The case for due diligence in the age of smaller deals
The M&A megadeals and IPO days of 2020–2022 have given way to a new reality: interest rate hikes, a bear market, even the threat of securities class actions by unhappy investors stuck with depreciated assets.
The party may be over, but smaller deals are still happening. As 2023 unfolds, Bain & Company forecasts a return to the field by well-capitalized companies ready to make “strategic, bold moves.”
And while it may be tempting to scale back due diligence in leaner times, smaller deals don’t mean smaller risks.
Cursory investigations reveal cursory information
Reputational, business, and legal risks exist in any deal, regardless of the size—which means due diligence is not the place to cut corners.
Briefer screenings can miss things like:
- A negative story outside of a formal court action. A subject can be part of a dispute but not a party to it, with their name mentioned deep in a court record, news story or regulatory report. Someone whose public record may look clean at face value can be part of a negative story.
- Something that happened outside of the subject’s normal place of work or business. If a subject was part of a negative incident that happened during a ski vacation, for instance, a surface-level investigation won’t find it. This could come back to haunt an acquiring company in the future if a similar complaint arises.
- Publicly-available information an investigative reporter or competitor could find. In industries where this sort of activity is common, due diligence finds issues before adversaries can.
For these reasons, we advise our clients against scaled-back screenings for smaller deals.
M&As remain key for business transformation. If your year ahead involves a possible merger or acquisition, contact us at [email protected] or 415-905-0462 for a free, private consultation.