Attacking M&A Due Diligence - To Win!

Daniel Behrendt
http:/www.linkedin.com/in/danny-b
Acquisitions – Due Diligence
Overview

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Contents
I. Summary of E2E Acquisition Process
II. Teams
III. Due Diligence – Summary
IV. Due Diligence – Detailed

Daniel Behrendt
Summary of E2E Acquisition Process*
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Strategy
Approval
Approval to
Negotiate
Final Go/
No Go
Annual
Review
ExecutionStrategy
Transaction
Planning
Define Acq.
Strategy
Manage
Target ID
Build Business
Case
Strategy /
BG Finance
Corporate
Development
Provide Executive
Sponsorship
Business
Group
Venture
Integration
Value & Structure
Transaction
Negotiate
Deal
Sign & Close
Transaction
Lead Confirmatory
Due Diligence
Establish
Integration Plan
Lead Initial
Integration
Performance
Tracking
Integrate
Acquisition
Realize Value
Drivers
Support
Prelim DD
Lead
Prelim DD
Define Value
Drivers
Sign Off On
Integration Plan
Ensure
Sponsorship
Establish BG
Integration Team
ID
Targets
Strategy/BG Finance Venture Integration Business GroupCorporate Development
Activity Owner:
*MSFT/Samsung Example

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Teams*
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• Drive acquisition strategy, vision and deal
prioritization
• Manages potential acquisition targets
• Secures headcount and budget funding
• Drives required sponsorship / leadership for
acquisition strategy and process
• Initiates buy/build analysis
• Ensures BG alignment
• Facilitate acquisition evaluation and
approval process
• Establish valuation, create deal structure and
execute negotiation strategy
• Manage external advisory and banking
relationships
• Leads negotiations with target principals and
any 3rd party advisors
• Defines and implements valuation, deal
structure and negotiation strategy
• Leads confirmatory due diligence process to validate
initial assumptions
• Partners with BG to assess integration assumptions,
reporting structure, employee offers and accounting
• Drives creation of success metrics and adoption of
score card review process
• Provide cross-company knowledge / leadership
on integration and people strategies and issues
• Identify and mitigate integration risks
• Establish appropriate integration approach and
timeline
Responsibility Key Contributions
• Owner and Sponsor of acquisitions
• Establish business plan and execute post-deal
integration
• Provides final decision on pro forma business plan
• Drives required sponsorship / leadership for
acquisition strategy and process
• Executes acquisition integration
• Reports scorecard metrics
Strategy / BG Finance
Develops underlying strategic
rationale for acquisitions and
establishes management support for
specific targets.
Venture Integration
Implements integration activities to
enable growth and create value
through excellence in deal execution.
Corporate Development
Sources, evaluates and executes
transactions which increase
shareholder value and achieve
Microsoft’s strategic objectives.
Business Group
Provides executive sponsorship and
program manages deals through
post-deal integration
*MSFT/Samsung Example

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Due Diligence – Today’s Objectives
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• My Objective: make Due Diligence easier and more efficient for individuals and
business units when evaluating 3rd party, private targets for potential transactions.
• Your Objectives: enhance capability to use Due Diligence to efficiently and effectively:
(1) validate the value drivers supporting the strategic rational of a transaction;
(2) identify and evaluate risks to the deal’s value; and
(3) plan for risk mitigation
*I focus only on private company transactions – public entities often have a different set of “rules” around Due Diligence, and because much
information (financials, risks, 3rd party research and analysis) is in the public domain, DD processes often are restricted.

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Due Diligence – Basics
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• Overview: Due Diligence is a process of information exchange for the purposes of
structuring, executing and closing a transaction.
 Successful “DD” gives the buyer access to the information and people needed for informed
decisions on a transaction, while minimizing the use of time and resources
• Timing: Due Diligence can take place in different stages, various locations and
through a variety of methods, but its customary to get 3-4 meetings.
• KSFs: Maintain a focus on the strategic rationale and risks of the deal, thorough
preparation, effective communication and time management.
• Deliverables: An accurate assessment of target valuation and price, discounted for
risk, and a post-merger integration plan to mitigate those risks and retain/generate
maximum value.

