1. White Paper
PART 2 OF 3
Executing Effective M&A:
Critical Considerations from
Pre- to Post-Deal Closure
M E R R I L L D A T A S I T E

2. Contents
PART 2 OF 3
Executive Summary 3
Introduction 3
A Guide to performing successful due diligence 3
Beginning the courtship: How to strengthen relationships during due diligence 4
The real deal – Why due diligence matters to both buyer and seller 5
Preparing to close the deal 5
Conclusion 6

3. Executing Effective M&A: Critical Considerations
Executive Summary
Executive Summary
M&A transactions that succeed in creating enhanced value always follow certain steps
before, during and after the deal itself.
In the previous instalment of Executing Effective M&A, we examined some of the critical
pre-negotiation preparation that must take place to properly position a deal for success.
In Part 2 of this 3-part series, we examine best practices during the actual process of due
diligence, as potential buyers and sellers begin to dig deep and share critical information
that will ultimately affect not only the success of the proposed deal, but also the final
valuation.
Introduction
Once a would-be buyer and prospective seller in an M&A transaction identify each other,
the courtship has only just begun.
From that point forward, until the deal is either concluded or abandoned, each party
will be consumed with the process of due diligence. The buyer will seek to uncover and
digest every detail about their potential acquisition, and the seller will need to be
prepared to effectively and efficiently answer any and all questions that may arise
throughout this phase.
Even for the largest of companies that routinely conduct due diligence on dozens of
potential acquisitions each year, this process can be daunting - no two deals are ever
exactly alike.
However, familiarity with the due diligence process does stand serial M&A participants in
good stead. Having conducted numerous due diligence events helps corporate deal teams
Even for the largest of understand how to approach this investigatory phase of the M&A transaction with
companies that routinely confidence. Their experience lets them know what types of red flags to watch for, what
conduct due diligence corporate areas deserve the most scrutiny, and what processes and tools can make the
on dozens of potential job easier.
acquisitions each year, this
However, for most companies who are interested in either buying—or selling—a business,
process can be daunting –
this may be a once-in-a-lifetime event. Management at these companies may have little to
no two deals are ever
no experience in preparing for due diligence, and might not fully grasp the breadth and
exactly alike.
depth of information that must be produced, vetted and ultimately reviewed for the due
diligence to be successful.
In this paper we will examine some best practices for conducting due diligence that can
help M&A participants confidently prepare for and complete this process.
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4. A guide to performing successful due diligence
At its most basic, due diligence is the methodical and measured evaluation of every
aspect of a business’ corporate life. In an M&A setting, a potential acquirer will need to
conduct due diligence on historical corporate information that includes sales, profits and
losses, legal arrangements, management backgrounds, employee issues, technology and
patent details, contracts, leases and much, much more.
Whatever the subject area, proper due diligence centres around members of the deal team
being able to efficiently inspect and review hundreds and even thousands of supporting
documents, and it requires the target company’s team to produce and be able to verify
that information in every case.
Why is robust due diligence so critical?
It is the target company’s
For one thing, many organisations that are on the acquisition trail want to make a
job to produce all the
purchase that will add value to their business as a whole. They want to buy something
information necessary
that is not being fully used and to find an opportunity where they may be able to
to help the acquirer
realistically grow their business after the purchase.
feel confident about its
purchasing decision. It’s In this case, an acquirer will be looking for unrealised potential during its due diligence
here that some would-be exercise. This may entail rigorously scrutinising items such as the current customer base
sellers falter because they and then extrapolating that number based on the synergy between the two entities
don’t recognise the scope concerned. Or, an acquirer may need to fully understand the cost base of the products
of information buyers will produced by the target company, so they can identify savings that might accrue after a
need to inspect. successful deal conclusion.
Acquirers also need to be absolutely sure that they are buying what they think they’re
buying.
It will not be acceptable after a deal has concluded to find out, for example, that the
business or asset acquired is under-performing in terms of profit, or that its trading
partners or 3rd party suppliers have included organisations that would run afoul of
government legislation. That’s why thorough and robust due diligence is a must for
corporate development teams, shareholders, employees and investors as a whole.
