In any M&A or investment deal, Due Diligence (DD) and Reporting are the final steps. While they are relatively mundane, it is extremely essential to do these to both reduce your risk and to ensure compliance with law. They are also a vital part of the post-acquisition process.
There is also another key reason why reporting and DD are increasingly relevant today. A Harvard study has pointed out that while the M&A momentum continues to build, there is also a high financial risk involved as 70-90% of deals are financially unsuccessful. In order to reduce this percentage, a through diligence and reporting process goes a long way.
Due diligence reduces the concept of information risk in corporate transactions. Information risk arises from the fact that a lot of information in M&A deals, especially in cases of acquisition where a large proportion of acquired companies are small, private firms, there is a lack of transparency in data. Sellers prefer not to revel all private information, especially those that can result in an unfavorable view by the buyer.
When there is information risk, due diligence is conducted towards the end to verify the claims of the seller. In cases of Merger or Joint Ventures (JVs), both parties conduct due diligence. Due Diligence ends with a comprehensive report detailing all aspects of the parties. These reports are important both for reasons of traceability and legality.
Furthermore, shareholders greatly value and demand these reports. With the amount of risk involved in M&A deals, comprehensive reports go a long way in convincing existing shareholders that the company is fully aware of all risks involved and has taken reasonable steps to mitigate them. Simply put, the added transparency from the reports and processes is crucial to a publicly listed company.
There are, however, limitations to Due Diligence. While each party desires a comprehensive and lengthy process to get as much information as possible from the other party, Due Diligence delays a deal. Usually, M&A deals ae time-consuming and happen when there is a pressing need. Companies also desire to finish the process as soon as possible in order to reap the benefits sooner.
At the end of the day, there is no rule on the period for due diligence. One suggestion that we can give is to start the due diligence and reporting process during the acquisition period, and not to wait till negotiations are reaching an end. That way, you reduce the total timeframe that it takes for an M&A to reach fruition.