A thorough, smart and stealthy due diligence process is among the top ingredients for successful mergers and acquisitions. We spoke to finance executives and dealmakers about the homework a growth-hungry company needs to do. “You cannot over-plan,” says Arie Maree, Ansarada Managing Director for Africa and the Middle East. “Once the rubber hits the road with a deal, there are tight timelines, plenty of stress and lots of money at stake. More planning means a smoother due diligence and ultimately, a smoother transaction,”
- When dealmaking, enter with a focused mind, says Standard Bank's Andrew Balnaves.
- The CFO should ensure due diligence is accurate and meticulously undertaken, says Sibanye's Charl Keyter.
- In dealmaking, understand what you buy, says Deloitte's Karin Hodson.
"Our mantra is to simplify the due diligence process," says Arie. Ansarada operates virtual deal rooms - platforms via which all of a deal's communication can be streamed, and through which the deal can be structured. The company, started in Australia 12 years ago, and with offices in Sydney, Chicago and London, has run in excess of 30,000 transactions in 5,000 cities. "Everything on the portal is trackable, so you can see which party looked at which document and when."
Ansarada's way of working allows for such things as the Q&A process to be run in a controlled manner, Arie explains. "It also enables the person selling the business to structure the deal as they want it, which greatly reduces stress." Fast, easy and secure, the platform features a reporting mechanism from which insights can be drawn. "For instance, you can see if a counterparty is focusing only on certain information, and prepare your team to answer questions on that same topic."
Dump everything
The concept of the virtual deal or data room began in the early 2000s. Prior to this, it was commonplace to have piles and piles of printed documents - all labelled - kept under lock and key in a lawyer's office, for example. "Bidders would fly in to access this physical data room before hopping back onto a plane and returning to their office, after which further dealings were conducted telephonically, via email and Excel," says Arie. "From both a safety and simplicity perspective you can imagine how this used to be. Now you can do all of this on an iPad - with zero risk. You can even run a deal through your phone, via the deal room. The amount of time and money that this has cut out is huge. Technology has certainly simplified the due diligence process."
Despite the relative newness of the deal room concept, the way that this is used has also changed over time, says Arie.
"These days, people are much savvier with regards to how deals are structured and the size of the data they put out to the buyer. In the past, we saw massive deal rooms, where people would just dump everything. Now people are structuring it more effectively and filtering out the unnecessary information to just present what is absolutely necessary to the buyer."
Data security
A major failing for any due diligence process is being too lax when it comes to data security, says Arie. "Communicating via email or social media, for instance, is a definite no. We have seen people trying to run smaller deals on unsophisticated file share platforms. The problem here is that your information is often in the public domain. Not knowing where your information is and who is viewing it is very risky. In fact, some banks will not touch a transaction if there isn't a platform in place that has the highest creditable security."
Arie says that the key to a successful due diligence is simplicity. "If you can cut away anything superfluous and focus only on the sophistication where it is needed, you should be successful. So, focusing where it really matters to the outcome of the transaction or value of the transaction." Planning is also key, he says: "You cannot over-plan. Once the rubber hits the road with a deal there are tight timelines, plenty of stress and lots of money at stake. More planning means a smoother due diligence and ultimately, a smoother transaction."
Great help
Given their global perspective, Ansarada has identified general differences and trends between local and international ways of conducting due diligence. Local processes are generally quite amicable," says Arie.
"While you can severely control and restrict security permissions on documentation, we find that in South Africa, people generally apply basic policies. Also, it is often allowed here for the buy-side to download and print documents, which is indicative of the nature of the process."
When it comes to seeking outside opinion, Arie believes there is great value in this. "Often, people going into a transaction are doing this for the first time and sometimes also the only time in their careers. Whereas an advisor does this for a living. They may have done 30 such deals previously. So, they can be a great help."
Arie says that CFOs are in a unique position as they can be objective during the dealings. "We often find that on the sell-side, the business owner is emotionally attached to the business. This warps objectivity," he says. "The CFO is in a unique position in that they can use financial analysis and objectivity to the advantage of the asset or company being sold. The CFO can be involved with advisors and consult to the CEO or business owner to say what life after the transaction may look like. The CFO, aside from having acute financial expertise, can play a critical role in consulting back to the business."
Arie's due diligence top 5
- Easy access to information and the structure thereof.
- The speed at which you can communicate with everybody involved in the process - on both your side and theirs.
- The security and safety of information, and applying adequate security to information in your hands.
- Running the due diligence through a Q&A platform.
- The insights you can draw from analysing reports, and being able to make decisions based on fact and data.
This article was first published in CFO Magazine.
