Building Corporate The Future Readiness to Avoid of Due Diligence

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Building Corporate The Future Readiness to Avoid of Due Diligence Shareholder Activism

HOW TO FOSTER TRUST AND TRANSPARENCY WITH SHAREHOLDERS BUILDING CORPORATE READINESS TO AVOID SHAREHOLDER ACTIVISM | MERRILLCORP.COM |

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Introduction Three months or less. That’s the amount of time 85% of global dealmakers think

E SUMMARY due diligence will take by 2022, according to a Merrill Insight™ poll.

And though dealmakers are said to worship at efficiency’s feet, the due diligence

LDER ACTIVISM TO messy, art-not-science roller coaster ride. As process itselfACCELERATES is often a surprisingly EVELSa result, current global due diligence project averages range from six to seven months.

ACTIVISTS – SHIFTING How will due diligence times drop to three months in the next four years? And what willAND the future of due diligence look like? PE TACTICS TRIGGERS

As pioneers of the first application for due diligence, our quest to answer these questions spans multitudes of landscapes and times. The following ITY, TRUST AND TRANSPARENCY: report summarizes those learnings, drawing from our experience building and UCCESSFUL SHAREHOLDER launching our new due diligence platform DatasiteOne, many years’ worth of SHIP MANAGEMENT proprietary transaction data and extensive polling of dealmakers in the field.

ONE AS AN ENABLING PLATFORM EHOLDER RELATIONSHIP MENT

The best way to predict the future is to create it.

  • Peter Drucker

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WHERE THE FUTURE OF DUE DILIGENCE IS HEADING

E SUMMARY

The dramatic rise of private equity, new technological advances and the increasing professionalization of the M&A industry are pushing old due diligence LDER ACTIVISM ACCELERATES boxes into new shapes. Today, TO the very concept of due diligence is being tested EVELSand redefined. What are the key factors behind this change? These four trends are reshaping

ACTIVISTS – SHIFTING the face of due diligence, according to extensive Merrill Insight polling. PE TACTICS AND TRIGGERS

  1. Specialization Wins Globally, 36% of dealmakers believe private equity’s focus on speed and efficiency is driving the most change in due diligence. And no matter where you ITY, TRUST AND TRANSPARENCY: sit in the deal ecosystem, the way to achieve efficiency gains and secure ROI is UCCESSFUL through SHAREHOLDER in-depth industry expertise.

SHIP MANAGEMENT

Private equity firms increasingly leverage third-party expert networks and their own subject matter expertise (SME) to win over LPs – and sellers – in a crowded marketplace. M&A associates are encouraged to choose a sector focus much ONE AS AN ENABLING PLATFORM earlier in their careers. Finally, 73% of M&A professionals cite sector expertise as EHOLDER RELATIONSHIP the most important factor in choosing an advisor.

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At 39%, EMEA dealmakers are slightly more likely than those in the Americas (34%) to rank private equity focus on speed and efficiency as the most important driver behind due diligence efficiency gains.

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2. Move to Continued Preparedness Both buy- and sell-side are shifting from seeing due diligence as a short term, transaction-based process to viewing it as an embedded part of the entire M&A lifecycle. That’s why 23% of global deal professionals, including 25% from North America, cite the shift to continued preparedness as a critical driver behind due diligence change. Like chess masters, the best buyers think many steps ahead. They take a sustained, strategic approach to building their deal pipeline. This means more time proactively identifying, vetting and developing relationships with potential acquisitions; in many cases, years in advance. The sale itself is merely prelude to a larger endgame, with integration and add-on purchases carefully mapped, long before exclusivity agreements are signed.

Americas dealmakers (25%) weigh the shift to continued preparedness more heavily than those based in EMEA (19%).

On the flip side, sellers have moved away from the concept of a sale process as a one-and-done short-term endgame. For many, a sale process is merely a stepping stone on a path that involves multiple buyers and long-term strategic growth. As a result, constant asset readiness is critical to taking advantage of fast-moving market cycles, avoiding costly paperwork pitfalls and smoothing the way for future M&A lifecycles.

