Post Transaction Due Diligence

Christopher Davis and Linda Spedding outline the benefits of undertaking post transaction due diligence activity to achieve the aims of the acquiror/ investor/ funder.

WHY DO ACQUISITIONS FAIL?

Despite the best intentions behind acquisitions and mergers, statistics show that in most cases they are unsuccessful.ⁱ

Why should this be the case? For, is it not the case that the acquiror has carefully developed strategic objectives for the transaction? That being so, surely it is a matter of implementing the business plans to achieve those objectives.

Due Diligence pre sale/ investment

Firstly, those strategic objectives and business plans often rely on flawed assumptions. Why? Because the due diligence undertaken on the acquisition Target will, all too often, not have validated those assumptions - the key drivers of value.

Does the Target have good title to the assets that drive the value – whether those assets be secure revenue contracts, a customer base, brand name, technology, tax losses, management expertise or otherwise?

Has the due diligence exercise assessed the risks that may destroy that value?

As Les Baird, head of Bain & Company’s Mergers and Acquisitions practice says “We’ve found that in the face of uncertainty, proactive, deeper due diligence can deliver a competitive advantage in the speed and quality of deals done.”ⁱⁱ

POST TRANSACTION ACTIVITY

Once the typical acquisition, investment or joint venture completes, the Target often continues with its business without there being a coordinated integration plan to extract the maximum value from the transaction. Thus the opportunities for driving value and the risks that can destroy that value that may or may not have been identified as part of the due diligence exercise are often not followed up on post completion.

Further, the matters requiring implementation as identified during the due diligence phase need to be attended to.

Also, the covenants entered into by the sellers or, in the case of an investment, the investees and Target, need to be implemented and monitored.

All too often an institutional purchaser or investors will leave these actions to the Target management/ investees without ensuring and monitoring the implementation.

The result - failure to drive the value from the transaction.

Solutions

Therefore, ongoing due diligence, risk management and corporate governance is required after the transaction has completed. This is rendered more complex where two businesses are being merged and includes:

• multi-disciplinary post transactional integration such as undertaking a corporate entity and corporate governance review; review of policies and procedures; rationalising regulatory licences across the two businesses such actions in relation to contracts across the Target and acquirer as a result of any rationalisation of the two businesses; any review of employment contracts, benefits and supporting documents; review of external funding arrangements; a real estate review; intellectual property review; insurance arrangements; information security review; review of the Target’s intercompany arrangements – particularly where there has been a merger of businesses;
• address issues arising from the transaction including to remediate matters identified during due diligence as requiring attention, making any notifications to regulators, notifying third parties affected by change of control advisory provisions;
• ongoing monitoring for acquirors, investors and joint venture partners including of transactional covenants and commitments, ESG targets.

It is also important to bear in mind that pre-transactional due diligence exercises are typically “red flag” reports that take a high level approach to identifying issues of major significance.

Summary

Therefore, a prudent acquiror/ investor/ funder will assess the Target’s risk management programme, and ensure that it reports on compliance issues - particularly those that pose criminal/ regulatory penalties to directors, managers and the Target.

This will vary by country - according to the government’s enforcement priorities. In view of the potential broad spread of compliance exposure across the spectrum ranging from anti-moneylaundering, anti-bribery and corruption; taxation; data privacy/ protection; health & safety; product liability; employment and environmental, there are multiple areas that can destroy transactional value.

To minimise risk, the acquiror/ investor/ funder may require that an initial post-transactional review is undertaken.