Merger and acquisition (M&A) activity can be an important component—even a critical one—for a company’s growth strategy. A successful acquisition can help a company make a quantum leap in terms of market presence, filling in gaps in a company’s product or service portfolio, and improving profitability and other performance metrics. On the other hand, transactions that don’t ultimately perform as expected, including not providing positive returns or resulting in large negative surprises, can cause serious damage to companies and their boards of directors, ranging from litigation to the ouster of managements and even board members. In 2015, through lawsuits, shareholders challenged 65 percent of M&A deals valued at over $100 million or more, involving Delaware-incorporated companies.
Given the potential consequences of M&A activity to companies and their boards, directors have a stake in overseeing the transaction process from an early stage through to post-closing integration. A critical aspect of this oversight responsibility relates to the due diligence process. Specifically, boards should seek to satisfy themselves that management conducts a robust due diligence process designed to ferret out potential risks and valuation considerations, assess their magnitude and the probability of the risks’ occurrence, consider whether mitigation is possible, and respond accordingly. In other words, due diligence done well can provide significant insights into the target company and allows for a more informed assessment of the potential risks and anticipated benefits of the transaction. Thus, it is in the board’s interest to emphasize the importance of and facilitate a well thought-out diligence process.
Over the years, M&A practitioners in the legal, accounting, and other professions have heard reasons cited why due diligence is not a necessity:
- Existing knowledge of the industry
- Don’t see the value in due diligence