To a seller, on a practical level, they must expect to have every legal and financial
contract or document carefully vetted. Employment agreements will be reviewed, bonus
arrangements and salary information will be evaluated. Supply chain arrangements will
be investigated, and the background of corporate suppliers will need to be verified.
Accounting information will be scrutinised and cross-checked with exceptional care.
In this case, it is the target company’s job to produce all the information necessary to
help the acquirer feel confident about its purchasing decision. It’s here that some would-
be sellers falter because they don’t recognise the scope of information buyers will need to
inspect and they fail to provide that information in a usable, easy-to-access environment.
Beginning the courtship: How to strengthen relationships during due diligence
For buyers and sellers, the process of due diligence has become even more critical in light
of market volatility, economic uncertainty and other external factors. In addition, issues
of fraud, improper disclosure and other deal-breaking items continue to rise.
What that means today is that every single piece of information shared during the due
diligence phase must be both easily accessible to the review team and presented in a way
that continually builds confidence between the potential partners.
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5. Executing Effective M&A: Critical Considerations
Particularly in regions where a history of corruption, bribery or other regulatory red flags
exist, acquirers must proceed with the utmost caution to ensure they don’t unwittingly
buy themselves into a company full of trouble.
This “confidence-building” between partners happens organically when the deal team
feels secure that they are not only being presented with the complete information they
need to assess a business, but that the information is available to them in a form that
allows them to search for the irritating “needle in a haystack” that might doom a deal.
It’s been said before that good due diligence is formed from the phrase “trust, but verify.”
That can pose a challenge, especially in areas of the world where the concept of due
diligence may be unfamiliar to management and where they may not be used to having
to prove what they say about their business is true.
Confidence crumbles between potential partners when information is not forthcoming,
not readily available, or not presented in a user-friendly format that is easily accessible.
In some cases, a target company may intentionally not disclose critical information. In
others, it may be that crucial facts were simply missed because the due diligence process
was too cumbersome for all involved.
In either case, a situation where information is missing or difficult to interpret can kill
even the best of potential deals. A would-be buyer may interpret this lack of information
as reticence or even duplicity on the part of the target. On the seller’s side, the due
diligence process can crumble because their organisation becomes overwhelmed and
overburdened by continually trying to meet a potential acquirer’s unrelenting requests
for additional data.
In both cases, an unwieldy, poorly managed due diligence process could prove fatal to
the deal.
The real deal—Why due diligence matters to both buyer and seller
Consider this example of two companies that were unprepared for the rigours of due
Confidence crumbles
diligence:
between potential partners
when information is not The first company was a cross-border acquisition target, and the second the would-be
forthcoming, not readily acquirer.
available, or not presented
The seller was relatively unsophisticated about the complexities of due diligence. The
in a user-friendly format
company’s management team had never been involved in the sale of a business, and
that is easily accessible.
their discomfort with the process contributed to a piecemeal, disorganised presentation
of documentation to the acquirer.
On the other hand, the acquirer was trying to complete due diligence on a company in
an unfamiliar country, with its deal team reviewing scattered documentation that was
often duplicated or out of date. In addition, the inherent language barrier contributed to
misunderstanding and confusion.
Among its other assets, the target company had a contract in place that accounted for a
significant portion of its annual sales. Unfortunately, in this case, the acquirer’s deal
team missed one critical detail in its review: The contract contained a change of control
clause, which meant that upon the purchase of the target company, the contract became
void and would have to go back out to bid.
After the deal closed and the acquirer discovered this problem, it angrily contended that
the target company had not adequately disclosed this crucial fact. Since there was no
way for the target to prove that it had disclosed the information, the integration of the
5

6. new entity ultimately disintegrated. On top of the bad feelings the incident created for
both seller and buyer, trust diminished on both sides. The would-be benefits that were
initially identified from the purchase never came to fruition, and the purchaser divested
itself of the business at a loss.
Preparing to close the deal
There is a way to take some of the pitfalls out of the due diligence process by employing
a critical tool that can speed review, provide complete audit trails to ensure—and prove—
A VDR provides a secure
disclosure, enhance confidence and trust between parties, and even maximise deal value:
document repository located
both sellers and buyers can make use of a virtual data room (VDR) as a due diligence
“in the cloud”, which can
review platform.
index and host thousands
and thousands of pieces of A high quality, industry-leading VDR enhances due diligence in a variety of ways:
supporting documentation
First, using a VDR brings concrete order to a process that can often be disorganised.
in an organised filing
structure. As a virtual data room, a VDR provides a secure document repository located “in the
cloud”, which can index and host thousands and thousands of pieces of supporting
documentation in an organised filing structure.
