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Joint Venture and M&A Due Diligence: A Comparison

     

There is really no denying the fact that due diligence is generally a nightmare regardless of what type of transaction necessitates the process. Granted, some due diligence investigations are worse than others, but very few, if any, are a quick, easy, or joyous occasion. The individuals tasked with overseeing the whole ordeal are under tremendous pressure to ensure that every angle is assessed, every document reviewed, and every pertinent box checked. Of course, the underlying transaction does influence the purpose, focus, scope, and extent of the due diligence investigation. Here is how the due diligence process for a joint venture (JV) differs from that of a merger and/or acquisition (M&A), and some tips on making either scenario a bit less stressful:

Confirming Verus Informing

In an M&A situation, the due diligence process focuses heavily on determining whether the company that is doing the acquiring, or in the case of a merger, the larger firm with more at stake, is getting what it believes it is getting from the other company involved in the transaction. This means that due diligence for M&As requires extensive and in depth scrutiny of the other company’s assets and liabilities. The larger company, or the one with more at stake, must confirm that the other company is not riddled with bad debts or significant liabilities that it may later become responsible for addressing.

In a JV, on the other hand, the parties are not becoming a single entity. Instead, the goal is to work together to capitalize on each other’s strengths and assets. Thus, in this sort of due diligence, the parties want to learn about each other to assess what each side brings to the table and whether it is mutually beneficial. Although assets and liabilities are certainly important points to consider, they are not necessarily determinative of the decision to partner because there should not be any assumption of liability.

Past Versus Future

Another way to look at the difference between a JV due diligence investigation and one for an M&A transaction is to consider the time period that the parties will be interested in researching. For M&A, the larger company generally wants to examine the other company’s financial history and past dealings. Because the larger party will likely exert control over future actions, the leaders are more concerned with things that have occurred in the past that may come back to haunt them. 

However, in a JV, although both parties’ past dealings are indicative of their potential, the primary goal is to evaluate each party’s goals and their respective trajectories. Thus, due diligence for a JV is generally forward thinking, whereas for M&A it is very much retrospective.

Investment Versus Partnership

Perhaps the best way to differentiate between due diligence for a JV as opposed to M&A is to look at the ultimate purpose of the transaction. Clearly, M&A involves the melding of two distinct companies, although the level of integration does vary depending on the circumstances of the deal. But, in a JV, two companies are not becoming one, they are merely establishing a strategic partnership that is complementary in terms of goals, strategy, operational capabilities, and/or market access. 

In both cases, a lot of information must be exchanged for each party to adequately evaluate the other. Thus, the companies conducting due diligence must establish a data room to facilitate this information sharing. And, because most of the data that will be requested will be of a sensitive and valuable nature, it is important for each side to be assured of security and control with respect to its information. This is easily accomplished via a highly secure virtual data room.

An online data room has multiple functions, as it may initially serve as a corporate repository and can later be used as a deal room for a specific transaction, such as a due diligence investigation. In general, it is wise to establish such a repository early in a company’s existence and to keep it organized by creating topic-specific folders. This will allow companies to keep track of key items, such as formation and organizational documents, financial statements, and contracts. Then, when a potential JV or M&A transaction is on the horizon, all of the pertinent documentation is readily available and easily accessible.

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