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The Due Diligence Anxiety Matrix

Scott Snyder, Sr. Director, Portfolio Marketing, Merrill Corporation | June 28, 2017

If you’ve ever bought or sold a home, you have some sense of the angst conjured by the decisions surrounding a major financial transaction. Now, instead of a house, imagine it’s a company or license worth tens of millions, or even billions of dollars, where shareholder wealth, reputations and even careers may be at risk. Talk about anxiety.

Whether you are a buyer or seller, a certain uneasiness lurks in every merger, acquisition, licensing or partnership event. During a recent presentation at the Due Diligence Summit for Life Sciences held in Boston, my colleague Michael Kennedy highlighted these tensions and detailed the challenges for both the potential buyer/licensor and the seller/licensee. 

Due Diligence Anxiety Matrix - Merrill - Scott Snyder Blog

 Anxiety 1: Comprehensive vs. Expedited Due Diligence

The nail-biting begins right away, in the earliest stages of the due diligence process and continues throughout the entire lifecycle of the engagement. Buyers face the test of ensuring they have conducted a comprehensive review of all the facts material to the potential transaction, and often find themselves confronting the same concerns over and over:

  • Did we ask the right questions?
  • Are we satisfied that the answers were accurate and complete?
  • What risks have we uncovered and are there any we haven’t?  – And are we confident in our risk mitigation strategy?

Extremely thorough preparation is the only way to ensure that there are no surprises discovered in the later stages of the deal’s proceedings.

For sellers, the diligence process generally can’t end soon enough. They face an arduous task of identifying and collecting every document and artifact that could be relevant to the transaction. For smaller companies, this can be a significant undertaking which unfortunately includes the frequent discovery that they don’t possess -- and maybe never considered creating -- some documentation the buyer may require for review. Sellers will also likely need responses to endless questions about those documents and their business. This back-and-forth can take weeks – or even months -- depending on the parties involved and the availability of information.

Anxiety 2: Maximize Value vs. Maximize Price

Buyers are motivated to seek the best value – but value doesn’t necessarily equate just to the price tag. Other considerations include negotiating the best exit timeline, optimizing the royalty payment schedule or creating the right incentives to retain key employees.

Sellers, meanwhile, certainly seek to maximize price for their investors and employee base. But there are other factors, particularly in a licensing or partnership transaction, where the relationship may carry on for several years, given that exits are now usually royalty based, rather than all-cash deals. In these situations, the seller should consider additional questions as a component of “price”:

  • Is the buyer financially stable?
  • In the case of a licensing agreement, do they have a track record of launch success?
  • What is their core strength – and does it align with ours?
  • Are they ethical?
  • When critical decisions arise, will we get shut out, or will we have a seat at the table?

Anxiety 3: Clean Close vs. Mitigation of Post-Deal Risk

Making sure you have everything you need from due diligence prior to close is essential for the buyer/licensor. This helps facilitate a closing that can proceed without interruption, and mitigates dreaded post-close surprises and subsequent risks for both parties. Buyers are also motivated by a desire to retain transaction momentum, and no one want to see a deal stall out at the hands of improperly conducted due diligence. The seller/licensee also faces critical due diligence questions of their own at the transaction’s close:

  1. Has all relevant information been disclosed to avoid post-close litigation? 
  2. Are they satisfied with their own due diligence on the potential buyer/licensor, ensuring they made the best possible deal for both the short- and long-term? 
  3. Have you secured the information previously shared with other potential bidders? At this point, only the final buyer has access to the data.

Anxiety 4: Optimize the Post-Close Integration vs. “Our Work is Done”

When the deal has been fully executed, but the hard work has just begun. The buyer now faces the difficult task of driving a seamless integration to maximize the expected value of the transaction. This includes moving quickly to begin post-close operations and exploring additional opportunities to exceed the expected deal value. Excellent execution of post-close integration is essential to every transaction and to the final determination of its success.

The seller’s natural reaction may be to pause and celebrate crossing the finish line, thinking their work is done – but their team is also essential to a successful transition. Whether it is an M&A, licensing or strategic partnership event, sellers continue to own a large share of the accountability for long-term success. They need to be prepared for a journey ahead.

Anxiety is, no doubt, unavoidable when the stakes are high in deal-making. But it’s also clear that the right framework, processes, preparation and technology can subdue the potential for heightened tension and contribute to a less stressful and more cohesive outcome for all parties involved.

 

Learn More:

  1. Brochure: Navigating complex life sciences opportunities through structured information management
  2. Webinar Playback: Executing Effective M&A in the Emerging Healthcare Sector
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