DD – Does it simply confirm a decision already made

  • This topic has 21 replies, 22 voices, and was last updated 1 year ago by Clifford Newton.
Viewing 7 posts - 1 through 7 (of 7 total)
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  • #36101
    Clifford Newton
    Participant

    I’ve been involved in several due diligence cases and in everyone the obvious conclusion was not to purchase, yet the owner had already made up their mind regardless. I therefore question the need for the activity.

    #39157

    If a decision has ben made to proceed with the transaction, irrespective the due diligence findings, the benefits of due diligence can still be actualized in the form of adding educated clauses, conditions and indemnifications to agreements and also negotiating the deal price by taking into account any red flags uncovered during the due diligence process.

    #39174
    Matthew Person
    Participant

    In my experience, having overseen diligence for multiple buy-side acquisitions, the process is called “confirmatory” diligence for a reason. The process is meant to confirm the investment thesis and the valuation. Every company has “hairballs” – nuggets of problems that can make an acquirer cough – but most are solvable in post-merger integration. The key is knowing what hairballs impact go/no-go decisions and which impact valuation to a material enough degree to warrant a purchase price reduction. If you’ve done your homework in financial modelling, synergies analysis should build in post-merger expenses to remedy hundreds of thousands of anticipated costs – all of which factor into the valuation. As such, most issues are assumed risks that are outweighed by strategic impact and thus result in the deal going forward. This may look odd to the outsider, but the CEO will have already presumed such risk in the initial deal analysis.

    #39179
    Chengzhi (Roy) Chen
    Participant

    Believe not. For exmaple, a proper and comprehensive DD (e.g. Commercial DD) can reveal new business opportunities as well.

    #39227
    Bander Dhubaiban
    Participant

    Hi Clifford,
    I believe that the DD in that case did not show additional issues/risks that the buyer did not consider before making the buy decision. The buyer in this scenario was possibly looking for new critical information that could impact the decision and if the DD team did not bring that to the surface, the buyer would go ahead with the deal.

    #39257
    Stephane Hetroy
    Participant

    I believe, the confirmation of a decision already taken, happens quite often and is close to the picture of the great external consulting work done to comfort the CEO or BoD on the already decided new vision to implement. Unfortunately, I do assume that when there are a lot of conflicts of interest and if a CEO / top shareholders want to close a deal they will do it anyway, even if the DD results strongly suggest stopping the deal. Ego, money, image, market pressure… are all factors sometimes pushing for the ‘crime’. Another potential aspect is the watering down of any negative points at each layer when going up the hierarchy (command chain) in a company. Then the decision is not yet made by the CEO or BoD but the end result would be accepting a project even if the DD was originally negative. This is similar to the situation during a war when everybody on the ground says “the situation is really bad we are suffering heavy losses or something wrong is happening.” Then the feedbacks going up the command chain becomes more and more neutral or even positive… ‘no more risks and only positive outome’. This can happen if external advisors are pressured to waterdown their DD findings which are deemed too negative for the deal (after you have a group effect and responsibility dilution).

    #39258
    Randy Krivo
    Participant

    I have definitely seen deals blow up when the DD turns up some unpleasant surprises. But, if the buyer has “already make up their mind” to buy the target company, they often do move forward with the acquisition, but not after receiving some kind of adjustment to the deal.

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