Due Diligence review is one of several means used to investigate the target company. Due Diligence review often provides confidential information and the opportunity for the acquiring company to look inside the target, to do three things:
- Validate the acquisition assumptions;
- Identify any unforeseen upsides and downsides to the transaction, and
- Begin preliminary transition/integration planning. If any of these purposes is not fulfilled, the transaction success is at risk.
In order to be effective, the Due Diligence team should be technically competent to observe and assess the business. The team members should also be sensitive to the risks of Mergers & Acquisitions, and sufficiently experienced to deal with the interpersonal challenges that exist during Due Diligence reviews. Often, some personnel at the acquired company lose their jobs when the transaction is complete.
Prior to any on-site Due Diligence reviews, the team should be familiar with the acquisition strategy so that they can interpret their findings in relation to the strategic goals of the acquisition. Often, there is a primary purpose for an acquisition that may include People, Process, or specific Plant or Assets. These strategic priorities should be thoroughly understood by the team members. Due Diligence objectives and the review should be prioritized to assess these priorities. For example, if a company were to acquire another for their R&D process expertise, a key element of the Due Diligence would be scalability of that process. If during the review, the team recognized that the process was not scalable to the extent planned, they would raise the issue, which may result with prohibitively high integration and transition costs. These unanticipated costs may make the acquisition unaffordable.
During the Due Diligence review, information should flow freely among team members to create an information pool to be assessed by the team leadership.