One of the persistent puzzles surrounding mergers and acquisitions (“M&A”) activity is its propensity for failure. In fact, hundreds of studies suggest that fifty to eighty percent ofmergers and acquisitions are failures. Thus, while the goal of an M&A deal is that the whole is worth more than the party, the converse is frequently true. An important determinant of any M&A transaction’s post integration success is data due diligence. In today’s M&A environment, where transaction experience substantial scrutiny and technology plays a crucial role, data due diligence is tantamount.
Nonetheless, merging or acquiring companies often fail to perform adequate data due diligence and fail to consider the electronically stored information (“ESI”) and data storage systems of the target company or merging counterpart. This oversight presents substantial risks and can cause substantial post-integration problem and, in turn, increase the likelihood of M&A failure.
Creating an E-Discovery Checklist
One of the crucial ways that in-house and outside counsel can fail to conduct proper data due diligence is by ignoring potential eDiscovery issues as part of the M&A deal.
Why is this important?
eDiscovery issues may well affect the value of the company being acquired, the cost and difficulty of merging the two companies, or heighten litigation risk going forward. Corporations and law firms have fine-tuned due diligence checklists to account for various traditional business risks such as legal, contractual, regulatory, securities, financial and undisclosed liabilities, yet eDiscovery is noticeably absent.
This failure of counsel to conduct data due diligence on a target company’s e-discovery issues, e.g. preservation and cost obligations regarding its ESI, can cause substantial losses for the acquiring company, impacting the expected return.
An e-discovery checklist could have many elements and would vary with respect to the industry and company, but regardless, it should account for:
- The state of the target company’s ESI, ensuring that it has been thoroughly identified, categorized, and sourced;
- Existing preservation and litigation holds;
- The cost of preserving data for existing or anticipated legal holds;
- and Both structured and unstructured data
I would like to hear your comments on this checklist, including additions. More thoughts on M&A coming in future posts.
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