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M&A Due Diligence: 4 Things to Look for Before Completing a Deal


In 2012, following an $11.1 billion takeover of Autonomy a year earlier, HP recorded a record of around $8.8 billion. Following an internal investigation, HP alleged that Autonomy had “accounting irregularities” that had contributed to overpricing their business (which Autonomy strenuously denied). At around the same time, shareholders sued HP for the losses they incurred, eventually settling for $100 million.

What a mess!

It begs the question: if a giant like HP can’t get their due diligence right, what hope is there for other businesses? In this case, as in many other disastrous M&A actions, it’s the things you don’t know that cause the most significant problems.

Regardless of whether Autonomy defrauded HP or not, HP should have caught the problems during due diligence. In this scenario, it was the financials that tripped them up, but due diligence must go much further than that.

Financial statements, intellectual property, management, litigation, tax, regulatory issues, insurance: there’s no shortage of things you need to investigate. And that’s just the obvious ones - there are plenty of other areas where you can trip up.

Here are four things you need to look at before completing a deal (that you might not have thought of already):

1. Calculating the True Value of Synergy (It’s Hard)

Synergies boost the value of the resulting merged firm above the value of the two firms when separate. Simply put, the sum is more than equal to the parts. This can be either cost savings (for example, removing redundant staff, sharing resources) or sales synergies (for example, cross-selling).

The problem is, it is notoriously hard to estimate the value of synergies, and buyers often struggle to calculate the cost of integration: realizing these synergies comes at a price, and it isn’t always worth paying.

In 2005, eBay bought Skype for $2.6 billion, intending to use its services to improve communications on its marketplace. What eBay hadn’t realized is that their customers didn’t even want this feature – they preferred to remain anonymous. It didn’t work out: eBay later offloaded Skype to private investors in 2009 for $1.9 billion.

How realistic are the synergies you are trying to achieve? What will they cost to implement?

2. Get Eyes on Every Contract

You know that contracts are important; every agreement the other business has signed will become your problem once the M&A activity is complete.

But have you found them all?

The contracts you need eyes on include:

  • Contracts with employees, unions, customers, distributors, and suppliers

  • Loans & credit agreements, equity finance agreements

  • Past acquisitions & settlements

  • NDAs and non-competition agreements

  • And much more

You need to understand every written and oral agreement that concerns the company. One way to achieve that is by using a virtual data room to store, organize, and share these documents securely.

What steps are you taking to find every contract? How will you organize documents so they don’t fall through the cracks?

3. Culture & Values

A company is far more than just financial statements, intellectual property, and inventory in a warehouse; each business has its own culture, values, and way of working. Even when everything works on paper, making it work in real life is sometimes harder than you think.

For example, in 2005, Sprint acquired Nextel Communications for $35 billion. The match seemed like a good one: Sprint had success in the consumer market, while Nextel was strong at selling to businesses. Combined, they hoped each company could cross-sell its products to the other’s customers.

Yet their two styles did not work. It was reported that there was a significant culture clash: many Nextel executives left, communication between the two sides was poor, and integration was slow, difficult, and more costly than expected. Sprint later wrote off $29 billion from the merger.

How good of a fit are your two businesses? What risks are there from trying to combine them?

4. Cybersecurity

Your company, like most, is probably highly (if not totally) dependent on the data held within your digital systems. So is the organization you’re looking to merge with or acquire.

It is important to take into account the cybersecurity risks that can damage the value of the business you are trying to acquire. Information you need includes past attacks they may have experienced, the level of risk of a future cyber-attack, and the risk of any of these vulnerabilities affecting your current business after the acquisition.

It is also vital to keep in mind that current vulnerabilities increase the risk that a cyberattack has occurred but has not been detected yet, and that it may devalue the assets you are purchasing or leave the future combined business open to lawsuits, regulatory fines, and reputational damage.

How accurately have you assessed the cybersecurity threat to the organization? 

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