The Environment for Due Diligence
Legal professionals perform the clear majority of traditional due diligence projects. They typically also play the lead role, directing everyone else in the process. The second largest player in traditional due diligence projects are typically the financial professionals. The legal professionals’ are primarily concerned with all the legalities and any possible liabilities in a deal, and the financial professionals’ primary foci are the financial data and the tax consequences.
Due diligence does not exist as a separate discipline in the educational institutions. Due diligence is not taught in law, business, or in any schools. If discussed at all in the education environment, due diligence is buried inside countless topics. Due diligence is simply not a focus that the educational community has recognized.
Rather, due diligence has evolved over decades by tradition. It is very interesting that no one questions whether the traditional due diligence practices are sound. What is even more interesting that rarely does anyone look further into a prospective acquisition or merger beyond the mere basics.
I wonder if the two-thirds failure rate of all mergers and acquisitions has anything to do with this essentially blind acceptance of the entire traditional due diligence process?
Typically, the target of the due diligence tends to evoke irritation at the process from the beginning, and, as the due diligence process gets longer and longer, the reluctance to push for important information gets stronger and stronger. As the time lengthens and the costs rise, it becomes easier and easier for management to justify minimizing or even ignoring anything that is more difficult. Many if not most firms suffer from mild to extreme reluctance to consult more qualified outside expertise. It is amazing how many excuses can be found to cut short even the most minimal due diligence processes. Finally, all too often, the deal is done before any real due diligence, traditional or otherwise, takes place. Too many times the deal has been done in the board room or on the golf course, then the boss says ‘go do the due diligence but don’t bother me with the results, I am already working on my big speech to the shareholders bragging about this great deal.’
An enormous emphasis is also placed on the short term by almost all firms, especially those in the public markets. A quick increase in price or earnings for the stock market is in many cases the sole reason for an M&A transaction. Quick revenue increases or cost reductions often make management the hero, albeit almost always at the cost of the stakeholders in the long term.
I again wonder that, in light of the fact that approximately two thirds of all mergers and acquisitions fail completely, or fail to deliver the value expected, that there might be something wrong with the traditional due diligence process on these deals?
From my perspective, the traditional due diligence methods account for 10% to 25% of what I define as a complete due diligence process.
In my humble opinion, traditional due diligence looks too much at the past, and not enough at the future, and is usually too fast, and too narrow.
Important note: I am not saying that there is anything wrong with the countless great attorneys, terrific financial people, and top-drawer specialty consultants, of whom I have had the pleasure of working with many of them over the years. Quite the opposite… they are absolutely necessary. I am simply saying that their work is only part of a complete due diligence process.
Charles F. Bacon, CEO & Keeper of the Vision
charlesbacon@superdiligence. com
Due Diligence, Inc.
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