Read Mergers and Acquisitions For Dummies Online
Authors: Bill Snow
Mergers and Acquisitions For Dummies (74 page)
Listing and description of any outstanding premium adjustments
Buyers may be able to get better insurance rates after the deal closes; larger companies are often able to warrant preferred pricing from insurance carriers.
Litigation history
Understanding Seller's history with lawsuits, both as a defendant and plaintiff, is another must-know due diligence area for any Buyer. The following list lays out some important litigation info:
All litigation, arbitration, and other proceedings to which the company is a party
Listing of all pending or threatened claims, lawsuits, arbitrations, or investigations (including investigations by any governmental authority)
Description of settlements of litigation, arbitration, and other proceedings
Bankruptcy proceedings in which the company is a creditor or otherwise interested
All orders, injunctions, judgments, or decrees of any court or regulatory body applicable to the company
All agreements in which the company agrees to indemnify or hold harmless another person or entity for claims against that person or entity
Schedule of any litigation involving an officer or director of the company concerning bankruptcy, crimes, securities law, or business
Watch the advisors closely; they make mistakes
Advisors are very important to the M&A process, and while most advisors do a fine job, you may run into one who isn't doing his best. As an example, a few years ago I was representing a Seller during a particularly difficult due diligence process. One of the Buyer's executives contacted me to berate me about a problem his plethora of expensive accountants had uncovered with my client's financials.
According to the accountants, the earnings we provided in our materials didn't jive with what they uncovered during their very intensive and extensive exploratory exam of my client's finances.
This executive from the Buyer was convinced we were “hiding something” (those were his words). I asked to review the Buyer's work, and after much delay, the other side finally e-mailed me its spreadsheet.
Sure enough, the accountants were showing a $500,000 hole in my client's earnings. Their analysis clearly showed that we overstated earnings by that amount. I also knew they were positioning themselves to renegotiate the deal and demand a lower price.
But the devil is in the details. I pored through their work, literally cell by cell, until I found the one blatant and obvious mistake: Someone incorrectly (and probably carelessly) transcribed the audited numbers. The raw data the accountants were using to calculate earnings was inputted incorrectly. The mistake was a case of user error. When I popped in the correct numbers, guess what? The earnings as calculated by the Buyer's accountants suddenly fell in line with how the Seller represented earnings.
I calmly reported this information to the executive and e-mailed my findings. I knew the issue was resolved because the other side dropped it and never mentioned it again.
To this day, I wish I had been a fly on the wall of the accountants' office when they received the call from that executive.
Governmental filings
Depending on the industry and the nature of Seller's business, a slew of government filings and paperwork are a part of due diligence. These documents include
Any governmental licenses, permits, and authorizations
All filings to any national, state, or local governmental agency or authority, including the SEC, the IRS, the FDA, and the INS, to name just a very few
Any complaints, investigations, or other informal or formal proceeding by or before a governmental agency or authority and involving the company
