Material Adverse Change

CHAPTER 3Let the Buyer Beware

What is Bad? All that proceeds from weakness.

—Friedrich Nietzsche

Due diligence is the investigation that the buyer completes on the target company to determine whether to buy, any potential issues, and how much to pay. For example, assume that you are in the market for a new house. You would want to review the seller's disclosure list of any problems, inspect the property, see if there are any liens on the title to the house, arrange a mortgage, and so on. It is no different in buying a company. You need to make sure you know what you are buying before you legally commit to purchase it. However, while this sounds like simple common sense to most, there are numerous cases where sophisticated buyers have not done adequate due diligence in multibillion-dollar acquisitions. And the results can be a disaster.

In fact, one of the most common problems in all M&A transactions is a buyer's failure to complete an adequate amount of due diligence. Take the case of Bank of America buying Merrill Lynch for $50 billion. Bank of America decided to purchase Merrill Lynch between a Friday night and a Monday morning.¹ How does anyone complete an entire diligence process on a global, massively complex bank in the span of 48 hours? Most people take more time deciding whether to buy a new home or car than Bank of America took to commit to a multibillion-dollar deal. Was it that management truly understood what they were buying and were fully ready to move forward, ...