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Reputational harm. Financial harm. They’re among the things financial services execs dread most.
With mergers and acquisitions, the risk for substantial harm is high.
Will you know if your target company execs are in cahoots with local officials? Do they have relationships with your suppliers, distributors or competitors? Are your newly acquired clients on the Politically Exposed Persons list? Do the target’s distributors or clients really exist?
Proper due diligence can unearth a lot of nitty-gritty, game-changing intel that can have a huge impact on your deal and your organization, from regulatory and compliance issues, corruption and bribery, to financial misrepresentations.
A shocking number of mergers and acquisitions fail—McKinsey & Company estimates more than 70 percent globally. A recent Forbes article by Control Risks blames the high M&A failure rate on poor due diligence.
Legacy problems often plague integration teams. These are problems that should have been exposed during pre-deal investigation. Control Risks advocates using a “black hat” team of strategists, risk managers and forensic specialists to aggressively try to poke holes in the assumptions that support the deal. You should investigate early, often and deep. Hit hard at the typical failure points, such as cooked books, political connections, bribes and conflicts of interest.
Don’t be afraid to dig. Uncovering something doesn’t necessitate killing a deal; it permits you to craft a stronger one and mitigate the risks.
Tom Carter, co-founder of Kickdrum Technology Group, advocates maturity modeling as a solution to broken due diligence. Maturity modeling answers questions in degrees, so the results are more accurate. Then, it provides a guide to fix any issues and where a company should head post-investment, including time and cost estimates. Carter says it does more than vet a company’s claims. It uncovers hidden value and risks.
A great deal of risk lurks among third parties, so a deal’s success hinges on exploring third-parties’ connections and dealings. Digging deeper also means relying less on the incomplete picture an internet search provides. Tools like Lexis Diligence® ratchet your due diligence up a notch, empowering you through access to thousands of global news sources, watch lists, global databases, country risk analyses and more than 46 billion public records on entities and individuals.
You want to protect your company. But best practices for financial services due diligence can be tough to nail down. Take the time to get it right and you’ll help ensure you’re doing the deals that offer the lowest risk and the best ROI.