talent Assessment of Senior Vice President
Results from Assessment of SVP (name of executive and details have been changed).