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A Word on the Seller’s Perspective
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• Most targets will provide you with as much information as possible to maximize the
perception of value and their ROA – less uncertainty, higher price
 Some targets may wait to disclose sensitive content until after the signing of definitive
agreements or Closing – even if you already have an NDA.
 Others may also limit access to information or individuals to minimize distractions to its
management, employees, partners and/or customers.
• Targets use the process to evaluate YOU as a potential manager, partner and leader,
and to determine if the transaction will further their personal and professional goals.
 Use the process to build rapport and create a good reputation for your company.
 Your interaction with your colleagues and advisors in front of the target signals the type of
culture and company you represent, and what is in store for the target post-acquisition.

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Due Diligence – Best Practices
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• Be Focused & Efficient: The content of each question should be crafted to a core
area of interest, such as HR, Finance or Technology.
 Each area should help either validate the strategic rationale or evaluate risks
• Prepare: A thorough plan and well-written question list is the best way to prepare
your deal team, external advisors and the target for your due diligence process.
• Effectively Communicate your due diligence plan and objectives to manage external
and internal deal team members, as well as to set expectations with the target.
• Properly structure questions to manage time and facilitate responses.
 Well-written questions keeps the deal team and target on track.
 Poorly written or presented questions distract hurt your credibility.

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Due Diligence – Goals
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• Efficiently and effectively (1) validate the value drivers supporting the strategic
rational of a transaction; (2) identify and evaluate risks to the deal’s value; and (3)
plan for risk mitigation (PMI).
Due diligence is not just for pricing or deal structure – it is used to determine how a
target should be integrated, from reporting structure and employees’ titles to
retention packages and joint sales plans, buildings and facilities, IT migration,
security issues, and more.

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Due Diligence – Process & Timing
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During a process, you will typically have 3-4 opportunities to perform “DD”: Initial
Engagement, Preliminary Due Diligence and Confirmatory Due Diligence.
• Initial Engagement is an informal discussion, often between senior leaders of both
companies, to discuss the high-level opportunity.
• Preliminary Due Diligence often takes place prior to the execution of a Letter of Intent
(“LOI”), as the initial terms of the LOI may be determined from the results of that Due
Diligence.
• Confirmatory Due Diligence is the usually the final opportunity to collect information,
and occurs after signing the Definitive Agreement but prior to Closing.

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Due Diligence - Initial Engagement - Overview
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• Initial engagement is like 소개팅: It’s a casual conversation, and everyone knows the
questions (and most of the answers) already.
 Subject matter: Roles and respective companies, overview topics (vision, objectives,
products, people) – can be accompanied by presentations and/or demos, with a deeper
conversation possible if an NDA is in place.
 Structure: Interaction can be through a prepared set of presentations in a formal
environment, a conference call, or just a casual chat in an informal setting.
 Team: Attendees vary, but unless the target is in a process, rarely are 3rd party advisors
present.
 KSFs: Validate initial assumptions while creating a good rapport.

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Due Diligence – Initial Engagement - Preparation
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• Drive internal alignment prior to the meeting
 Necessary participants and who leads
 What subject matter and which topics are off limits
 Frame ahead of time on desired transaction and scope to start anchoring
• Do your homework
 Basic research on the company, its competitors and industry
 What gaps will the transaction fill in your strategic roadmap
• Work-backwards for desired results
 Better understand build v. buy v. partner, target comparisons, how a transaction impacts
your competitive position, including anti-trust, and the potential price range.
• Have an open but cautious conversation
 Gauge the target by preparing to speak on type of potential transaction/relationship
 Understand culture, vision and business goals from each side
 Prepare to respond to target’s inquiries (“What is your interest?”), even if evasively
 “Still evaluating that;” “Have to discuss internally;” Considering a variety of options.”

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Due Diligence - Initial Engagement – General Questions
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• Your deliverable is a thorough analysis on the opportunity, including a basic target
overview, to your management.
 The Initial Engagement is not the time to go into a deep Q&A session
 Refine the strategic rationale to socialize with GBM senior management
 Determine whether to sign an NDA and move forward into Preliminary Due Diligence.
• General Questions
 Overview of the business
 Corporate Vision and Strategy
 High level financials and forecast
 Description of the key products/services and underlying technology
 Management team background
 Anticipated price range (optional)
 Number of employees and split between R&D, Sales & “other”
 Location of offices and related subsidiaries
 Conversation on the best type of relationship to generate value
 Other suitors

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Due Diligence – Building a Team
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• Team will evolve throughout the process
• Not every internal “Deal Team” is equipped with the knowledge or experience to
conduct a thorough due diligence.
 Bring in people from different parts of your business to participate to (1) obtain a complete
perspective and (2) achieve buy-in internally.
 Always be on the look out for potential “contamination” or conflicts.
• You may also need to rely upon external advisors or internal experts to assist in both
drafting and analyzing the questions and reviewing documents.
 Although external advisors have a much larger role during the Confirmatory phase,
discussed below, they have value throughout due diligence.