  1. Form over Function Spurred by the move to a state of continued preparedness and overall industry maturation, financial services firms are slowly, reluctantly adopting a more programmatic approach to the entire M&A lifecycle, including due diligence. For an industry inhabited almost exclusively by finance professionals, this switch to assembly line, process-oriented thinking can be painful and countercultural. Systemic issues, such as lack of project management training and focus at elite business and law schools, high turnover rates for junior banking and legal associates, and widespread nonadherence to centralized, secure document sharing policies, underscore this point. In a recent Merrill Insight poll, for instance, 48% of dealmakers globally cited unsecured transmittal practices as the top challenge to ensuring secure data sharing and collaboration.

In a Merrill Insight poll, 16% of dealmakers globally cited insufficient project management experience and support as the #1 challenge facing corporate development professionals.

Nevertheless, program management best practices are starting to wend their way into M&A. Law firms have begun to take an assembly line approach to contract reviews, either out or insourcing to dedicated specialist groups. Consultants work closely with internal corporate groups to improve processes. Integration PMOs are becoming more standard.

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4. Technology Advances Just as the jump from paper to digital dramatically changed the due diligence game in the early ‘00s, dealmakers expect advances in technology to become a due diligence game-changer in the years to come.

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In practice, this means the concept of a virtual data room (VDR) will soon be as outdated as the old physical LDER ACTIVISM ACCELERATES TO data rooms VDRs took their names from. Instead, “smart” due diligence technology partners will support the entire EVELS M&A lifecycle through tools such as self-organization, predictive analytics and contract review and redaction.

ACTIVISTS – SHIFTING PE TACTICS AND TRIGGERS

Globally, 23% of dealmakers believe advanced technology is driving the most change in due diligence.

ITY, TRUST AND TRANSPARENCY: UCCESSFUL SHAREHOLDER Here are four common due diligence problems dealmakers expect SHIP MANAGEMENT technology to help solve in the next five years, according to a Merrill Insight poll of 325 dealmakers:

  1. Admin time. It takes a global average of 28 days to gather and index ONE AS AN ENABLING PLATFORM documents to prepare for a sale – with average timeframes easily slipping EHOLDER RELATIONSHIP over 60 days for the top 25% of transactions. With deal teams regularly MENT

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stretching into the hundreds, project management capabilities also are at a premium (see section above). Therefore, it should come as no surprise that 30% of global dealmakers listed document self-organization and project management as the most significant due diligence challenge technology will help solve.

  1. Redaction reduction. Redaction is an incredibly boring, incredibly highstakes game – as recent US headlines on Robert Mueller’s investigation attest. That’s why a resounding 29% of global dealmakers picked contract review, analysis and redaction as the biggest due diligence problem technology will soon fix, with 36% of EMEA ranking it more important than document self-organization.

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Common admin time problems:

28 DAYS 60 DAYS

Average time to gather and index documents to prepare for a sale Average timeframe slippage for the top 25% of transactions

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3. Predictive deal analytics. Long the holy grail of the banking community, almost 30% of global dealmakers believe the ability to use aggregate deal data to help predict bidder behavior (20%) or provide actionable industry benchmarks (10%), for instance, will come to fruition in the near to mid-term.

Americas dealmakers are more excited about predictive deal analytics (20%) vs. actionable benchmarks (8%), whereas EMEA is split evenly between the two (15%)

Predictive Deal Analytics

Actionable Benchmarks

Americas

EMEA

20 % 8

15 % 15

%

%

Unlike document self-organization and redaction capabilities, which mainly shift time-consuming admin from the deal team onto the technology platform, this move has the potential to change the way the entire M&A game is played, impacting not just process but sale strategy and deal terms.

  1. Audit trails and regulatory readiness. Increasingly intricate national security, antitrust and data privacy regulations combined with rising costs from M&A-related litigation have created an environment where detailed, page-level tracking of document views during due diligence is a critical business necessity for both buyer and seller. Globally, 11% of dealmakers listed this as the most important problem technology will solve in the due diligence process.