In addition, a VDR also removes physical constraints from the due diligence process
because the secure document repository can be accessed via the Internet from anywhere
in the world at any time. Sellers can provide varying levels of access to any potential
party in any location with simple, permission-based access settings, which means that
access can also be segmented by topic if necessary, so human resources information is
separate from patent information, for example. Different members of the deal team can
also login to the same VDR site, but be limited in the information they are able to see.
Another benefit of a quality VDR is that every piece of information hosted on the site is
searchable down to the page level. The ability to segment data at both folder and
document levels provides exceptional granularity, and the ease with which information
can be located and reviewed is unparalleled.
All user activity is tracked inside the best VDRs, including pages accessed and
information reviewed, which provides sellers with an audit trail that can be used to
prove disclosure in case of any later disputes. This means sellers can be confident that
should any questions about disclosure arise down the road, they can produce a certifiable
audit trail showing certain information was in fact accessed by the correct people and for
precisely how long.
In addition, with the various reporting functions built into a premier VDR, a seller can
gain valuable insight into the motivations or interests of a would-be buyer. For instance, if
the acquisition team spends 90 percent of its time examining information in a particular
folder, the seller will be aware that future questions may be forthcoming on that topic
and have time to prepare effectively for a deeper dive into those subjects.
Another major feature of the highest-quality VDRs is the Q&A function. The Q&A feature
allows potential buyers to ask questions of the seller, and allows an administrator to
answer in a generic form. This actually facilitates communication because the workflow in
the Q&A form allows the administrator to send out e-mails to department heads who will
be responsible for answering those questions. Every aspect of these exchanges is also
tracked and as such, communication amongst both deal teams is improved.
6

7. Conclusion
During the due diligence process, best practices call for a complete, accurate and thorough
exchange of information that is easy to review by both buyer and seller. A VDR provides
demonstrable value to both buyers and sellers in that it can help cut the time required for
due diligence significantly, and help buyers build confidence that they have been able to
do a thorough due diligence review on the asset or company in question.
For sellers, using a VDR means they look competent, professional and well prepared, and
another benefit is that by making access to information easy for a potential acquirer,
sellers can attract a larger pool of potential prospects and improve the ultimate value of
their deal.
In Part 3 of “Executing Effective M&A”, we will examine industry best practices for
maximising value and capturing synergies after the initial deal is done.
To learn more about how Merrill DataSite can help you through the due
diligence process, visit www.datasite.com or e-mail info@datasite.com
About Merrill DataSite
Merrill DataSite is a secure virtual data room (VDR) solution that optimises the due diligence
process by providing a highly efficient and secure method for sharing key business information
between multiple parties. Merrill DataSite provides unlimited access for users worldwide, as well
as real-time activity reports, site-wide search at the document level, enhanced communications
through the Q&A feature and superior project management service — all of which help
reduce transaction time and expense.
Merrill DataSite’s multilingual support staff are available from anywhere in the world, 24/7,
and can have your VDR up and running with thousands of pages loaded within 24 hours
or less.
With its deep roots in transaction and compliance services, Merrill Corporation has a
cultural, organisation-wide discipline in the management and processing of confidential
content. Merrill DataSite is the first VDR provider to understand customer and industry
needs by earning an ISO/IEC 27001:2005 certificate of registration — the highest standard
European Headquarters for information security — and is currently the world’s only VDR certified for operations in
101 Finsbury Pavement the United States, Europe and Asia. Merrill DataSite’s ISO certification is available for review
London EC2A 1ER, UK at www.datasite.com/security.htm.
+44 (0)207 562 3200
As the leading provider of VDR solutions, Merrill DataSite has empowered nearly two million
Merrill Communications unique visitors to perform electronic due diligence on thousands of transactions totalling
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Hong Kong transactions. Learn more by visiting www.datasite.com today.
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