How Not to Destroy a Deal

By DirectorCorps

January 7, 2020 All Industries M&A

Kison Patel, the CEO of software company DealRoom, remembers working for a private equity firm trying to do a deal not long ago. His firm bombarded the target company with requests for information — including repetitive requests for the same information, often in Excel spreadsheets. Eventually, the seller got fed up and walked away.

Due diligence has always been a part of acquisitions, but it doesn’t have to ruin them, Patel writes. He advises companies to use collaborating sharing tools rather than Excel, and to not underestimate the time it takes to go through due diligence. Parties should come prepared. That means sellers should assemble materials that buyers will want beforehand to avoid upending operations complying with requests.

Still, there’s no doubt that it’s taking longer to close an acquisition. The average time to close a deal has risen 30% since 2010, according to an analysis of 23,000 transactions of S&P 1200 companies by research firm Gartner. The larger the deal, not surprisingly, the longer it took to close. Deals worth more than $25 billion took on average 106 to 279 days to close.

What’s the hold-up? According to Gartner, deal-making in recent years is becoming increasingly complex. Cross-border and digitally driven deals raise a host of new issues. Investors and regulators also are increasing their scrutiny of acquisitions, the firm says. Gartner’s advises companies to beef up their in-house legal department if they plan to incorporate acquisitions as part of their strategy.

“Organizations increasingly rely on M&A to drive value, which means a greater volume of deals for legal departments to manage,” said Abbott Martin, vice president and research leader for Gartner’s legal practice, in the release. “The complexity of deals has also risen with their volume. Legal departments need new strategies for managing the associated costs while delivering due diligence and deal support in a timely manner.”

Buyers are increasingly demanding cybersecurity and data protections from sellers, for example. A recent American Bar Association study found 70% of 151 deals analyzed in 2018 and the first quarter of 2019 include representation of the seller’s cybersecurity capabilities, and 68% vouch for the seller’s protection of personal data. The study, “Private Target M&A Deal Points,” involved public companies buying private ones.

Gartner recommends creating agile legal teams that can respond to the increased complexity and due diligence needs, with the skills to tackle data management, privacy and cybersecurity issues. Finding and sticking to a compelling deal narrative will help, the firm writes.