Due Diligence: Transparency is Key

For investors and dealmakers alike, the due diligence process is a critical step to successful deal completion.


23 May 2014

Due Diligence: Transparency is Key - www.dealcloserblog.com

By Jimmy George

For investors and dealmakers alike, the due diligence process is a critical step to successful deal completion. But is there a correlation between the length of the due diligence period and deal success? Are most M&A leaks intentional?

To both questions above, the answer is a resounding yes. We recently had the chance to attend the 5th Annual German M&A and Private Equity Forum in Dusseldorf, Germany, where we had the chance to speak with investors and dealmakers who use Intralinks Dealspace™ as part of the dealmaking process.  While at the conference, we noticed an overarching trend developing in the dealmaking landscape: increased organization transparency results in increased investor interest; clearly a win-win for both investors and dealmakers.

One of the more poignant discussions on the subject came from our own Philip Whitchelo, who gave a presentation entitled, “When No One Knows: Pre-announcement M&A activity and its effect on M&A outcomes.”  The presentation was based largely on an Intralinks study, completed in conjunction with M&A Research Centre (MARC) at Cass Business SchoolCity University London, which investigated the effect of due diligence on deal success while also examining the causes and affects of deal leaks.

Key findings from the research include:

  • Longer due diligence results in a higher likelihood of deal success
  • Longer due diligence is to the advantage of the buyer (and to the disadvantage of the seller)
  • There is no significant difference in due diligence between cross-border and domestic deals
  • M&A leaks are almost always deliberate, and result in significantly higher takeover premiums for the target

There are many benefits of organizational due diligence. According to Andros Payne, Managing Director of Humatica, organizational due diligence is paramount in understanding the level of cultural change that may be necessary to increase valuations after a deal is completed in a quantifiable manner. Through the due diligence process, buyers and investors gain a better understanding of the risks involved in an acquisition, which may have not been publicly apparent otherwise, and the understanding of those risks may lead to pricing fluctuations prior to deal completion. This gives buyers a head-start opportunity to begin developing a strategy and 100 day plan for tackling these risks upon deal completion.

Ultimately, full and complete transparency is to the benefit of all parties involved in a deal. The due diligence process is crucial in understanding how an organization truly works, and will shed light on said organization’s ability to execute a valuation plan after a deal has been completed. By studying the behaviors inside an organization, it becomes miles to make and execute sound organizational decisions. Another win-win for everyone involved.

You can watch the videos from the event and download the research paper “When No One Knows: Pre-announcement M&A activity and its effect on M&A outcomes” for more insights into due diligence.