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Due Diligence - Preliminary Due Diligence - Overview
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• Preliminary Due Diligence is readying to propose: what are both sides made of?
• Subject matter: a post-NDA discovery process that occurs prior to deciding whether
to complete a LOI to acquire the Company.
• Timing/Structure:
 First send written Q&A to help narrow the issues and access to documents or data room
 Follow up with 2-3 days of interactive meetings to deep dive into core areas of interest, face
to face with key employees, including founders and management.
• Team: start to involve 3rd party experts
• KSFs:
 Remain flexible: a target’s willingness to disclose information, its openness regarding the
potential transaction and availability of management will vary.
 Deeply engage with the target company and its management.
 Sit in shoes of the target:
 Sellers are sophisticated - the less access the Buyer has, the more concerns, and the
deeper the discount on purchase price (if you still decide to purchase).
 Avoid negative consequences, such as management distraction or leaks.
 Protect proprietary/confidential information

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Due Diligence - Preliminary Due Diligence – Seller’s Perspective
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• The Seller will evaluate the buyer via the way you interact with the seller and your
colleagues
 Evaluating you; not just as a potential buyer, but as a potential manager, partner and/or
leader for them and their business.
 You will answer their questions implicitly as you provide insight into your business unit’s
culture and goals when you interact with the target and each other.
• Protect competitive advantage/“secret sauce” in the face of rich, potential competitors
 A seller revealing detailed information on finances, technology or personnel can be
problematic for both sides, even under NDA or non-solicitation clauses.
 Use outside advisors or non-core project employees to restrict who has access to highly
sensitive information (“Contamination” is discussed in greater detail, below.)

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Due Diligence - Form of Exchange – Written Questions
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• Overview: create an exhaustive list of inquires and cement stakeholder “buy-in”
 Cooperative effort between all members of the TF and across all functions.
 Prepare the target by providing a full list of questions in advance.
 Narrow the issues and prepare follow up with target response in advance
 Use the list to organize the sessions and timing.
 Target can use the list as advance notice on your areas of interest and to determine
attendees for each core area of discussion.
• Crafting Questions: e.g., when some Strategic Value is around the target’s technology
 R&D team: focus on the technology capabilities, the development process, and technology
roadmap.
 Finance team: future R&D spend, the engineers’ salaries and any licensing payments.
 Product team: compatibility with your company’s products
 Sales will want to know about customer feedback and forecasts to date.
 Legal and IP Center will ask about claims or litigation related to the technology and IP filings
 HR will want to know the background and employment status of the developers, their
incentives and motivation, etc.

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Due Diligence - Form of Exchange – Written Questions
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• Create a Balanced Question List: is a form of art
 Never a perfect split – HR will want to know employee incentives and benefits to determine
retention, Finance wants to know employee incentives and benefits to project OpEx.
• Be efficient: 1000s of questions on sensitive subjects risks that the target answers
none.
 The best approach is to work off your Strategic Rationale, using questions that will need to
be answered to determine what is the business you are acquiring.
• General Questions
 Company Overview. What are You buying and from whom?
 Legal Issues & Documents. What problems come with the company/M&A?
 Employees. Who are the necessary employees, and how can I retain them?
 Products/Services. Where is the underlying value of the company?
 Key Business Relationships. Which 3rd Parties does the company rely on?
 Finances. What drivers/assumptions are behind the financials & projections
 Marketing & Sales. What is the addressable market and size of opportunity?
 Manufacturing, R&D & Technology. What gap does this company fill for us?
 Spotting Risks. What scenario(s) would lessen the value of the transaction?
 Strategy. Where are my synergies across the above?

