Managing Buy-side Due Diligence in Smaller Transactions
The total value of mergers and takeovers across the world reached $777.7 billion in the first quarter of 2017, according to data from Thomson Reuters. A rise of 12% on the same period in 2016, the figure included blockbuster deals such as the acquisition of Swiss biotech firm Actelion by Johnson & Johnson for around $30 billion.
Such deals are not everyday occurrences. Many corporations take a different track and execute multiple strategic partnerships with smaller players. These players are often regional or technology leaders with revenues of less than €10 million and located in remote markets.
Even when M&A deals are smaller, transaction costs for the acquirer are generally high and can easily exceed 20% of the purchase price. This is usually due to discovery and compliance costs, which are applicable to every transaction, no matter what size it happens to be.
One of the first hurdles is the “data request list,” which is often a combination of historic “catch-all” lists that ends up being so extensive that it can frighten any entrepreneur before a project even begins. In these situations, the data request list can then end up becoming the actual data room index.
There can be a continual stream of people visiting the target business, from both the buying company and the advisors. The parties typically spend days travelling to and from remote locations, often on multiple occasions because of incomplete information, which means that due diligence cannot be completed in an efficient and cost-effective manner. This is typically only discovered after arriving at the target´s premise.
In contrast to larger firms, many small firms have inconsistent information. The target needs to provide clarification for inconsistencies, which can be very time-consuming, even if the items are immaterial.
Each separate department in an organisation wants the opportunity to review their specific areas and topics of interest (for example IT, health and environment, compliance), resulting in them talking separately to the same person within the target firm, typically the owner.
The owner is then exposed to multiple request lists from each separate department, which can contain similarities with regards to certification processes. This can, understandably, frustrate and annoy representatives of the target firm.
Small businesses often have basic legal challenges that need to be quickly assessed and resolved by the buyer, such as incorrect company registrations, missing intercompany contracts, and incorrect tax filings.
It is common that accounting departments begin the task of assessing “back-end” connectivity into corporate ERP systems and processes, such as SAP or similar systems, without consulting with project management, who often carry out the same task. This non-alignment of the two departments is a frequent issue.
Senior management is also highly involved in the deal progress and the negotiations. Even small transactions have the attention of highly paid executives.
Thus, these processes involve many specialist parties, both internal and external. Compliance processes have to be strictly adhered to, which requires a constant stream of employees travelling around the world to visit the target. Unfortunately, more often than not, they arrive only to find incomplete information (a classic example being a draft version of an audit report not signed by the auditors). Additionally, they could never be sure if the disclosed document was actually the final one.
While the due diligence process traditionally has been initiated by the seller, with Drooms®Buyside, buyers drive the due diligence by providing the data request list and the data room.
Drooms®Buyside turns the process around and lets potential buy-side companies run the process. The potential acquirer provides the data request list to the target through the data room and asks them to populate it before they visit the firm in person for one-on-one discussions. In detail, the process works as follows:
- Review standard index with respect to the “target”
- Upload the standard index into Drooms®Buyside
- Allocate buy- and sell-side rights to the companies and their advisors
- The target company uploads documents into the data room
- The target company then notifies relevant buy-side parties about new documents
- The acquirer can view all documents directly on their computer desktop, providing an easy overview of any missing information
- Due diligence can be completed prior to on-site meetings
An additional benefit of carrying out due diligence using a technology platform is that acquirers can observe targets’ “upload behaviour” and gain a lot of insight into the process itself (for example, is the target prepared?).
Drooms®Buyside does not allow the target to invite additional bidders into the process. The data room is exclusively for one acquirer. Depending on the trust relationship with the seller, acquirers can use Drooms as a trustee. The buyer has “view-only” rights, and Drooms coordinates the information.
By speeding up the due diligence process, Drooms®Buyside helps corporations manage and reduce overall transaction costs and enables them to complete multiple small M&A deals in a much more cost-effective and efficient way.