How much is “too much”?

Viewing 7 posts - 1 through 7 (of 7 total)
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  • #51904
    Yiwei Lee
    Participant

    In conducting due diligence, there are many facets to consider (e.g. financial, commercial, HR) to ensure reliability and fair assessment of a company.

    In doing so, how should we balance between cost and effectiveness? (i.e. we can look through every single employee compensation contract, or only a sample)

    #52157
    Nathan Taylor
    Participant

    Depends on the size of the target company and your own firm’s threshold for materiality.

    #52175
    Mohammad Manzouri
    Participant

    I believe that buyers should be prepared to pay a premium if they feel they need to acquire an un-soliciting target. Otherwise the greater vision of acquiring may be lost in dwindling negotiations

    #52845
    Christopher Twible
    Participant

    I have that problem at the moment. The target is small and the DD cost could be material compared to the purchase price. But the risk of not doing DD and inheriting liabilities in my industry is large. The acquisition is strategic and needs to be done… i’m struggling with the cost of advisors for such a small transaction

    #55504
    Dorminic Kang
    Participant

    As some of the above members mentioned, it really depends on the value and complexity of the transaction. In straight forward “plain vanilla” deals, the DD that is conducted is usually a “red flags only” or “short form” DD whereby only the deal-breaking kind of issues will be investigated such as looking at material contracts, enforceability of IP, regulatory compliance, validity licences etc. With regard to cost, this is also sometimes negotiated into the term sheet where sometimes the DD costs are shared between the buyer and the seller, or in the case of a merger, the surviving entity. Generally M&A deals are usually collaborative rather than confrontational – it is in both parties’ interests to close the deal. The risks of something going wrong after closing the deal (i.e. a major issue with the target that was not disclosed in the DD report or discovered through DD) are usually managed through getting the target to offer representations, warranties and indemnities (some surviving post completion for a short period of time).

    #55686
    Karen Mildenhall
    Participant

    Materiality is the litmus test of how much is too much in DD.

    #56125
    Megumi Hida
    Participant

    It depends on the industry and target’s business model. For example, if the target is chemical company, Environmental DD will be must. If the target is IT company and their product is the key asset, it may not be necessary to run full-blown HRDD.

    As others mentioned, buyers need to evaluate the target’s business model and decide what are the priorities in assessing the deal.

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