In September 2024, Boeing agreed to pay the Brazilian aerospace company Embraer $150 million. The reason: it was withdrawing from their joint venture plan, originally slated to take place in 2020.
Why did Boeing back out? Wider financial concerns triggered by COVID-19 cast doubt on the future profitability of the deal, though Boeing also claimed Embraer had failed to meet certain conditions set forth in their initial agreement. In any case, the withdrawal effectively dissolved a $4.2-billion deal and heralded a long arbitration period.
While no one foresaw the pandemic's impact on aviation, more rigorous due diligence might have led Boeing to renegotiate or avoid the $4.2 billion deal in 2020. Plans inevitably change, but in business, thorough preparation is crucial—especially in mergers and acquisitions (M&A). Below, we explain what due diligence looks like in an M&A context, including how long it takes and what different types exist.
No matter the industry, business mergers and acquisitions are major transactions that present immense growth opportunities as well as immense risk. To minimize these risks, companies conduct M&A due diligence, a process that evaluates all aspects of the target company—such as legal liabilities, operational efficiency, strategic fit, and cultural compatibility—before finalizing any deal.
The goal of this thorough examination is to help make well-informed decisions that are in the best interests of your company and its stakeholders. When done well, M&A due diligence uncovers potential issues, verifies information, and ultimately ensures a smoother integration post-merger.
According to the Harvard Business Review, 62% of M&As fail to meet their financial objectives, with poor due diligence cited as one of the primary reasons for failure. This underscores the importance of assessing financial stability and alignment before proceeding with any company you’re considering a joint venture with.
Considering that 60% of global CEOs plan to make one or more acquisitions in the next three years, thorough due diligence is more critical than ever to ensure those deals are successful. This process prevents business owners from stepping into risky or problematic situations, and ultimately helps to protect company interests in the long run.
Oftentimes, M&A due diligence is associated with uncovering financial issues like bankruptcies and liens as well as legal troubles that could affect the company’s stability, like pending lawsuits. However, M&A due diligence can also assess factors beyond the financial and legal realm, like customer needs and projected synergy. For example, it might involve evaluating reputational risks and customer alignment.
Consider how in 2005, eBay acquired Skype for $2.6 billion—a price it’d later acknowledge as far above what it deserved. eBay’s CEO at the time, however, justified the purchase with their belief that Skype would enhance user communication on the auction platform.
Unfortunately, users quickly dispelled this idea, as they found Skype unnecessary for conducting auctions. As a result, the acquisition led to a $900 million write-down before eBay eventually sold Skype to Microsoft in 2011.
The bottom line: Thorough due diligence helps companies identify potential risks, financial or otherwise—enabling them to avoid costly mistakes, enhance post-merger integration, and maximize the value of their investments.
Since due diligence involves a thorough assessment of a target company, it covers several domains. The process can thus be broken down into more specific categories:
This involves reviewing the target company’s financial statements to ensure their accuracy and sustainability. It includes analyzing cash flow, profitability, assets, liabilities, and historical performance to assess the company’s financial health. Financial due diligence helps uncover potential risks like debt issues or overestimated revenue projections.
Legal due diligence focuses on reviewing contracts, agreements, licenses, and compliance with laws and regulations. It ensures that the target company is not entangled in any significant legal liabilities, such as pending lawsuits, and that all necessary permits and licenses are in place. It also assesses any potential legal risks that could arise from the acquisition.
You can think of this type as a specialized subset of financial due diligence, focused specifically on a company’s tax compliance and liabilities. Tax due diligence ensures that the target company’s tax affairs are in order, identifies any tax-related risks, and evaluates how the merger or acquisition will impact tax obligations going forward. This helps avoid potential tax penalties or complications that could arise after the deal closes.
This process examines the efficiency of the company’s operations, including its production processes, supply chain, and organizational structure. The goal is to identify areas for improvement, potential bottlenecks, or inefficiencies that could impact future performance. It also evaluates the company’s ability to meet demand and maintain quality standards.
IT due diligence focuses on the target company’s technology infrastructure, cybersecurity measures, and data management policies. It examines whether the company’s IT systems are secure and robust, while identifying potential vulnerabilities. It also checks compliance with relevant data protection laws, like GDPR, and assesses disaster recovery plans.
Mergers and acquisitions vary greatly in duration, ranging from a few weeks to several months. The timeline ultimately depends on factors like the scope of the transaction and the complexity of the companies involved.
Using Business Screen's reputable services can significantly expedite this often time-consuming process. With a two-day average turnaround, Business Screen ensures that critical background checks and verifications are completed promptly. This efficiency not only saves time, but also maintains the high standards necessary for a successful M&A transaction.
A strong due diligence process is the foundation for a successful M&A venture. Use our checklist below to ensure nothing’s left uncovered.
To ensure there are no oversights, consider using a reputable third-party due diligence service with a professional background in M&A due diligence, like Business Screen.
No matter what industry you’re in, a well-executed due diligence process can be the difference between a failed acquisition and long-term growth. Thorough assessment of target companies can help identify and mitigate potential risks, paving the way for a successful deal.
For a better idea of due diligence in action, check out our sample due diligence report. You can also learn more about how due diligence benefits your M&A strategy by contacting Business Screen. Our experts are happy to discuss how we can help streamline your M&A due diligence process.
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