Beyond Traditional Due Diligence for Mergers an Acquisitions in the 21st Century

By Harvey, Michael; Price, Michael P. et al. | Review of Business, Spring 1998 | Go to article overview

Beyond Traditional Due Diligence for Mergers an Acquisitions in the 21st Century


Harvey, Michael, Price, Michael P., Lusch, Robert F., Review of Business


Too many mergers and acquisitions result in failure, which may be due to an inadequacy of the traditional due-diligence process as well as the limited breadth and duration of the process. Consequently, there are three important phases of due diligence: prior to, during and after acquisition. The due-diligence team for all three phases should include the same individuals. Phases one and three are addressed here; phase two has been examined previously.

Introduction

Mergers and acquisitions (M&As) are accepted strategic options in a competitively aggressive post-industrial economy. In the past three years and after four years of decline, there has been a dramatic increase in M&A activity in the U.S. Merger volume in the first quarter of 1995 alone totaled $73.2 billion, up 36% from the record highs of 1994. On April 1, 1996 alone, 44 mergers were announced totaling $30 billion. Some of the major ones were: SBC Communications and Pacific Telesis, Aetna Life & Casualty and U.S. Healthcare, Allegheny Ludlum Corp. and Teledyne, Inc., Furnishings International, Inc. and Masco Corp., DSP Group, Inc. and Scitex Corp., Cooper Cameron Corp. and Ingram Cactus Co., Hiberina Corp., and San Bernard Bank & Trust, Fresh Juice Co. and Ultimate Juice Co. M&A activity will continue to grow rapidly due to (1) the availability of acquisition capital, (2) the relatively low cost of that capital, (3) the maturing of many industry and product life cycles, (4) the increased number of foreign firms seeking acquisitions in the U.S. and (5) a growing appetite of U.S. companies for expansion in the international marketplace.

The new wave of M&A activity concerns some of the acquiring companies and their financial intermediaries. The "hangover" of the mid-1980s M&A binge has many potential acquirers concerned about undetected liabilities that precipitated some of the failed M&A activities of the 1980s. The specter of environmental liabilities being passed on to the acquirer and the source of funding has heightened this weariness. Increased regulation in the banking industry underlines the importance of conducting effective due diligence prior to any M&A.

Many of the deals of the 1980s are coming apart as fast as they were put together. It is estimated that $100 billion of spin-offs have occurred since 1991 with an additional $77 billion pending, and new proposed deacquisitions are being announced almost weekly. Spin-offs are frequently viewed as overt indications of the failed spree of leveraged acquisitions during the latter half of the prior decade. Many companies are having difficulty reaching the performance expectations used to justify the acquisitions in the first place.

Experts have begun to re-examine the traditional due-diligence process of the past several decades to determine how to enhance its value. The complexity of M&A transactions, the financial instruments used in the transactions and increased government regulation have stimulated a renewed interest in due diligence. The expense of conducting a comprehensive due-diligence process is dwarfed by the costs associated with a failed merger or acquisition. Thus, it is important to explore how the due-diligence process can be used to enhance the probability of a successful merger or acquisition.

The Traditional View of Due Diligence

Many highly visible M&A deals of the 1980s, which produced sobering results, were undertaken with cursory or limited due diligence. The current probability of a successful "corporate marriage" through acquisition or merger is only about 50%. The American Management Association estimates that of the 7,500 annual mergers and acquisitions:

* Nearly 25% of these transactions confronted declining productivity within 12 months.

* Nearly one of every six companies established through merger or acquisition lost market share.

* One of every four had significant management turnover creating management instability. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Beyond Traditional Due Diligence for Mergers an Acquisitions in the 21st Century
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.