Daniel Behrendt
Due Diligence - Form of Exchange – Full Question List (Part 1)
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Company Overview. Key Question – what are you buying and from whom?
ü Company Background: vision, culture and history
ü Company Corporate Structure: what type of entity, who are the owners, who is on the BoD, and where is the
company incorporated.
ü Corporate Documents: what is in the corporate bylaws, articles, and shareholder agreements.
ü Related companies and affiliation, such as sales offices, R&D centers, recent acquisitions or divestments.
Legal Issues & Documents. Key Question – what problems come with the company?
ü Pending or threatened legal/regulatory issues with impact to the company’s Strategic Value
ü Claims for/against that might negatively impact the company, employees, expenses or PR.
ü Sample employee, partner and supplier contracts (Confidentiality, IP Ownership, CoC clauses)
ü Important partner contracts (terms, change of control clauses, etc.)
Employees. Key Question – who are the necessary employees, and how can I retain them?
ü Reporting structure and employees by function and location (along with seniority, title, salary)
ü Employee backgrounds or redacted resumes
ü Planned departures, turnover history and any unfilled key positions.
ü Projected headcount, both as a standalone and if asked to achieve post-transaction goals.
Products/Services. Key Question – where is the underlying value of the company?
ü Overview of products, product roadmap and release timeline
ü Key contributors to each product in ideation, development, manufacturing.
ü Description of each product by features, price points and revenue/business model
ü Support volume for a product and method.
ü Product limitations

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Key Business Relationships. Key Question – what 3rd Parties does the company rely on?
ü Customers (B2B, B2C, SME, etc.) for each product and top customers by revenue
ü Threats/risks to keeping third party relationships.
ü Customer adds & churn over past year(s)
ü Customer satisfaction metrics by product
ü Key suppliers and partners and overview of contract terms (CoC, post-merger obligations, etc.)
Finances. Key Question – what drivers/assumptions are behind the financials & projections
ü What drives historical and future income, and is it aligned with your strategic value?
ü How does the Company value itself?
ü How does the Company see financials changing through the transaction (customer adds/churn, increased ASPs,
lower COGS/OPEX, etc.)?
ü What are the potential sources of synergy and how can they be quantified?
Marketing & Sales. Key Question – what is the addressable market and size of opportunity?
ü Description of sales pipeline and processes
ü Overall sales planning and quotas.
ü Detail on marketing expenses and compensation plans
ü Sales compensation plans.
Manufacturing, R&D & Technology. Key Question – what gap does this company fill for us?
ü Product cycle, QA and Release
ü List of patents, pending patents and industrial designs and any encumbrances?
ü Any dependencies on third party rights or open source material
ü Where are the engineers/contractors that created the technology?
ü S/W v. H/W Development procedures

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Spotting Risks. Key Question – what scenario would lessen the value of the transaction?
• Risks are any threat to a generating value from a transaction.
• For example, with R&D companies, employee retention post-acquisition is always a risk. Key employees
leaving the company could harm the continued development and enhancement of existing technology, as well
as the future technology roadmap, lessening the value of the transaction.
• Understanding the companies past churn rate, hiring plans, benefits and compensation package and
personalities and goals of key employees helps us to shape a mitigation plan for that risk.
• Since the source of value on each transaction is different, your TF will have to work closely to consider the
risks to success.

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Due Diligence - Form of Exchange – Face to Face Meetings
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• Overview: Face to face meetings with the target’s management and/or advisors.
• Timing: After reviewing/analyzing responses to your written questions and follow-up
• Preparation: Strategic thought around location, timing, attendees and format.
• Structure: The agenda should include
 Introductions and objectives of meeting(s)
 Follow on questions by module basis
 A tour of the company/facilities and opportunities to socialize and interact with the target’s
representatives outside of the conference rooms.
• KSFs:
 Interaction & Maintaining an environment conducive to cooperation
 Time management
 Transparency: differentiate from other acquirers with honestly on PMI vision and goals,
especially if a seller’s key employees will continue to drive value or are the key shareholders
 Confidentiality
Remember, Due Diligence is not an interrogation – it is an opportunity to evaluate a
target company while building rapport with its management and key employees –
some of whom may eventually become your co-workers.

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Due Diligence - Form of Exchange – Face to Face Meetings
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• A Note on Practical Agendas
 Introductions to attendees from both the buyer and target
 Setting Ground Rules, including Length of Session and Lunch/Break Times
 Interactive Session to Review Target’s Material with Follow On Questions
 Lunch Break (working lunch is not uncommon)
 Office/Facilities Tour
 Interactive Session to Review Target’s Material with Follow On Questions
 Allow time for Questions/Comments from the Seller
 Schedule dinners (alternative hosts) after each session to build rapport and additional,
informal interaction between module members.
• A Note on Time & Resource Management
 Set a mutually agreeable set of dates and times - best case scenario is where the target will
give you as much time as possible for you to go through each of the core areas
 Often, the target will limit the number of days and hours per day, to keep its representatives
from being too distracted or fatigued to handle their daily business duties.
 The target (and you) may have retained advisors and other internal resources that you want
to use efficiently.
 Consider concurrent sessions where there will be little overlap between attendees; e.g.,
schedule the R&D module at the same time as the Financial module, since different deal
team members will be required.

