Friday, 9 September 2016

Due diligence:so essential, so easily overlooked

Due diligence: the right tool
for many IP-related tasks
"Due diligence is a critical tool when entering into an M&A transaction". So says Mark Scott, this being the title of a Smart Business article where he interviews Elizabeth G. Yeargin (Partner in Ohio law firm Brouse McDowell). This message is scarcely hot news, which is actually quite depressing. Due diligence is indeed a critical tool, not just for M&A transactions but for many other tasks -- but it is increasingly apparent that many people in the business world seem to forget it almost as quickly as they heard it.  It should not be any more necessary to tell corporate decision-makers that due diligence is a critical tool than to remind them to get dressed before going out to work, or to turn their cellphone on before trying to make a call. 

To put it another way, you wouldn't think of crossing a road without checking first to see what traffic is hurtling towards you. So why should anyone be so reckless as to plunge into a corporate transaction that might be worth millions or, increasingly these days, billions, without performing a simple due diligence exercise that warns you of third party IP rights that might be targeting you, or checking that patents and other key assets on which you rely actually cover the area in which you need market protection?

A couple of points in the article are worth picking out -- not so much for the benefit of regular readers of this weblog, who will need little persuasion that due diligence is a worthwhile proposition, but for the benefit of those poor souls who are unlikely ever to see it and who may one day be answerable to colleagues, shareholders and their own consciences for the avoidable errors that will be attributed to them:
"How informed is the typical buyer going into an M&A transaction?

... Companies will often spend less time and money if it’s a smaller transaction because they see the risk as being smaller. But you run into some of the same issues when trying to complete a deal whether you’re buying something for $50,000 or $50 million. Regardless of the size of the target, you need to dig into the potential legal and financial risks, uncover potential liabilities and get assurance that the benefits of the deal outweigh the potential dangers. You can then use that information, if you decide to move forward, to determine or adjust the purchase price for the target [It is a mistake to confuse the likelihood of the occurrence of a loss with the likely scale of a loss. Risk calculation, in due diligence and elsewhere, measures the chances of things going wrong.  An assessment of the consequences once things have gone wrong is quite a different matter. The former is based on the identification and interpretation of relevant factual data (eg who owns patents, how long is their maximum duration), while the latter requires assessment of a cascade of hypothetical situations].

What areas should you focus on as you conduct your due diligence?

Buyers typically are adept at reviewing another company’s management team and the big picture financials such as revenue, sales volume and personnel costs. But you also want to review the condition and composition of that company’s assets. ... What about intellectual property (IP)? What does that company’s customer base look like? What supplier or material contracts are in place? You also want to be aware of any litigation or product liability issues that might pertain to that company, as well as matters that involve employee benefits, labor unions, insurance, taxes or potential anti-trust concerns [It's  good to see IP specifically mentioned-- though it is also given an oblique nod under the heading of 'litigation', especially in the United EU and other developed markets]. ..."
Aistemos remains a firm enthusiast when it comes to diligence, as can be seen from this case study, posted a month ago.  This is why due diligence forms the core of the webinar being held later this month on how due diligence can assist in making savings in running an IP portfolio [the webinar takes place on 21 September: full details here].

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