Due diligence is essential in high-stakes business operations, especially during mergers and acquisitions (M&A), where the financial stakes can reach billions of dollars and impact many livelihoods. This investigative process goes beyond typical day-to-day decisions, such as choosing toothpaste or a wedding venue, where the repercussions are minimal. In contrast, M&A activities demand rigorous scrutiny because the future of a company and its employees depends on the thoroughness of the evaluation.
Companies are advised not to solely rely on information provided by the target company’s management but to seek insights from various internal sources, including disgruntled or former employees. These individuals can offer unfiltered perspectives on the company’s operations, potential pitfalls, and issues with products or services that are not visible at the management level. While a company's executives might highlight the strengths of a product or technology, feedback from developers or sales staff might reveal outdated technology or difficulties in product functionality.
Two Examples
The importance of such due diligence has been seen time after time when organizations fail to look beyond what upper management in the to be acquired company tells them. For example, a company I worked for was in talks to be acquired by another, much larger, company. During the discussions scant attention was given to the thoughts, opinions, or realities of the general employees with all the focus being on the executive team. Even when meetings with front-line managers occurred they were not fact-finding discussions but generally consisted of the acquiring company telling the manager (and employees) how much better things would be under the new ownership. While the merger was eventually considered to be generally successful it took significant longer than if due diligence had involved front-line employees and managers. The product lines were in entirely different markets and approaches that worked for one (across the board including sales, support, professional services, etc.) were entirely different. Had the acquiring company taken the time to understand what they were getting into they would have been able to make the appropriate adjustments much faster and likely earned a much earlier return on their investment.
The second example consists of a company being acquired by an investment firm. The investment firm did their due diligence at a very high level, looking at financials, talking with executives, looking into the market opportunities, etc. They did not spend significant time talking with lower level employees and definitely did not speak with any disgruntled or former employees (which I would guess was by design of the executive team of the company being acquired). Had they taken the time to talk to lower level employees and managers they would have learned far more about the actual state of the technology and markets they were investing in. They would have gotten to see the level of functionality between divisions, the state of and concerns about the existing technology, what the sales people were actually seeing in the field, and far more granular information than they received through the more traditional approach of speaking with the executives. It is, of course, hard to say exactly how these additional data points may have impacted their decision to acquire but at least with the additional information they could have made a completely informed decision and not had further challenges down the road.
Bottom Line
The lesson is clear: in M&A, it is crucial to dig deep and gather information from a broad range of sources. This approach not only uncovers potential issues that could affect the viability of the deal but also provides a more comprehensive understanding of the target company. Such thorough due diligence ensures that decisions are made with the best possible information, safeguarding investments and corporate futures.
Joshua Chessman, Advisor
Jonathan Care, Advisor
(C) 2024, Lionfish Tech Advisors, Inc.
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