Thursday, November 30, 2006

Due Diligence - Sellers

While diligence is ostensibly the buyer’s process, it typically is a bigger deal to the seller, who should take pains to manage the process closely. This is because wide-open diligence poses any number of problems to sellers:

- Disclosing sensitive information (often to a bitter competitor)
- Consuming management time
- Dragging on without end

As a seller, you’re highly motivated to limit the scope of review and the time buyers have to review the information. You don’t want to waste time and resources turning everything over, particularly if you know the documents are of marginal utility to the other side. It helps to try to think like the buyer and anticipate which of your information would be most useful to them, even if it’s not exactly what they’ve asked for.

You also don’t want to make your executives available for endless meetings and diligence sessions with buyers. Savvy buyers know that such meetings are not typically very helpful, particularly with public companies, and will be fine with keeping them brief. With others, you will need to set limits on availability, and be sure that the questions are appropriate for the senior exec involved. There’s nothing like seeing a slack-jawed head of marketing getting grilled about the intricacies of last year’s advertising budget . . .

And then, of course, there is the sensitive stuff. What’s important here is to keep things in perspective. Yes, it can get the hackles up to see your competitor rifling through your secrets. On the other hand, not everything marked “confidential” is worthy of considering thusly. Use this simple test: If your competitor doesn’t buy you, and violates the NDA and tries to use the info against you, what’s the worst they can do? For the vast majority of so-called "confidential" info the answer is: Precious little. Share freely if it’s painless to do so. For the truly sensitive stuff, consider providing it later in the diligence process once things have turned serious. You can even redact or simply tell the buyer it’s too sensitive to share (this last move is best used with care, as it can easily blow trivial documents far out of proportion to their meaning in the context of the deal).

Finally, while buyers would be content doing diligence 'till the cows come home, sellers are wise to put time limits on the process. The amount of time will depend on number of bidders and deal leverage, but setting boundaries is key. Naturally, you will not want to let diligence push on past signing unless it is limited to specific integration matters (and isn't set up as a closing condition).

There are far more intricies to how sellers handle the diligence process, from document copying to using multi-party diligence to further an auction process. I'll try to cover some of those in later posts.

Wednesday, November 29, 2006

Due Diligence - Buyers

Questions percolate in about the diligence process, so I thought I'd post some thoughts on various aspects of the process from the differing perspective of buyers and sellers. Today, the buyers:

As a buyer, your primary goal in diligence is simple:

Verify that the asset you are buying is essentially what you think it is.

However, buyers often run their diligence in ways that, at best, cost them money and time, and at worst ruin their deals. The two primary mistakes are using a cookie- cutter approach to diligence and over-reliance on outside help.

If an acquiror applies a standard diligence approach to all deals, it will inevitably be overdoing its diligence on many deals. A screaming deal - either due to price or strategic need - demands a very different level of diligence than a deal that is in the margins financially and for which there are strategic alternatives.

In the latter case, you'll want to go through everything at some level of detail, because even small hiccups could push your marginal deal into the red. In the former case, you should just be doing what I like to call "nuclear" due diligence - take a high level pass and make sure there is no radioactive waste: Subsidiary asbestos mining companies, crooked accounting - you get the idea. Subjecting such a deal to a rigorous diligence process is simply a waste of time and resources. Worse, since it is such a great deal, the delay inherent in doing such detailed work - and the annoyance it causes your target - may open a window for an interloping buyer to push you out of the way. If you went shopping for a new TV or computer last Friday, you would have seen this principle at work at Best Buy and Circuit City stores across the land: Not a lot of consultive selling; just a mad scramble to get the limited-quantity deals.

Relying over-much on outside accountants, consultants and lawyers complicates problem number 1. Diligence is in many ways an ass-covering exercise for those involved. In the absence of very clear guidance, even internal people will overdo diligence out of concern for missing something. External professionals will be even worse. Their incentives - financially, professionally and with respect to potential liability - are all aligned on the side of doing exhaustive diligence. As a buyer, you need to make sure they understand very clearly what your goals are for diligence in each case. Are you looking only for unexploded bombs, or for any accumulation of small liabilities? As is the case in many strategic deals, time to deal execution is often far more important than doing a complete diligence work-up.

