What gaps do you observe in DD process?
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In most M&A deals, financial, tax and legal DD is performed. However, other DD components (like HR, IP, IT and commercial DD) and are sometimes left out. What’s your experience?
From my point of view and in my experience, it depends on the time we have for developing the DD process. That is our main enemy: time. So, in several cases we go on with the process without stopping and analyzing in a deeper way some key factor. These factor, are, for instance, Technical issues or Hr issues.
regards
César Otero
One common gap I see in diligence is the lack of thorough Cybersecurity & Privacy DD. With the recent increase in requirements to secure cyber insurance, this workstream is becoming increasingly important.
I agree with Jake above. Usually IT Due Diligence is undervalued. Many smaller companies outsource their IT services and many times there are contracts involved which can get messy after a merger. There are also IT security standards that must be adhered to – which are often overlooked.
Woon, I posed a question related to this on cultural diligence, which I felt had been not highly prioritized in the last process my team completed, and I was wondering about how best to improve it moving forward. While we complete dilgience on all the streams you mentioned, I do think “cultural diligence” is a bit harder to wrap ones arms around and thus can get left aside, which is unfortunate as having complementary cultures can make (or break) life post acquisition. We can look at compensation and org charts from an HR perspective, and understand who hit their targets and who didn’t, but it doesn’t give us a great window into what drives the culture at the target.
establish process to conduct workshop ahead of the DD commnecement to set proiroties and align all workstreams to focus on what matter to identify major risks findings and factor that into the development of the valuation.
I have to say that any DD I have done Internationally (outside of the US), I have relied on external consultants such as KPMG to look over anything related to GDPR and Cybersecurity policies.
in my view the scope/focus of the DD is influence by geographical locations. E.g.
Should one consider an Acquisition in emerging markets or Middle Eastern markets. I could have a different focus for “other areas of DD”Some examples:
Various countries has different forms of local employment protection – it should be well understood to avoid penalties.
Social dialog, ethics reporting practices…Gaps observed in the DD process from my point of view is primarily that each of the workstreams use the same template to appear as though we are a cohesive town however in my organization each of the functional areas Finance, Tax, IT, etc. do not speak to each other for the most part. I think my organization in particular has an opportunity to improve our diligence reporting by working closer together.
On the client side we typically see the quality of data shared as a significant gap. We observe data coming in very slowly or not at all which only creates additional risk to the buyer when the target claims they are unable to produce the needed data to make an informed decision. Typically the PE firm or Corporation looking to make the acquisition will tell the target not to produce any new documentation which complicates our ability to produce quality diligence findings.
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