3 minute read 23 Nov 2021
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Ask these M&A due diligence questions before signing a deal

Authors
Elyse Reilly

Partner, Strategy and Transactions, Financial Services Transaction Diligence, Ernst & Young LLP

Results-oriented business advisor focused on driving shareholder value. Collaborator, developer of people, focused on propelling women and proud mother of two.

Paul Pan

EY-Parthenon Americas Value Creation Leader

Problem solver and trusted advisor to corporations and PE funds investing in the consumer sector. Avid tennis player and college football enthusiast. Husband and proud father of two.

3 minute read 23 Nov 2021

M&A outcomes can be improved with integrated due diligence across eight critical disciplines including cybersecurity, finance and tax.

In brief

  • Integrated due diligence can be a springboard for accelerating value creation and avoiding risks.
  • Assessing IT capabilities, and cybersecurity and data privacy risk, can be crucial in determining valuation.

Stakes are higher than ever for M&A due diligence as acquirors attempt to value rapidly evolving business models and deal multiples continue to soar.

While competition is driving asset prices higher, risks are increasing as well. These include a broad range of topics including cyber security threats; the unknown long-term impact of the COVID-19 pandemic on consumer behavior and supply chains; potential hidden, toxic cultures; and the accelerating speed of technological change and business disruption.

Companies that merely view diligence as a cost to obtain financing and insurance, and only focus on finance and tax, will miss key risks in today’s market.
Elyse A. Reilly
Partner, Ernst & Young LLP

Before companies sign a deal, commercial, financial and operational stakeholders should have an aligned view on a target’s growth potential; sustainability of cash flows; financial and operational resilience; and value drivers. Integrated diligence — a holistic view of a target’s risk profile — can be the springboard for accelerating value creation and avoiding blind spots, particularly as companies pursue targets outside their core sector. Without integrated due diligence, there can be unexpected cybersecurity and tech costs; delays in synergy attainment; extension of transition service agreements (TSAs); and culture clashes that can erode deal value.

“Integrated diligence does not have to mean more costs and more time. It means having the capabilities to pinpoint and assess the areas of biggest potential risk and return,” says Paul S. Pan, Principal, Ernst & Young, LLP.

There are two key questions every executive should be asking in M&A due diligence.

  1. How do we identify and execute on what drives increased enterprise value?
  2. What are the big risks to the transaction that I cannot get wrong?

Every acquiror can dive into the critical diligence disciplines below to improve M&A outcomes.

  • Commercial diligence: How can the transaction help address changing customer demands, enhance the brand or market position? What incremental markets, customers or sales channels will be created?
  • Financial due diligence: What is the right data to support our forecast, and do we have the right key performance indicators (KPIs) to measure risk? How do differences in accounting policy affect the bottom-line profitability? Are there any balance sheet, off-balance-sheet or accounting concerns?
  • Human resources diligence: In this turbulent job market, how can roles, responsibilities and communications be structured to maximize retention of key employees? Are there significant costs associated with redundancies? How will we design compensation and benefits programs that align to our vision and culture?
  • IT diligence: How can the merger be a catalyst for IT transformation? Is the platform scalable? How can we assess existing IT capabilities for access to new markets and operational improvements?
  • Cybersecurity diligence: Have we considered the acquisition’s cybersecurity and data privacy risks in our valuation? How can these risks be mitigated and how can we protect the company financially and operationally while we integrate? When do we spend money to evaluate cyber?
  • Operations and synergies diligence: What are the sources and timing of synergies and how are they quantified? How will we integrate operations and how much will it cost? How can we minimize TSA duration to maximize profitability? 
  • Regulatory diligence: What regulatory issues could threaten compliance, erode transaction value or affect the target’s ability to achieve projected growth?
  • Tax diligence: Do we have a tax-efficient structure, and globally coordinated approach, to deliver the commercial objectives and investment rationale?

Summary

Integrated diligence can help leaders crystallize their strategic rationale, choose the right target, pay the right price and avoid transaction delays and post-closing risks.

About this article

Authors
Elyse Reilly

Partner, Strategy and Transactions, Financial Services Transaction Diligence, Ernst & Young LLP

Results-oriented business advisor focused on driving shareholder value. Collaborator, developer of people, focused on propelling women and proud mother of two.

Paul Pan

EY-Parthenon Americas Value Creation Leader

Problem solver and trusted advisor to corporations and PE funds investing in the consumer sector. Avid tennis player and college football enthusiast. Husband and proud father of two.

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