/* Google Webmaster Tools */ Baker Pacific Blog: November 2006

Thursday, November 16, 2006

Mergers & Acquisitions Due Diligence, Part 3
In advising companies that are acquisition candidates, two of the questions that I most frequently receive are:

1. What should I expect from the due diligence process?
and
2. How can I best protect my confidential information while still moving the process forward?

I already covered #1 (see Due Diligence, Part 1) and Part A of #2 (see Due Diligence, Part 2). I’ll cover the Part B of #2 in this post, finishing with Part C of #2 in two weeks.

How can I best protect my confidential information while still moving the process forward?

As discussed previously, there are three actions that a company can take that will decrease the odds of wasting time and unnecessarily parting with sensitive information, while not overly encumbering the acquisition process:

A. Gauge the seriousness of the potential acquirer (see Due Diligence, Part 2)
B. Stage the flow of information (covered below)
C. Be on the lookout for warning signs (to be covered in the next post)

B. Stage the flow of information

Staging the flow of confidential information based on the overall progress of the transaction is one of the best means of protection. Early in the discussions, less sensitive information is shared, and as the potential acquirer progresses and shows that it is serious, more sensitive information is shared. It forces the potential acquirer to “earn” the most sensitive information, and limits the number of parties that will see the most highly confidential documents.

While an NDA provides the legal protection, this method adds practical protection. Implementing this method involves staging due diligence into at least four phases of information sharing, although there’s not necessarily a defined break point between each phase.

(1) The first phase consists of the high-level, pre-NDA information, such as a “teaser document” and information that is already contained on the company website.

(2) Following an NDA is more detailed information on all aspects of the company (see Due Diligence, Part 1 for details). This information is typically heavier on current and historical information than on forward-looking projections. Quite a bit of confidential company information is disclosed in this stage, but very little that is competitively sensitive.

(3) The next phase involves the most sensitive company information, including projections, customer information, and any other requests from the acquirer deemed too sensitive to share earlier in the process. The process should be far along and the acquirer clearly serious before sharing these “state secrets.”

(4) Finally, the accounting and legal due diligence, is frequently at the end of the process. This phase is last more for reasons of cost and the larger number of people involved than for confidentiality reasons.

Saturday, November 11, 2006

Mergers & Acquisitions Due Diligence, Part 2
In advising companies that are acquisition candidates, two of the questions that I most frequently receive are:

1. What should I expect from the due diligence process?
and
2. How can I best protect my confidential information while still moving the process forward?

I addressed #1 last time (see Due Diligence, Part 1) and will cover Part A of #2 in this post, with the remainder in the next two posts.

How can I best protect my confidential information while still moving the process forward?
Potential acquirers are typically trustworthy and sincere in their intent when conducting due diligence, with making an acquisition the goal rather than gathering competitive intelligence. However, some may enter the process with both goals, and a few may actually have bad intentions.

With that in mind, there are three actions that a company can take to decrease the odds of wasting time and unnecessarily parting with sensitive information, while not overly encumbering the acquisition process:

A. Gauge the seriousness of the potential acquirer (covered below)B. Stage the flow of information (to be covered in the next post)
C. Be on the lookout for warning signs (to be covered in a future post)

A. Gauge the seriousness of the potential acquirer

In addition to the intentions of the potential acquirer, judging their seriousness at the beginning of the process and throughout can save a target company lots of time and frustration. In my experience, frequently a company would like to make an acquisition but simply is not in a position to do so.

There are number of easy ways to test for this, including the following.

Evaluate the company’s financial ability to make an acquisition. Do they have the cash to make a cash deal? Do they already carry a large debt burden, or do they have the ability to borrow to finance the deal? In the case of a public company, it is feasible to consummate a stock deal? The company should be able to provide a clear and realistic plan on how they would structure and finance the deal.

Evaluate the means of initial contact. Was it through a senior executive or board member, or through a person with less authority? If was through an intermediary, how credible is the intermediary, and is it formally representing the company?