Daniel Behrendt
Due Diligence - Form of Exchange – Face to Face Meetings - Team
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• Team Make-Up
 Balance participation and thoroughness with practicality.
 For corporate attendees, ask yourself what core knowledge or experience will be leveraged
from each attendee that will help facilitate discussion.
 “Note-takers,” or those unnecessary to evaluate responses from the target, should be left at
home and communicated with daily by email.
 Make your team efficient – a small start-up can be overwhelmed by the presence of a large
corporate diligence team.
 The more unfamiliar faces on-site, the more likely rumors around your visit will spread.
• Contamination/Taint: avoid exposing employees currently working or who could
potentially work on a competitive solution
 Taint is where an employee on potentially competitive internal project is exposed to the
target’s confidential information, creating a presumption that any similar ideas or processes
created, even if independently, came from exposure to the target’s confidential information.
 When discussing confidential technology, even under a mutual NDA, avoid exposing
employees currently working or who could potentially work on a competitive solution.
 You can still effectively evaluate a company’s “secret sauce” by retaining an outside
technology evaluation firm or using an internal expert not involved in the development of your
internal solution, who can review and assess data without exposing your engineers to taint.

Daniel Behrendt
Due Diligence - Form of Exchange – Face to Face Meetings - Team
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• Target Attendees
 The Seller may let you meet with all relevant employees, due to business distraction,
confidentiality and a suspicion of “ulterior motives”.
 Always request attendance to specific modules from those target representatives with the
best knowledge on the subject matter.
 The target may also insist on having advisors present to guide them on responses – this is
not unusual where the target is trying to generate an auction process or has a lack of
sophistication in transactions.
• General Team Make-Up Hints
 Executives, who can help build rapport, buy-in and an impression of senior level engagement
to the target, but are not seen as escalation points.
 Not just R&D, not just Legal – each module may require a different set of participants
 Stakeholders needed to thoroughly assess the target (and to generate internal buy-in)
 Advisors, including Legal, Financial, HR and Technical

Daniel Behrendt
Due Diligence - Form of Exchange – Face to Face Meetings – Locale
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• Convenient, but effective locations – priority on worksite/corporate
 A worksite is often simply more convenient for the target, and gives the buyer a better feel for
the company and culture:
 Is no one in the office yet at 10 am?
 Does the R&D Team spend their time sequestered in individual cubicles?
 Is there a collegial chatter among the corporate teams?
 How is the informal interaction by and between working level managers as well as the
rank and file employees?
 What’s the general mood?
 Some targets will prefer an off-site meeting, at an advisor’s office or even your office.
 In this case, the target typically is concerned about confidentiality – exposing the
potential sale process could have a severe, negative impact upon morale of target
employees, confidence of suppliers/partners/customers, and could even invite an
interloper into the process.
For confidentiality, always confirm with the target’s representative beforehand on what
the expectations of employees are with regard to your visit, and be careful how you
represent yourself and the process in front of them.

Daniel Behrendt
Due Diligence - Form of Exchange – Question Formulation (Part 1)
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KSFs for the question session
(1) Focus - especially on keeping questions clear;
(2) Time management - you have access to the team for a finite period of time to
cover many topics;
(3) Interaction – responses are more detailed and insightful when part of a
conversion as opposed to walking through “yes/no” type questions via check list.
• Consider the following the basic Dos and Donts as to formatting your questions.
 Immaterial and Irrelevant.
 Asked & Answered
 Adversarial
 Question Pending:
 Compound question:
 Equally Available.
 Not a qualified expert.
 Leading questions.
 Vague and ambiguous.
 Harassing.
 Unified Front.
 Legal Review.
 Anticipation

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Immaterial and Irrelevant: Each question must feed back into (1) validating your strategic
rationale; (2) assessing risks; and (3) determining valuation. “Ice-breaker” or peripheral
questions (“How do you survive in this weather”, “Is your home close to here?”) during
informal conversation are fine. Although you should feel comfortable with a broad range
of topics, questions that are not reasonably focused on the above three points or
expected to lead to information helpful for your analysis may reflect that you have not
given enough thought to a potential transaction. In the worst case, your questioning will
be perceived as a “fishing expedition” to gain a competitive advantage. This perception
will damage you and your business unit’s credibility and reputation, limiting your future
opportunities for open exchange with other companies.
Asked & Answered: Keep track of the questions that have already been asked and
answered. There is nothing more wasteful (or embarrassing) than asking the same
question that was just asked moments earlier. Also, considering assigning specific
questions to specific members of the TF, and review incomplete or missing responses at
each break.

