Checks and Balances

May 12, 2008

This year, as the credit markets struggle to regain their feet, I imagine it can be pretty difficult for some to smile through the adversity. Nevertheless, I’m still a believer that a good soak can wash the toxins out.

In our latest issue of Mergers & Acquisitions Journal, due out in June, Danielle Fugazy wrote the cover story on due diligence. The central theme of the article was that during the hysteria that engulfed the deal market from 2005 to the first half of 2007, buyers were giving short shrift to their homework. It’s not that they didn’t want to perform due diligence, it’s just that the pace of the market didn’t allow for it.

The sell-side advisers pushed the PE firms, who pushed the lenders, who pushed someone else, until nobody knew even who was pushing whom. If anyone even thought to push back, someone else would step in to take their place in the daisy chain of “investors” unwilling to say no.

Today, however, everyone seems to be pushing back – buyers, sellers, lenders, advisers, consultants, you name it. I’d argue that even us reporters are asking more of the right questions lately. On one hand, the collective pushback probably makes dealmakers feel even more squeezed in an already tight market. But these are the checks and balances that are necessary to truly thrive.

Experienced buyers often tell me that their best deals were made during the last economic downturn at the beginning of the decade. While some of that success had to do with buying low and selling at the high end of a cycle, one has to believe that the increased focus on due diligence, and perhaps the fear of doing a bad transaction, played just as important a role.