KEY TAKEAWAYS Specialization Wins

  • Clearly define your firm’s strategic focus and specialization to stand out from the crowd
  • Understand how to leverage SMEs to identify, vet and execute on M&A strategy
  • Individual professionals should focus on becoming an SME with a clear point of view Project Management for the Entire M&A Lifecycle
  • Treat deal origination, due diligence and integration as phases within the same M&A project lifecycle - rather than autonomous, separately run projects - to ensure deal objectives are met.
  • Map each lifecycle into long-term strategic growth planning to understand big picture timeframes, dependencies and deliverables.
  • Ensure the entire deal team, as well as key stakeholders, have sufficient project management training and support.
  • Put one, ongoing document management system in place to manage all
    M&A workflow activities, including due diligence. This will reduce common knowledge transfer, versioning and document control challenges. Technology Advances
  • Shift M&A technology mindset from transactional “VDR” vendor to full M&A lifecycle technology partner.
  • Map areas of technology impact within your team and deal processes.
  • Stay on top of due diligence technology trends to ensure new advances are quickly adopted to maintain competitive advantage.
  • Ensure your entire deal team is trained on your due diligence technology platform prior to launching a process. Refresh regularly and lean on
    project management support to reduce admin time.

Conclusion Due diligence is evolving rapidly. More disciplined, comprehensive M&A processes are becoming the norm, driven by private equity’s intense focus on speed and efficiency, a maturing industry and rapid advances in technology. To stay competitive, M&A professionals must move to an environment of continual deal preparedness, embedding specialization and project management best practices into the M&A lifecycle. Underpinning that, professionals must understand how technology will propel the entire M&A lifecycle through advances in document self-organization, deal analytics, contract review and redaction and audit trails.

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FUTURE FORWARD - CHALLENGES & SOLUTIONS IN DUE DILIGENCE E SUMMARY

The move to an ‘always on’ M&A life cycle, sensitive technology and intellectual property (IP) sharing issues, a complex global regulatory environment, litigious shareholders and widespread data privacy concerns all present unique challenges for professionals in today’s due diligence landscape. Here is a quick guide LDER ACTIVISM ACCELERATES TO on how DatasiteOne Diligence can help you navigate them successfully.

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ACTIVISTS – SHIFTING PE TACTICS AND TRIGGERS

CHALLENGES

DATASITEONE SOLUTIONS

Avoid document gathering, organization and sharing

Get organized early with DatasiteOne. Facilitate collaboration with external advisors, avoid duplicative file sharing and set the team up for success.

Minimize time spent on laborious Q&A management processes while keeping sensitive information under tight control.

Quickly and easily manage and track multiple Q&A threads in DatasiteOne. Advanced technology and user controls balance speed with control.

ITY, TRUST headaches AND TRANSPARENCY: between internal and external deal teams UCCESSFULduring SHAREHOLDER lengthy transaction processes. SHIP MANAGEMENT

ONE AS AN ENABLING PLATFORM EHOLDER RELATIONSHIP Keep sensitive technology, intellectual property MENT and employee data secure during the due diligence process.

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Choose DatasiteOne, which adheres to the strictest global security standards, including ISO/IEC 27001 certification and SSAE SOC 2 Type II attestation. GDPR compliant.

Ensure compliance with new National Security regulations through strong, careful control over information sharing.

Flexible publish and unpublish controls allow project administrators to stage and review content before sharing. Integrated user and document tracking and monitoring tools provide oversight of document use.

Track due diligence activity carefully to help avoid or mitigate future litigation risks.

Down-to-the-second audit trails provide one defensible source of truth for both seller and buyer.

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About Merrill DatasiteOne Merrill DatasiteOne is an innovative due diligence platform purpose-built to meet the unique needs of finance professionals around the world to help them accelerate the deal making process. Merrill Corporation built DatasiteOne for speed, simplicity, and security to support mergers, acquisitions, IPOs and other critical capital transactions. To learn more, visit www.merrillcorp.com or contact us: AMERS phone EMEA phone APAC phone email

888 311 4100 +44 (0) 203 928 0300 (852) 3905 4800 info@merrillcorp.com

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