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Adversarial: Avoid harassing or creating an argumentative interrogation. Debate and
discussion with your counterparty is healthy, but calling into question their truthfulness or
challenging their personal opinion is not productive. Instead, make a note of responses
that appear unreliable and save them for a later “clarification” follow-up. If you don’t have
a satisfactory response to a question, even after a follow up, note the subject matter as a
risk and discount the value of the transaction accordingly.
Question Pending: All statements from your side should end in a question. If you find
yourself talking more than the target’s representatives, or cutting them off, you are not
going to get the information you need. Try to keep on track and remember to always
have a question pending.
Compound question: Long questions with several different inquiries can be confusing
and lead to inaccurate responses. Compound questions have two or more questions
embedded in them. Examples of compound questions are: Would you like to have your
products sell better in China and the US by changing their features? Should your sales
team raise marketing effectiveness by spending more money on print ads? Instead, try
splitting the up questions: “What would make your products sell better in China? How
about in the US? Would changing their features help sales in either country?” Ask
simple questions for simple answers, and open questions for open ended answers.

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Equally Available. To save time, avoid questions that you should already know the
answer to or that you can find out on your own. “What year was your competitor
founded?”; “Which companies are the top revenue generators in the mobile space?”;
“Who are the other players in this industry?” are all examples of questions that have
answers equally available to you that should be part of your preparatory research. , The
exception to an Equally Available question is when you are assessing the knowledge and
understanding of a particular area. “What is our company’s strength in this industry?”
Not a qualified expert. Ask the right questions to the right people. Certainly, in a small
company or start-up, the CFO should also have a good understanding of the technology,
and the CTO should understand the company’s finances. In larger companies, however,
it may not be worthwhile to ask the VP of Business Development in-depth technical
questions or a chief engineer about the most effective marketing strategy for the
company. Questions such as “What is our biggest strength be in this industry?” or “How
should we create a strategy to enter this market” should be rephrased to “What would be
the biggest strength of our merged companies?” and “How could we jointly develop a
strategy for this market?”

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Leading questions. Avoid questions that contain an answer or leads the target to a
response. Since your goal is to provoke a thoughtful and independent answer, a
question that answers itself could prejudice or narrow the target’s response. “Your
objective is to hire at least 20 people for your R&D team, isn’t it?” or “Can you give some
examples of the biggest risks to your business, like losing employees or running out of
money?” are examples of questions that could be reformatted to obtain a more open
response from the target.
Vague and ambiguous. Opposite of leading questions, these requests are so open-
ended that the target may not understand what you are asking or looking for in a
response. The result is an answer that does not contain helpful information. Open
questions are productive, as they’ll get the other side to talk and provide an insightful
narrative. If you pose questions that are too vague, however, the target will not
understand the heart of your request.
Harassing. Consecutive, follow on questions to clarify a response or elicit more
information from the target on an area are acceptable. If the target or its advisor has told
you to cease requesting certain information, you should respect their demand and move
on. Again, the target is aware that the failure to respond may create uncertainty that
ultimately hurts their sale price. But, there may be sensitive information that they cannot
or do not want to divulge. Continued pushing will serve to do more harm than good.

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Unified Front. Always maintain coherence and a courtesy for your TF members,
especially while in front of the target. Do not argue with, belittle or cut off each other
while asking questions. If you need time to clarify a point between each other, ask for it,
and then step outside with your TF members to resolve your differences.
Legal Review. Prior to asking potentially problematic follow-on questions, first vet them
with local Legal or HR advisors. For example, questions on an individual’s age, race,
home country, marital status. These types of inquiries may not only be inappropriate, but
they may also violate local laws, even in the context of a transaction.
Q&A. At some point during the face to face Q&A, you may let the seller ask
questions. These questions will usually be about your vision for the combined
businesses, product/service roadmap and your thoughts around post-merger
integration. Although your job is to collect information, not to give it away, you should
engage with the target as appropriate to establish interactive communication.
When responding to questions from the target about your intentions on the business or
your own competitive solutions. Never respond with sensitive information or information
that you would not want to see published the next day in the newspaper. At later stages,
typically after an SPA is signed, you will have the opportunity for a more candid and
cooperative discussion with the target.

