Due Diligence by the Target Company
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I would offer that Due Diligence by the target company should be just as extensive as that of the acquirer.
What are your thoughts?
I believe it is important for the target to conduct as much DD as needed to reach a confident position that the merger or acquisition is the right option for the company’s future.
I agree, because when you do this, you can find the troubles that purchaser probably will see and prepare a fast and good response for this problem. Or you can improve your defense with data and evidence when the acquirer companie try down the price.
Those that have previously commented have largely hit the nail on the head. Due Diligence of the target is just as critical. I’ve seen a number of deals fail to close because the target company has completed strong due diligence and determined that the deal isn’t the right fit for them (usually on several fronts). This almost always benefited the target company in negotiations, integration discussions, and ultimately whether or not the deal made sense to carry out.
While financial DD is critical, I am continued to be astounded how little emphasis is put on HR and commercial DD. I really encourage non-financial individuals to drive and have an equal share. I enjoyed reading the Polycom case study, highlighting their informal process with key ‘deal parameters’ that had to be met to make it a viable candidate.
Absolutely, 100%, unequivocal YES! Hindsight is 20/20, right? We merged our dental practice with a large PE backed group. We completed our DD off of the information that they provided; there is not a lot of public information available for PE. Turns out they were overleveraged, acquired underperforming assets, and they had insufficient capital reserves. When dentistry in the USA was shutdown for the pandemic, they had to do a major recapitalization to avoid folding. A lot of equity partners lost a lot of money, we most likely will not receive the final installment of our subordinated note, and I am now part of a team trying to improve performance.
It is going to be an expensive lesson to learn!
It depends. I would say the target company as the seller and acquirer as buyer has different objectives to achieve. It depends on what is most important and relevant to their objectives. Whatever aspects which are crucial to achieves their objectives, they should do it as extensive as possible.
More the target company prepares and looks for items, the more they will have negotiation power and timely completion of the deal. Due Diligence will help the target company to set the minimum expectations from the sale. They get a chance to clean up the books, look for unrecorded assets & liabilities, etc.
I agree – the target company also has a responsibility to vet the acquirer on the same fronts – financial, strategic and cultural. Just as for the acquirer, the information and the extent of the diligence will significantly depend on the strategic motivations of the target as well. A seller who is looking to divest completely a unit or element of their operations may be more concerned with the financial viability of the acquirer than the strategic/cultural match however a seller who is looking to leverage synergies and technologies may be much more focused on the strategic and cultural understanding.
I agree, especially if a large portion of the target’s leaders and employees are being absorbed into the acquirer’s company. Performing proper due diligence of the acquirer will determine whether or not it would be a good fit for the overall business strategy and culture of the target.
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