Imagine that you are a car enthusiast, and you take interest in reading about the German brand of cars – Mercedes, BMW and Volks Wagen. When you want to purchase your next car, your choice of which car to buy will very likely have been narrowed down to any 2 or 3 of the cars you have frequently read of. This could be because you have sufficient information about them to enable you make a decision. However, to take a final decision, you want more information on things such as warranty, after sales service, financing and payment options, etcetera. So, you proceed to a car dealership to make your findings and hopefully make a decision. At the dealership, you ask questions to confirm the warranty available on the cars you have in mind (including their scope of coverage and duration). You also enquire about the after sales services and the responsiveness of the dealership to service requests. Essentially, you make all the enquiries and if possible, request documentation to enable you make a decision as to whether to buy a car, and which car to settle for.
In the scenario above, you have gathered intelligence by periodically reading about these cars. The intelligence enabled you to ponder over just 2 or 3 cars instead of a hundred of them. Then, by going to the dealership to make all the enquiries, you have done due diligence (DD) which enables you to make a final decision. You will agree that if you had not gathered intelligence before going to the dealership, you will be undecided on which car to purchase and will invariably enquire about the wrong things at the dealership, which in turn may lead to a wrong buy decision.
DD and business intelligence are the bedrock of any commercial transaction, especially for mergers and acquisitions (M&A) deals. Every deal ought to be preceded by business intelligence gathering and DD. The purpose of this paper is to do a deep dive into DD both as a concept and as a process. Most writers and authors address DD as a stand-alone subject. However, we believe that because business intelligence and DD are two sides of the same coin, it is best to discuss them side by side in this one paper.
In this paper we will introduce both concepts, discuss business intelligence in depth and do a deep dive into the world of DD. We shall also discuss the different issues to be considered in the DD process, including the relationship between DD and other parts of an M&A Deal, as well as the importance of site visits as part of the DD process. Finally, we will discuss the process of conducting Integrity DD on counterparties – an added advantage for DD practitioners.
The need for Business Intelligence
Business intelligence is often viewed as a subject for business consultants and strategists, not a lawyerly affair. However, we believe that a grasp of the business intelligence function will enable the lawyer to render more in-depth and strategic due diligence and other legal services to clients. Discussing business intelligence is important for two reasons. First, the importance of business intelligence in the M&A context cannot be overstated. It should be (even though sometimes it is not) the basis for making crucial decisions in the deal. Secondly, business intelligence is increasingly important for normal day-to-day business transactions outside the M&A sphere. Hence it is important to discuss business intelligence within the normal life of a business, and in the context of M&A deals.
But what is business intelligence? In his 2008 paper published on Forrester Research, Boris Evelson defined business intelligence as a set of methodologies, processes, architectures, and technologies that transform raw data into meaningful and useful information which allows business users to make informed business decisions with real-time data that can put a company ahead of its competitors. A simpler and more appreciable definition is offered by Moeller & Brady in the second edition of their 'Intelligent M&A' textbook where they defined the function of business intelligence to be, to act as the eyes and ears of the organization, to gather and, more importantly, analyse information that provides a competitive advantage.
The key points that emerge from these definitions are that business intelligence (a) requires collection of data, (b) involves the analyses and transformation of data into meaningful information, and (c) gives the business some competitive advantage over its peers. In these days of ICT and artificial intelligence, it is commonplace to find that business intelligence is defined as a set of applications and software that mine, collect, process and analyse data. Irrespective of how it is defined, business intelligence, at its core is about collecting, storing and analysing data in order to gain competitive advantage. Today, there are several business intelligence firms and software applications, and the business intelligence industry is a multibillion dollar industry (according to Cision PR Newswire). This underscores its growing importance.
Therefore, as long as businesses continue to compete for market share and dominance, they will continue to rely on accurate and properly analysed data to make sound decisions that will put them ahead of competitors. This creates the never-ending need for business intelligence, both for the everyday business and the M&A participant.
Who should collect and store business intelligence, and should collection be done internally or outsourced?
Recall that we had set out to look at business intelligence from 2 broad spectrums of (a) the everyday business and (b) M&A deals. Hence, there is often the temptation to treat the question of who should collect, and to what extent, along the lines of 'everyday business' and 'M&A'. However, it is our position that the divide should not matter.
Any business looking to compete should cultivate a business intelligence habit and should cover such scope as its resources allows. A company may have no intentions to acquire or merge with another company, but intelligence about an impending merger of two rivals, or a new entrant, or the unlocking of a new geographical market, may spur it to make quick acquisitions to ensure it remains competitive. In order to make such quick and successful acquisition(s), it will rely on previously accumulated business intelligence to decide on the most suitable acquisition targets. Thus, we see that a normal everyday company would have avoided losing market share by relying on business intelligence, and more importantly, it will have engaged in 'unplanned' M&A by relying on business intelligence.
The intelligence should as much as possible be collected and analysed internally (this requires that an intelligence desk/department be created within the organisation) to aid quicker decision making. Also, for businesses in highly competitive industries such as tech and FMCG, it may be desirable to hire external intelligence firms to provide intelligence on happenings across the industry and even outside the industry in so far as they have implications for the industry. This external intelligence need not be sent via emails daily, the business may simply be connected via API to the intelligence Firm, in order to get direct access to intelligence on its database.
In the M&A context strictly speaking, business intelligence is as useful to the seller as it is to the buyer. The reason is simple as has been shown above that a buy-decision may be spurred by the intelligence available to a party. Further, deciding who to buy is a decision which rests almost solely on the intelligence function. It is intelligence that aids a party in drawing up a list of possible targets based on the strategy of the buyer and the reason driving the acquisition. When communication has been established with possible targets, the buyer will rely on intelligence for every step of the deal from the preliminary stage (letter of intent/heads of agreement, confidentiality agreement, etcetera) to the due diligence stage (to be discussed later in this paper), the documentation stage, closing and most importantly, the post-closing integration.
On the other hand, a seller should rely on the business intelligence available to it in order to choose which suitor to sell its business to. Whether the seller is a strategic seller or a financial seller (to understand the different types of sellers, read our paper titled 'Before you sell your business, think like a buyer') business intelligence will help the seller to decide which buyer best suits the seller's strategic needs. Businesses that have been on the wrong selling end of an acquisition will attest to the fact that if they had intelligence on the particular buyer, they would not have sold to that buyer. In Airborne v. Squid Soap, a 2009 decision of the Court of Delaware, United States of America, Squid Soap (the seller) was a growth company and had lots of suitors looking to acquire it. It however opted for Airborne based on the false representations and assurances of Airborne. This proved disastrous and the company failed to obtain adequate value from the sale. The intelligence function would have revealed the different litigations and the Federal Trade Commission investigations which Airborne had pending while negotiating to purchase Squid Soap. Of course, these issues impacted on the post completion success of the deal, and resulted in loss to the seller.
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