Daniel Behrendt
Due Diligence - Confidentiality
33
• A Note on Confidentiality as a KSF
Rumors and uncertainty around an acquisition works to harm both sides of any
transaction. For the potential buyer, your best position is in a one-on-one process, with
no competitive bids or distractions for the target. A leak or rumor about your intentions
could put the company “in play” or otherwise generate interest in your target that may be
devastating for your position.
For the target, keeping confidence in their employees, partners, suppliers and customers
is paramount. Even the thought of a sale or uncertainty in a supplier could cause
customers to defect and partners to allocate resources elsewhere. The impact of rumors
on employees could cause resignations, a drop in productivity and a lowering of overall
morale.
The target does not have an obligation to provide you with any information at all and are
free to end discussions as they please. Your best position is to first consider why the
target has declined to answer a question.
For example, you will always have sensitivities on R&D or key processes/”secret sauce”;
employees resumes or pay/benefits to avoid future solicitations, customer lists/marketing
strategies if your business unit is or could become a competitor with the target.

Daniel Behrendt
Due Diligence – Data Rooms
34
• Leveraging Data Rooms
 A data room will contain documents related to your requests, although it will take time for the
target to locate and, if necessary, scrub all the documents it intends to make available.
 For confidential documents, the target should provide a schedule of withheld documents.
 Can be physical or virtual environments - virtual provides the seller with more control around
information provided, persons with access and information about what documents are being
reviewed, when, how frequently and by whom. It also allows for remote updates, for several
people to access the same document at once and reduced costs on both sides and can
apply certain restrictions on printing or copying, to help maintain confidentiality.
• What to Look/Ask For
 Important documents to review in any deal are those related to incorporation and BoD
meetings; ownership (capitalization tables, debt instruments, etc.); tax filings; contractual
relationships; insurance policies; organizational structures; and so on.
 Request any relevant correspondence which, depending on the strategic rationale, could
include exchanges with regulators, notices to employees and/or directors, and PR.
 You will most likely not have access to any sensitive or privileged documents, such as
communications between the target and its attorneys or the source code of its software.
• Understand the context
 For example, financial documents for the historical growth of the company and value drivers
and validate the projected financials and drivers.
 Certain preference structures on payouts in the AOI may impact pricing vs. retention benefits;
Shareholder Agreements that provide for ROFR/ROFO may also impact whether to proceed.

Daniel Behrendt
Due Diligence – Advisors (Part 1)
35
Selecting, Engaging & Leveraging Advisors
External advisors provide a deep level of expertise, but at a cost that can range from
$150,000 to $1M+, or even a percentage of the total amount of the transaction price, per
transaction. Some advisors will require the payment of a retainer fee, or a deposit, to
cover basic expenses and costs prior to receiving their full payment post-Closing.
Before holding detailed discussions with advisors, you should ask them to sign a
confidentiality agreement and to perform a “conflicts check.” The conflicts check is an
advisors way to determine that working for your business unit will not conflict or be
improper in light of the work they have done for others. Potential conflicts could be
existing or past relationships with the target, the target’s shareholders and key
employees and your competitors.
Before contractually retaining advisors, you will work with your GBM finance and
Corporate Finance teams to discuss the deliverables and fees of the advisor’s
work. Once you have approval, you will then sign a contract with the advisor, after
internal Legal review, that outlines the timing, scope, staffing and cost of your
engagement. As with other factors in a transaction, these fees vary depending on the
size and complexity of a deal, as well as the scope of services to be provided.
conduct a successful transaction.

Daniel Behrendt
36
• Types of Advisors
 Law firms, as legal advisors, analyze legal and regulatory issues
 Financial and tax advisors can help review and audit financial statements, tax returns, capital
structures, debt instruments, etc.
 HR advisors can comment on existing employee benefits packages, compliance,
organization and corporate culture.
 Technical advisors can assess the technology and products of a company without
“contaminating” your company or employees. To complete their scope of work, your advisors
will need access to you, the target’s representatives and the data room. The advisors may
also do independent research, but should maintain confidentiality throughout the process.
Your business unit is ultimately responsible for expenses associated with those advisors
– they are under your direction as any other member of your business unit. Your best
interest will be in actively guiding and reviewing the work of these advisors to ensure they
are meeting their responsibilities, responding in a timely manner, and providing the
information that you need to conduct a successful transaction.

