White Paper                             PART 2 OF 3Executing Effective M&A:Critical Considerations fromPre- to Post-Deal C...
Contents                                                                                 PART 2 OF 3      Executive Summar...
Executing Effective M&A: Critical Considerations                    Executive Summary                                 Exec...
A guide to performing successful due diligence                              At its most basic, due diligence is the method...
Executing Effective M&A: Critical Considerations                              Particularly in regions where a history of c...
new entity ultimately disintegrated. On top of the bad feelings the incident created for                              both...
Conclusion                              During the due diligence process, best practices call for a complete, accurate and...
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Executing effective m&a, part 2 – during the deal


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Executing effective m&a, part 2 – during the deal

  1. 1. White Paper PART 2 OF 3Executing Effective M&A:Critical Considerations fromPre- to Post-Deal Closure M E R R I L L D A T A S I T E
  2. 2. Contents PART 2 OF 3 Executive Summary 3 Introduction 3 A Guide to performing successful due diligence 3 Beginning the courtship: How to strengthen relationships during due diligence 4 The real deal – Why due diligence matters to both buyer and seller 5 Preparing to close the deal 5 Conclusion 6
  3. 3. Executing Effective M&A: Critical Considerations Executive Summary Executive Summary M&A transactions that succeed in creating enhanced value always follow certain steps before, during and after the deal itself. In the previous instalment of Executing Effective M&A, we examined some of the critical pre-negotiation preparation that must take place to properly position a deal for success. In Part 2 of this 3-part series, we examine best practices during the actual process of due diligence, as potential buyers and sellers begin to dig deep and share critical information that will ultimately affect not only the success of the proposed deal, but also the final valuation. Introduction Once a would-be buyer and prospective seller in an M&A transaction identify each other, the courtship has only just begun. From that point forward, until the deal is either concluded or abandoned, each party will be consumed with the process of due diligence. The buyer will seek to uncover and digest every detail about their potential acquisition, and the seller will need to be prepared to effectively and efficiently answer any and all questions that may arise throughout this phase. Even for the largest of companies that routinely conduct due diligence on dozens of potential acquisitions each year, this process can be daunting - no two deals are ever exactly alike. However, familiarity with the due diligence process does stand serial M&A participants in good stead. Having conducted numerous due diligence events helps corporate deal teamsEven for the largest of understand how to approach this investigatory phase of the M&A transaction withcompanies that routinely confidence. Their experience lets them know what types of red flags to watch for, whatconduct due diligence corporate areas deserve the most scrutiny, and what processes and tools can make theon dozens of potential job easier.acquisitions each year, this However, for most companies who are interested in either buying—or selling—a business,process can be daunting – this may be a once-in-a-lifetime event. Management at these companies may have little tono two deals are ever no experience in preparing for due diligence, and might not fully grasp the breadth andexactly alike. depth of information that must be produced, vetted and ultimately reviewed for the due diligence to be successful. In this paper we will examine some best practices for conducting due diligence that can help M&A participants confidently prepare for and complete this process. 3
  4. 4. A guide to performing successful due diligence At its most basic, due diligence is the methodical and measured evaluation of every aspect of a business’ corporate life. In an M&A setting, a potential acquirer will need to conduct due diligence on historical corporate information that includes sales, profits and losses, legal arrangements, management backgrounds, employee issues, technology and patent details, contracts, leases and much, much more. Whatever the subject area, proper due diligence centres around members of the deal team being able to efficiently inspect and review hundreds and even thousands of supporting documents, and it requires the target company’s team to produce and be able to verify that information in every case. Why is robust due diligence so critical?It is the target company’s For one thing, many organisations that are on the acquisition trail want to make ajob to produce all the purchase that will add value to their business as a whole. They want to buy somethinginformation necessary that is not being fully used and to find an opportunity where they may be able toto help the acquirer realistically grow their business after the purchase.feel confident about itspurchasing decision. It’s In this case, an acquirer will be looking for unrealised potential during its due diligencehere that some would-be exercise. This may entail rigorously scrutinising items such as the current customer basesellers falter because they and then extrapolating that number based on the synergy between the two entitiesdon’t recognise the scope concerned. Or, an acquirer may need to fully understand the cost base of the productsof information buyers will produced by the target company, so they can identify savings that might accrue after aneed to inspect. successful deal conclusion. Acquirers also need to be absolutely sure that they are buying what they think they’re buying. It will not be acceptable after a deal has concluded to find out, for example, that the business or asset acquired is under-performing in terms of profit, or that its trading partners or 3rd party suppliers have included organisations that would run afoul of government legislation. That’s