As a buyer, it is important that you have a senior person running the diligence process so that the personalities can be controlled and the process tailored to the needs of the specific deal.

One final thought for buyers is the difference between valuation and integration diligence. In strategic deals involving significant integration issues, you need to do some high-level diligence on the integration process: Verify software platform versions, people issues, etc. However, the specifics of the integration process are unlikely to matter in verifying value or deciding whether the deal is go/no go. The tricky part is that your operating people will want to get into the specifics right away, because they are responsible for delivering the post-merger results. And of course, it's critical that integration happen quickly and smoothly so deal synergies can be fully realized. One approach that often works - particularly if you've been reasonable with valuation diligence up front - is to negotiate in the definitive docs a process for integration-related diligence between signing and closing. Such diligence won't be a closing condition, and it will be limited to integration-related information, but it can meet your need for speed in the stage up to signing while still getting the detail your ops folks need to start integration as quickly as possible.

Monday, November 27, 2006

More on Mining Deals

Check out The Deal for an in-depth look at the mining company M&A saga I've been posting about all year. The article, which obviously went to print more than a week ago, ends by speculating that Phelps Dodge might be an acquisition target. Indeed.

Wednesday, November 22, 2006

Google AdSense

With Google shares cresting the $500 mark, I thought I'd help out and add AdSense to my blog. I'm interested in seeing howly closely the AdSense program can hew to the target audience. This is a narrowly-focused blog - will it elicit ads for diligence and financial services or garden tools?

A Classic Rediscovered

I recently read Sloan Wilson's The Man in the Gray Flannel Suit. The book has often been described simply as a critique of corporate conformity, but that's far from apt. While it is in ways a period piece, its themes of balancing corporate ambition and family responsibilities should resonate with any of us corporate tools.

Our hero, Tom Rath, has even more than that to contend with: As the book opens, poor Tom strives to answer the following inane question on a job application: "The most significant fact about me is . . ."

It's a shock, then, when he considers the following response:

"It was the unreal sounding, probably irrelevant but quite accurate fact that he had killed seventeen men."

So Tom's got to climb the corporate ladder, find time for family and come to terms with his wartime experiences. Five years ago that would have seemed difficult to relate to; not so much now as our Iraq veterans return to the workplace

Monday, November 20, 2006

More Mining Consolidation

Readers of Corporate Tool will recall my fondness for the flurry of transactions this year in the mining sector, which has seen an unprecedented level of consolidation and hotly-contested deals. Those who followed this summer's trials and travails will recall the following:

1. Inco and Phelps Dodge agree to merge, with Inco acquiring Falconbridge as part of what is to be a 3-way deal.

2. Falconbridge is not to be had so easily, ultimately succumbing to Xstrata after a protracted bidding war.

3. Inco, reeling from its loss in the Falconbridge bidding, breaks off its agreement with Phelps Dodge and falls into the arms of CVRD - but not without extracting a nice premium in yet another bidding war.

This morning comes the news that Phelps Dodge, unable to bulk up as planned, has sold to Freeport-McMoRan for $26B. This represents a 33% premium on top of what has already been a nice run-up on the back of record copper prices; Phelps shares were at an all-time high before the deal was announced. A nice time to sell, and this summer's series of interloping offers obviously led Freeport to lob in what is sure to be a knockout proposal (further boosted by being two-thirds cash).

Besides the valuations and the bidding intrigue in all these deals, what's fascinating is the speed with which consolidation is causing even old-line companies in an old-line industry to lock up: Phelps has been an independent enterprise since the 1830's!

Friday, November 17, 2006


I received a number of messages re my last post, and just at a time when my own work/life balance has precluded spending any time thinking about blogging. One common thread in the e-mail has the importance of using workplace technology as a tool for enriching one's life, rather than letting it enslave you.

