1 way to reduce the number of Due Diligence blunders (DD) in Mergers & Acquisitions (M&A) and other transactions

1 way to reduce the number of Due Diligence blunders (DD) in Mergers & Acquisitions (M&A) and other transactions

Mar 16th, 2016

In this post we look at the 1 way to reduce the number of Due Diligence blunders (DD) in Mergers & Acquisitions (M&A) and other transactions.

Due Diligence

Due Diligence (DD) is ubiquitously considered to significantly contribute to informed decision-making. That’s because it enhances the amount and quality of information available to decision makers to evaluate “all” costs, benefits, and risks of, for example, an acquisition, merger or an investment (Chapman, 2006).

Due diligence definition is “reasonable steps taken by a person in order to satisfy a legal requirement, especially in buying or selling something OR a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential.”

In the prior paragraph we have bolded words that one should treat probabilistically:

  • costs,
  • benefits,
  • liabilities,
  • commercial potential) and also
  • comprehensive appraisal and finally
  • risks.

Very few DD endeavors include a formal risk assessment

We believe that very few DD endeavors include a formal risk assessment and probabilistic evaluations. Indeed, to date, only a handful of clients (Fortune500) have asked us to perform this type of studies meanwhile the DD specialists were conducting their usual audit-like approaches. The cause for this is simple. Although DD takes different forms depending on its purpose, the DD process (framework) reportedly icludes nine distinct audit areas (Gilman, 2010):

  1. Compatibility
  2. Financial
  3. Macro-environment
  4. Legal/environmental
  5. Marketing
  6. Production
  7. Management
  8. Information systems and finally
  9. Reconciliation

See the problem? The list above defines audit areas, not risk assessment areas! DD purpose, to start, is to be an instrument that looks to the past and, at best tentatively, to the future. However certainly not in a formal, structured way.

Let’s not forget that auditing “refers to a systematic and independent examination of books, accounts, documents etc. of an organization to ascertain how far the financial statements present a true and fair view of the affairs. It also attempts to ensure proper maintenance of the books of accounts and other topics”. That is with the purpose of covering legal, codes compliance, standards of safety requirements. An audit does not attempt to describe what could happen (tomorrow, in the future) if the organization is hit by natural, man-madetechnological hazards. That is in contrary to risk assessments that aim toward that goal.

Closing remarks:  the 1 way to reduce the number of Due Diligence blunders (DD) in Mergers & Acquisitions (M&A) and other transactions.

So, it does not matter how many new “audit areas” will be included in DD. Cybersecurity, is for example an emerging area of concern. At the end of the day, to get better results, audits AND risk assessment should be ran simultaneously. However each one separately by its own specialist team, to reduce the occurrence of very costly blunders.

By adding the Risk Assessment layer to DD approaches success will be nearer for all.

That’s the 1 way to reduce the number of Due Diligence blunders (DD) in Mergers & Acquisitions (M&A) and other transactions.

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Category: Probabilities, Risk analysis, Risk management, Uncategorized

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