why thorough and robust due diligence is a must for corporate development teams, shareholders, employees and investors as a whole. To a seller, on a practical level, they must expect to have every legal and financial contract or document carefully vetted. Employment agreements will be reviewed, bonus arrangements and salary information will be evaluated. Supply chain arrangements will be investigated, and the background of corporate suppliers will need to be verified. Accounting information will be scrutinised and cross-checked with exceptional care. In this case, it is the target company’s job to produce all the information necessary to help the acquirer feel confident about its purchasing decision. It’s here that some would- be sellers falter because they don’t recognise the scope of information buyers will need to inspect and they fail to provide that information in a usable, easy-to-access environment. Beginning the courtship: How to strengthen relationships during due diligence For buyers and sellers, the process of due diligence has become even more critical in light of market volatility, economic uncertainty and other external factors. In addition, issues of fraud, improper disclosure and other deal-breaking items continue to rise. What that means today is that every single piece of information shared during the due diligence phase must be both easily accessible to the review team and presented in a way that continually builds confidence between the potential partners.4
  5. 5. Executing Effective M&A: Critical Considerations Particularly in regions where a history of corruption, bribery or other regulatory red flags exist, acquirers must proceed with the utmost caution to ensure they don’t unwittingly buy themselves into a company full of trouble. This “confidence-building” between partners happens organically when the deal team feels secure that they are not only being presented with the complete information they need to assess a business, but that the information is available to them in a form that allows them to search for the irritating “needle in a haystack” that might doom a deal. It’s been said before that good due diligence is formed from the phrase “trust, but verify.” That can pose a challenge, especially in areas of the world where the concept of due diligence may be unfamiliar to management and where they may not be used to having to prove what they say about their business is true. Confidence crumbles between potential partners when information is not forthcoming, not readily available, or not presented in a user-friendly format that is easily accessible. In some cases, a target company may intentionally not disclose critical information. In others, it may be that crucial facts were simply missed because the due diligence process was too cumbersome for all involved. In either case, a situation where information is missing or difficult to interpret can kill even the best of potential deals. A would-be buyer may interpret this lack of information as reticence or even duplicity on the part of the target. On the seller’s side, the due diligence process can crumble because their organisation becomes overwhelmed and overburdened by continually trying to meet a potential acquirer’s unrelenting requests for additional data. In both cases, an unwieldy, poorly managed due diligence process could prove fatal to the deal. The real deal—Why due diligence matters to both buyer and seller Consider this example of two companies that were unprepared for the rigours of dueConfidence crumbles diligence:between potential partnerswhen information is not The first company was a cross-border acquisition target, and the second the would-beforthcoming, not readily acquirer.available, or not presented The seller was relatively unsophisticated about the complexities of due diligence. Thein a user-friendly format company’s management team had never been involved in the sale of a business, andthat is easily accessible. their discomfort with the process contributed to a piecemeal, disorganised presentation of documentation to the acquirer. On the other hand, the acquirer was trying to complete due diligence on a company in an unfamiliar country, with its deal team reviewing scattered documentation that was often duplicated or out of date. In addition, the inherent language barrier contributed to misunderstanding and confusion. Among its other assets, the target company had a contract in place that accounted for a significant portion of its annual sales. Unfortunately, in this case, the acquirer’s deal team missed one critical detail in its review: The contract contained a change of control clause, which meant that upon the purchase of the target company, the contract became void and would have to go back out to bid. After the deal closed and the acquirer discovered this problem, it angrily contended that the target company had not adequately disclosed this crucial fact. Since there was no way for the target to prove that it had disclosed the information, the integration of the 5
  6. 6. new entity ultimately disintegrated. On top of the bad feelings the incident created for both seller and buyer, trust diminished on both sides. The would-be benefits that were initially identified from the purchase never came to fruition, and the purchaser divested itself of the business at a loss. Preparing to close the deal There is a way to take some of the pitfalls out of the due diligence process by employing a critical tool that can speed review, provide complete audit trails to ensure—and prove—A VDR provides a secure disclosure, enhance confidence and trust between parties, and even maximise deal value:document repository located both sellers and buyers can make use of a virtual data room (VDR) as a due diligence“in the cloud”, which can review platform.index and host thousandsand thousands of pieces of A high quality, industry-leading VDR enhances due diligence in a variety of ways:supporting documentation First, using a VDR brings concrete order to a process that can often be disorganised.in an organised filingstructure. As a virtual data room, a VDR provides a secure document repository located “in the cloud”, which can index and host thousands and thousands of