Intelligent M & A: Navigating the Mergers and Acquisitions Minefield, 2nd Edition

CHAPTER 7Due Diligence

In M&A, due diligence normally describes the process of investigating the details of a potential target and the industry within which it operates. Buyers must understand what they are buying. Targets must understand who is pursuing them and whether they should accept an offer as in such situations the target is conducting due diligence in order to provide its board with the ability to make an informed recommendation to shareholders as to whether to accept the offer.

Due diligence is often seen as the bidder's responsibility. This is wrong. It is just as important for the target to conduct due diligence on the bidder in order to determine whether the offer is bona fide and legitimate – specifically and most importantly to ascertain whether the bidder has the financial capacity to complete the transaction. Due diligence is not merely a “hygiene factor,” as one executive told us, but a determinant of successful deals. “Insufficient due diligence” was noted by 88% of respondents to a survey conducted by Mergermarket in 2013 for TheStoryTellers as the most common reason for the failure of M&A deals. This was followed by “misjudged valuation” (73%) and “poorly managed integration of people and culture” (60%).

Some of the most famous M&A failures can be tracked back to disastrous due diligence. Certainly the merger of AOL and Time Warner in 2000 to create a $164 billion behemoth, which then promptly lost 97% of its market capitalization, can be traced to a faulty ...