Take mobile phones - I've had one since 1993, and it's hard for me to imagine a bigger productivity booster than having near-ubiquitous voice contact wherever I want it. At the time I got my first phone (an analog beast installed in my car), I had a debate with one of the other lawyers in my firm about whether it was a good idea to have a phone. He was a free-spirited surfer dude, and he sneered at mobile phones as "electronic dog collars" . . . until the day a few months later when he made a two-and-a-half-hour drive to a deposition that was cancelled ten minutes after he left the building. What I stressed then, and did again when talking to my father years later when he was dithering about getting his first phone, is that the damn things come with an "off" button for those times when you don't want to be reached.

With technology like mobile phones, e-mail and, indeed, portable broadband, the issue is more about boundaries than the technology itself. Technology is only going to enslave you to the degree you let it. And if you're able to use it to work more efficiently or shift work around so you can have a more flexible day, it's downright freeing.

Of course, even solid boundaries can't save you from the problems of "bleeding edge" technologies - those things that seem to hold the promise of making our working lives easier but consume more time than they save by clumsy interfaces, too much maintenance or lack of reliability (think voice recognition software, most PDAs and all-in-one message services). I'll take a pass on the "gee whiz" stuff unless in can make my life better right out of the box.

Wednesday, November 08, 2006

Work-Life Balance

Not to keep pushing Fortune, but once again I've got to point out their work - the latest issue, besides having a terrific in-depth piece on the fall of Milberg Weiss (hee, hee), has an illuminating "How I Work" portrait of Sun CEO Jonathan Schwartz (sorry; no link). I really like this feature - it's interesting how successful business people seem to have so many different ways of structuring their time.

One constant, however, seems to be a lack of balance between work and family time. This is a theme you see almost every month, whether it's Toyota's former chairman lamenting the lack of time spent with his children while they were growing up or PepsiCo's CEO flatly stating that balance doesn't exist for her. For anyone who has spent time around CEOs and other senior management types, this isn't shocking. Whether it's the job or the people who usually occupy it (or a little of both), obsessiveness seems to come with the territory. Unsurprisingly, Schwartz expresses a similar sentiment, but with a twist: "There is no line between personal life and professional life, especially if you care a lot about what you do. I used to really resent that, and then it became really freeing."

Freeing? That seems weird at first, but look at how Schwartz works - not cloistered in an office, but on the move, able to connect with employees and customers wherever broadband is available. If your work and life are interconnected, it's not so much about balance as it is about flow: Making the moves between personal, family and work activities as frictionless as possible. With broadband wherever you go, this integration becomes much easier. I'm guessing this is what Schwartz is getting at - the freeing feeling that you no longer need to sit at a desk all day; that's it's OK to spend a couple hours with your kids in the evening, knowing that you can shift some of your work to after their bedtime. This is a far more liberating attitude than the oft-heard complaint that technology is intrusive, pushing work into places it shouldn't be.

Obviously this doesn't work for all jobs, but for many corporate types it should. I've tried to work that way since as far back as the pre-broadband days, and I welcome any technology that makes it easier for me to be successful while still having a personal life. We all need time in the office to collaborate and connect, and we need to spend a certain amount of time every day getting our work accomplished. What's no longer true is that we need to do it all in one place or all in one chunk of time during the day. That is freeing.

Friday, November 03, 2006

Hiring CEOs - Damage Control at Best?

Got around to reading Justin Fox's intriguing Fortune article on measuring CEO performance. Interesting timing, as I've had a number of recent discussions with company leaders about what, precisely, a CEO is supposed to be doing. Some focus on operations, others on strategy; some sit in their offices all day, others are out meeting customers and business partners. However, the bigger the company and the more diffuse its products and customers, the narrower the scope that the CEO can directly impact. In fact, pretty much the only area a large-company CEO can affect overnight is the corporate structure and culture. Sadly, changes in those areas have disparate impacts: Positive changes will yield incremental benefits that take time to accrue into meaningful results; negative changes will stink the place up right away as talented employees flee and morale plummets.

What this means is that a great large-company CEO can have a small positive impact on a company, while a boob in the same role can cause utter havoc. Amidst the rush to hire superstar CEOs, it's sobering to think that a board's most important consideration is ensuring they get someone who won't screw the place up.