Daniel Behrendt
37
• Managing Advisors and defining their scope of work is a joint effort for the task force.
 Law Firms
 Help determine the ability of the target to complete the proposed transaction, to
operate the business as planned post-transaction, to identify and evaluate legal risks
that would hurt the value of the transaction, and identify potential legal issues triggered
by the transaction that could impact the company or its business post-closing.
 Legal advisors might also perform as assessment of the target’s Intellectual Property.
 Typically, Legal advisors do not comment on tax, operational, business/commercial or
accounting issues, but many large law firms have separate departments that provide
those services.
 Legal advisors will make recommendations on the structure of any transaction to
minimize risks and maximize available benefits.
 Law firms will summarize their findings in a detailed memorandum to the client.
 Accounting firms, such as KPMG, PWC & Deloitte, review the target’s financial documents
 This review is not necessarily tied to the target’s valuation, but rather for auditing the
company’s financials for accuracy and credibility, ensuring compliance with relevant
regulations and standards, reviewing and commenting on working capital and
performing tax due diligence.
 The accounting firm will also advise on how to best structure transaction to lessen the
negative impact of taxation and/or repatriation of profits.
 The deliverable will be a detailed memorandum to the client.

Daniel Behrendt
38
• Managing Advisors and defining their scope of work is a joint effort for the task force.
 HR Consulting
 Advisors are varied in size and approach, but focus on identifying and evaluating key
employees, designing retention plans, advising on cultural integration, reviewing and
adjusting benefits plans, reporting hierarchy, HR policies and regulatory compliance.
 Larger consulting firms, such as Mercer, PWC and management consulting firms can
also guide on post-merger education and training plans.
 Deliver a plan that ensures that valuable employees are retained and motivated post-
acquisition, and that the company, from a personnel perspective, is aligned with the
buyer to generate value.
 Technical advisors
 Retained to provide an expert review on an unfamiliar but important technology and/or
to conduct technical due diligence without contaminating your team.
 Technical due diligence includes overall technology/software testing and validation,
solution scalability, QA, audits on software code, IP Compliance and assessment of
third party content and dependencies, detection of viruses or malware in code, etc.
 Avoiding taint: submit a list of questions, prioritized by area, so that the third party
advisor can go through those questions with the target, alongside its own inquiries and
follow up, to evaluate the company’s “secret sauce.”
 Will present a scorecard that grades each area without revealing the information relied
upon to create the assessment. Your team can then make a go/no go

Daniel Behrendt
Due Diligence – Confirmatory Due Diligence
39
• Confirmatory Due Diligence
Once you have completed preliminary DD and any follow on DD, you will be prepared to sign your
definitive agreements. Those agreements will usually have sections dedicated to closing conditions
and limits on material changes in the business, between sign and close. Your transaction, however,
will not be binding until the definitive agreements are executed and the deal “closes.”
During Confirmatory Due Diligence, your focus will be on filling in blanks from earlier diligence
sessions, gathering information to help on the planning and execution of integration and overseeing
the work of advisors.
Confirmatory DD also let’s you confirm closing conditions have been met, earlier representations are
still true and that there is no material change in the target or its operations since the last DD and close
A sample closing condition is whether the target has performed all of the obligations contained in the
SPA required to be completed prior to Closing, such as signing a key employee to a new contract,
ending a particular partnership or no other change with material adverse effect on your purchase.
Since target companies tend to open up a bit more post-signing, you may now have access to
employees, technology or other sensitive data that the company was unwilling to provide without a
definitive agreement. You can use this information to fill in any gaps in your prior diligence, or to meet
individual employees to discuss and cooperate on PMI, jointly set KPIs, create retention plans and
discuss combined entity operations. Moreover, due diligence gives us the opportunity to validate the
credibility and feasibility of our financial financial forecasts.

Daniel Behrendt
Summary - Notes
40
• Summary
Through due diligence, you can evaluate any transaction from a strategic, legal, financial
and personnel perspective to give you confidence that your deal will generate value.
Proper due diligence will provide you with the information you need to make the best
decisions for your business, bearing in mind the strategic opportunity, risks and
mitigation. You will have a rare opportunity to take a company out for a test drive, “kick
the tires” and let your mechanic check under the hood prior to purchase.
Due Diligence does not have a magic formula of questions, participants or timing – every
transaction is different by structure, type of entity (public/private), industry, size, owners
and purpose.
If you conduct extensive preparation; focus on the desired content; clarity on the format
of your inquiries, manage your time; and promote interaction – both with the target and
participation from members across your business unit, you will raise your chances for
success.

Attacking M&A Due Diligence - To Win!

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