pieces of supporting documentation in an organised filing structure. In addition, a VDR also removes physical constraints from the due diligence process because the secure document repository can be accessed via the Internet from anywhere in the world at any time. Sellers can provide varying levels of access to any potential party in any location with simple, permission-based access settings, which means that access can also be segmented by topic if necessary, so human resources information is separate from patent information, for example. Different members of the deal team can also login to the same VDR site, but be limited in the information they are able to see. Another benefit of a quality VDR is that every piece of information hosted on the site is searchable down to the page level. The ability to segment data at both folder and document levels provides exceptional granularity, and the ease with which information can be located and reviewed is unparalleled. All user activity is tracked inside the best VDRs, including pages accessed and information reviewed, which provides sellers with an audit trail that can be used to prove disclosure in case of any later disputes. This means sellers can be confident that should any questions about disclosure arise down the road, they can produce a certifiable audit trail showing certain information was in fact accessed by the correct people and for precisely how long. In addition, with the various reporting functions built into a premier VDR, a seller can gain valuable insight into the motivations or interests of a would-be buyer. For instance, if the acquisition team spends 90 percent of its time examining information in a particular folder, the seller will be aware that future questions may be forthcoming on that topic and have time to prepare effectively for a deeper dive into those subjects. Another major feature of the highest-quality VDRs is the Q&A function. The Q&A feature allows potential buyers to ask questions of the seller, and allows an administrator to answer in a generic form. This actually facilitates communication because the workflow in the Q&A form allows the administrator to send out e-mails to department heads who will be responsible for answering those questions. Every aspect of these exchanges is also tracked and as such, communication amongst both deal teams is improved.6
  7. 7. Conclusion During the due diligence process, best practices call for a complete, accurate and thorough exchange of information that is easy to review by both buyer and seller. A VDR provides demonstrable value to both buyers and sellers in that it can help cut the time required for due diligence significantly, and help buyers build confidence that they have been able to do a thorough due diligence review on the asset or company in question. For sellers, using a VDR means they look competent, professional and well prepared, and another benefit is that by making access to information easy for a potential acquirer, sellers can attract a larger pool of potential prospects and improve the ultimate value of their deal. In Part 3 of “Executing Effective M&A”, we will examine industry best practices for maximising value and capturing synergies after the initial deal is done. To learn more about how Merrill DataSite can help you through the due diligence process, visit www.datasite.com or e-mail info@datasite.com About Merrill DataSite Merrill DataSite is a secure virtual data room (VDR) solution that optimises the due diligence process by providing a highly efficient and secure method for sharing key business information between multiple parties. Merrill DataSite provides unlimited access for users worldwide, as well as real-time activity reports, site-wide search at the document level, enhanced communications through the Q&A feature and superior project management service — all of which help reduce transaction time and expense. Merrill DataSite’s multilingual support staff are available from anywhere in the world, 24/7, and can have your VDR up and running with thousands of pages loaded within 24 hours or less. With its deep roots in transaction and compliance services, Merrill Corporation has a cultural, organisation-wide discipline in the management and processing of confidential content. Merrill DataSite is the first VDR provider to understand customer and industry needs by earning an ISO/IEC 27001:2005 certificate of registration — the highest standardEuropean Headquarters for information security — and is currently the world’s only VDR certified for operations in101 Finsbury Pavement the United States, Europe and Asia. Merrill DataSite’s ISO certification is available for reviewLondon EC2A 1ER, UK at www.datasite.com/security.htm.+44 (0)207 562 3200 As the leading provider of VDR solutions, Merrill DataSite has empowered nearly two millionMerrill Communications unique visitors to perform electronic due diligence on thousands of transactions totallingWorld-Wide House, 5th Floor trillions of dollars in asset value. Merrill DataSite VDR solution has become an essential tool19 Des Voeux Road Central in an efficient and legally defensible process for completing multiple types of financialHong Kong transactions. Learn more by visiting www.datasite.com today.+852 2536 6640 About Merrill CorporationCorporate HeadquartersOne Merrill Circle Founded in 1968 and headquartered in St. Paul, Minn., Merrill CorporationSt. Paul, MN 55108 (www.merrillcorp.com) is a leading provider of outsourced solutions for complex business800.688.4400 communication and information management. Merrill’s services include document and data management, litigation support, language translation services, fulfilment, imagingOffices in major cities and printing. Merrill serves the corporate, legal, financial services, insurance and realthroughout the world estate markets. With more than 5,000 people in over 40 domestic and 22 international locations, Merrill empowers the communications of the world’s leading organisations.info@datasite.comwww.datasite.com Windows, Windows Explorer and Microsoft Outlook are registered trademarks of Microsoft Corporation in the United States and other countries. All rights reserved. MD0214EU_1 M E R R I L L D A T A S I T E