Due Diligence in a Merger or Acquisition

This week has started with some interesting news in the world of mergers and acquisitions. On Sunday, the San Francisco Chronicle reported that Apple’s man in charge of mergers and acquisitions met last year with Elon Musk, CEO of Tesla. The meeting has spurred speculation that the technology behemoth based in California is interested in purchasing the fledgling electric carmaker. Both Apple and Tesla have refused to comment on the veracity of the rumor, but many business analysts believe that as mobile competition from companies such Google and Samsung becomes more fierce, Apple would benefit greatly from purchasing a company such as Tesla and entering the automotive industry. Other analysts doubt the speculation, believing instead that the companies more likely discussed a possible partnership.

In other news, a recent study by the University at Buffalo School of Management, soon to be published in the Journal of Financial Economics, finds that companies with board directors who have investment banking experience are more likely to acquire other businesses. Even more interesting, the study also found that not only do the investment banker directors spur more acquisitions, but the acquisitions they do make are better, translating to an increase in shareholder value of $36 million. Study co-author Feng Jiang states that the investment banking directors’ “expertise generally benefits shareholders in mergers and acquisitions.” Of course, even if your company does not have a board director with investment banking experience, you can still have a successful acquisition. And, one of the most important things your company can do in any merger or acquisition is ensure that you have undertaken the best and most thorough due diligence.

Due diligence refers to the process of investigating a person or business before signing a contract. In the M&A world, due diligence generally refers to the process through which a potential acquirer evaluates a target company or its assets for an acquisition. This includes reviewing all financial records including market valuation, accounts receivables, past performance, and other financial information relevant and material to the transaction. Note that the target or seller may also perform due diligence on the acquirer/buyer, including investigating its ability to purchase or other information that may affect the seller/target after the sale. Other areas of concern apart from the financials that should be examined during the due diligence process include intellectual property and employee benefits and labor issues, including any immigration issues.

Why is the due diligence process so important in a merger and acquisition? Due diligence is important because it influences the purchase price of the deal, the representations and warranties contained in the final purchase agreement (See blog post Mergers and Acquisitions: The Paperwork Involved in the Process, February 12, 2014), and any indemnification provided by the seller/target. Aside from these important considerations, due diligence is important because it helps reduce the number of failed mergers and acquisitions.

A merger or acquisition can be one of the most significant events in the life of a company. A merger or acquisition is very detailed, and requires considerable planning and due diligence. The legal professional at DeCardenas Law Group have experience structuring mergers and acquisitions and we can help you and your company ensure its future growth and success.  For assistance with any number of California business law issues, please contact the legal professionals at DeCardenas Law Group today.  We can help guide you through the steps of a merger or acquisition and help to ensure that you and your company have a proper and thorough due diligence process before sealing any deal.