Michael D. Moberly July 16, 2008
The purpose of M&A due diligence is to provide buyers and investment sources with sufficient, forward looking/sensing risk identification and mitigation weaponry to effectively protect and preserve the value (sustain control, use, ownership) of about-to-be-purchased intangible assets and IP post transaction.
In today’s aggressive, nanosecond, predatorial, and winner-take-all business transaction environments, its essential to determine if the about-to-be-purchased assets can sustain a deal’s objectives. That’s why it is necessary to design-negotiate-execute pre and post transaction (due diligence) covenants to monitor vulnerabilities and risks (to those assets) that can adversely affect-impair their stability and sustainability insofar as value, revenue, and future wealth creation are concerned.
A sellers’ or acquisition targets’ intangible assets carry a readily and globally exploitable liquidity that outpaces-disregards conventional IPR’s enforcements, i.e., patents, copyrights, trademarks. This elevates their vulnerability to many different forms of internal-external compromises that are often preludes to (asset) value losses and/or erosion that can literally sabotage M&A deals. Examples include (a.) abnormally high levels of misappropriation, infringement, product counterfeiting-piracy, (b.) poorly monitored (employee) non-compete and non-disclosure agreements, and (c.) under-the-radar forms of entanglements that contribute to deal frictions, challenges, and disputes that stifle and/or undermine deal trust, momentum, and finalization.
When these occur (singularly, or in multiples) prior to deal finalization, the value of the about-to-be-purchased assets (intangibles, IP) can quickly hemorrhage. However, if these risks (circumstances) are brought to the attention of deal teams (ala the covenants) in real time the terms of a transaction can be renegotiated to ensure the buyers’ objectives are achieved.
To effectively mitigate such risks, it’s important for buyers and investment sources to have in place highly proactive deal impact analysis processes, i.e., monitoring covenants. When negotiated – integrated properly (up front) in a transactions’ due diligence phase, these covenants literally permit the monitoring of key (value, revenue producing) intangibles and IP so deal management teams can be alerted to any previous or on-going circumstances that adversely influence the assets’ value and/or materiality.
Again, when circumstances adverse to a deals’ objectives are encountered (revealed) the deals’ terms can be re-negotiated (e.g., risks shifted, leveraged) without losing deal momentum, timing, or resorting to costly and time consuming dispute resolution options, or worse, possibly killing an otherwise good deal.
Traditional templates (one size fits all) methods of transaction due diligence (particularly those that don’t address or underestimate the contributions of intangibles) are really snap-shots-in-time and do not provide sufficient or necessary (on-going) monitoring to address the nanosecond liquidity (value erosion) vulnerabilities now common to any transaction in which intangible assets and IP are in play!