[Evgeny Gorbunov]

If financial DD against the deal but conducted HR DD indicated the good outcome, would you pursue the deal?

[Muhammad Saqib Ishaq]

The deal may be worth pursuing if you could use the results of the financial due diligence to negotiate a lower deal price.

[Craig Hasler]

Hi Evgeny,

Thanks for the prompt.

I think the financial characteristics (and future outlook) of the deal take precedence over all other matters. While the HR due diligence may be positive (bringing in strong employees from the acquired company) and does add value to the deal, ultimately we do transactions to increase shareholder value (bottom line). On the basis of this comment, as per Muhammad’s suggestion above, the financial terms of the deal must make sense to move forward.

All the best.

Craig

[Marco Túlio Garcia Gonçalves]

Dear Evgeny, in my opinion it depends on the objectives of the deal. It is clear that financial due diligence is the main input to the transaction. However, if the transaction makes sense to the buyer due to the synergies found in HR, or if the skills that the target has and perhaps even difficult to find in the market are important to the buyer, it might make sense to continue with the transaction even if the financial DD would indicate otherwise, as long as this motivator is clear to all buyer decision makers. For example, perhaps in a consolidating industry this is the last opportunity that exists to acquire the competence the buyer needs, so in this case it is cost vs. benefit vs. opportunity and not just financial.

[Raghuram Sudhakar]

I would go for a Financial DD over HR DD.
The risks of acquiring a company with bad people and cultural fit are distrust, resistance to change and attrition. Even in the case of most specialized skillset, the ability to replace talent might still exist. It may take longer lead time.
However, the risks of acquiring a company with financial inappropriateness impacts the results of the company in the immediate quarter. What’s worst, financial irregularities exposes the acquirer directly to the regulators resulting in scrutiny and penalties.

[James Elding]

HR is really important in case where a technology company has been developed by a few technically gifted few. Think of inheriting a company with a product that has been developed by a few coders and is in the order of millions of lines of integrated code. I don’t have industry knowledge on the retention packages for these deals, but my guess is that retention bonuses and stock options are substantial.

[Mohamad Alchalabi]

It would still depend on the roots causes of the lower financial performance. The acquirer may be able to turn things upside down and make the newly acquired entity much more successful, especially with the help from HR elements identified.

[Stephane Hetroy]

Personally, I would always put a strong emphasis on the numbers. If there is a huge gap between the two I would try to understand why and where the disconnect happens. In my view a very good HR DD should correlate somehow with the financial DD except if the acquirer is ready to pay a huge premium or crazy price to enter a market, acquire R&D knowledge and/or keep at bay competition. However, in these last scenarios, I assume this is why an M&A deal destroys value instead of creating value when the integration does not go as planned (value vs price). Another risky aspect of a very good HR DD and bad Financial DD is the cultural gap and employees leaving the boat post-acquisition, the acquirer is then left with not much. Also to point, a funny and side aspect, if the people in this potential target are so great when comparing to the acquiring company… what is the issue with the acquiring company then?

[Abdulaziz Noaim]

I would pick Financial DD, although if HR (employees skills, talents..etc) might cost to develop and train. The financials are harder to overcome than HR.

[R Ganes Ramalingam]

Depending on the nature of business, if the target business is manpower related or has large number of headcounts, then its worthwhile revisiting the issues highlighted in the Financial DD for further negotiation and consideration.

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