The Changing Landscape for Due Diligence in 2010
Whether economies are strong or weak, purchases and sales of companies persist, making “due diligence” studies of target companies a necessary aspect of professionalism for managers and advisors alike. With more than 30,000 announced deals worth more than $2 trillion at the end of 2009, and another 19,000 announced deals worth nearly $1.22 trillion by the end of the first half of 2010, M&A continues to be strong around the world.1
But as we go to press with this second edition of The Art of M&A Due Diligence, first published 10 long years ago, we realize that our key term, due diligence, may sound quaint. Rooted in centuries-old English equity court concepts of good human character, these two words inhabit a fair and ordered realm that is quite different from the seemingly random one that has existed in recent years.
Has the nature of economic reality changed since 2000? You decide.
. . . then you know that your world has been rocked. Indeed, it was unpredictable events like these that inspired philosopher Nicholas Taleb to write his best-selling book The Black Swan, about unknowable risk.4
Yes, all these events and more have transpired in the wake of our first edition, compelling us to reexamine “due diligence,” which seems more arcane by the day. This very notion, applied to mergers and acquisitions, presumes that a management team and its advisors can conduct a reasonably diligent study of a company to be acquired within a reasonable time frame. The events of the past 10 years make this goal far more difficult to accomplish.
VALUE OF DUE DILIGENCE
And yet, paradoxically, these surprising events heighten the importance of due diligence more than ever. They raise the stakes for poor due diligence, while at the same time creating, regrettably but inevitably, a narrower margin for error.
Clearly, acquirers need to be more careful than ever before as they assess the possible risks of buying a particular company, but how careful do they have to be? Must they think of all possible risks and factor them all into the acquisition price—or only those that are most likely and most important?
This question has many dimensions, all of which will be explored anew in this new edition. But perhaps the most important one relates to the word due. So far, as of the year 2010, diligence is still subject to interpretation. With the exception of some special applications in securities law, due diligence has not been the subject of federal regulation. It is still largely determined by the courts, case by case. This is good.
Fortunately, much of the global economy—and the U.S. economy in particular—still retains some vestiges of the old English common law system or its close cousin, equity law. Under common law, right and wrong actions are decided by legal precedent, with past decisions being used to interpret statutory law. In the case of equity courts, statutory law is less important: the court’s interpretations stem from concepts of fairness.
Although modern events may seem to have eviscerated the very notion of fairness, this notion continues, despite attempts to upstage it with ironclad laws and rules that would expand two stone tablets into two million.
Common law and equity law take facts, circumstances, and motives in particular situations into consideration, without creating and enforcing single paradigms across different situations. We believe that preserving this heritage is more vital than ever in our new world, where regulations are increasing and responsibility born of common sense seems to be on the wane. Heeding the advice given in this book can help to reverse this unfortunate trend.