The due diligence phase of a business acquisition is designed to ensure that the acquiring party understands and agrees to what they are buying.
No matter how hard the due diligence team tries there will be things that are missed or underestimated. In the contract for sale, the seller often provides some warranties in order to close the deal. There is no deception here but rather the seller is demonstrating confidence in what they are selling.
Large organisations are complex and the people working on both sides of the deal have limited knowledge, limited access to the full resources of both organisations and limited time. From experience the parties act in good faith with an adequate process under the circumstances but it is unlikely to be the complete solution.
It begs the question as to why some of these issues are not uncovered during the due diligence process? A number of things could be at play such as:
- The individuals responsible for the due diligence, don’t know the issue exists.
- The acquired organisation operate at a different performance standard to the buyer. As far as the seller is concerned it is business as usual and they are compliant with their own standard.
- The issue is controlled by a particular process that is not formally recognised or documented and may be broken during the integration process.
- Down the chain there may be fear, ignorance or avoidance of the issue.
- Those with the knowledge are unaware that the issue may be of interest to the Due Diligence team.
- The acquiring organisation and its representatives don’t appreciate the consequences of the information provided during due diligence.
- A truncated sale process forces the acquiring party to prioritise due diligence activity not realising there is a smouldering issue in the de-prioritised area.
- Due diligence fatigue and reaching a point of “just get the deal done”
For whatever reason, the bed has been made and the deal done. It is now up to the Integration Manager to make it work. An experienced integration manager would insist as part of the integration design phase that effort be made to uncover those smouldering issues. For all the reasons above the issues are still invisible and require special attention to make them visible.
Firstly it is critical to create an environment of trust where it is safe to provide information without inappropriate ramifications. This is difficult enough to achieve under normal circumstances but it is doubly hard under M&A conditions. The best integration managers see this as a real opportunity to build and demonstrate trust and forge the desired business relationship with the acquired organisation. The leadership here may define the success or otherwise of the integration. Do you establish amnesty conditions or reinforce accountability? Wherever the response falls on the continuum, success is achieved if the outcome is fair and is seen to be fair under the circumstances.
The next thing is, to appropriately define the scope and materiality threshold. The goal here is to achieve a clear, common and agreed understanding of what is being sought. The more clearly and unambiguously the requirement is defined the better the quality of the outcome. Don’t fall into the trap of expecting people to know what you are looking for or leave the brief too vague in the hope that something turns up. From experience neither approach yields a good result. But, by far the worst situation is assuming that all has been identified during due diligence and ploughing on regardless of what is smouldering under the surface.
Finally, wrap a process around the objective, ideally managed as part of the integration design phase; since all the infrastructure to achieve the right outcome should already be in place. Having this information gathered early in the integration puts the acquiring organisation in the best possible position to call upon any seller’s contract warranties.
In summary, giving this issue early and sufficient attention as part of the Post-Merger Integration will help avoid some much bigger surprise later in the process. It is an early opportunity to build trust with the acquired organisation, able to deal with the issue before it gets worse and offer the best hope of calling upon any seller warranties that may exist.