What is due diligence?\n\u201cDue diligence" first came into use as a result of the passage of the U.S. Securities Act of 1933 which transferred responsibility onto securities dealers and brokers to fully disclose to potential investors any material information related to the securities or instruments that they were selling. The consequence for failing to disclose such information made them liable for criminal prosecution. However, the authors of the Act understood that making full disclosure a legal requirement left the securities dealers and brokers vulnerable to unfair prosecution if they failed to disclose some material fact that they did not have, or could not have reasonably had, prior knowledge. So, to provide protection to the dealers and brokers, the Act included a legal defense which they called the \u201cdue diligence\u201d defense.\nEssentially, the due diligence defense meant that as long as the dealers and brokers exercised due diligence in their investigation into companies whose equities they were selling, and fully disclosed to the investor what they found, they would not be held liable for information that was not discovered in the process of that investigation.\nThe evolution of due diligence\nSince the passage of the Securities Act, the meaning of the term \u201cdue diligence\u201d has become associated with the orderly investigation of a variety of matters pertaining to business and has been adapted for use in many situations. Regardless of how it is used, \u201cdue diligence\u201d implies that the person conducting the investigation has made a \u201cdiligent\u201d effort to obtain all of the relevant and meaningful information pertaining to the matter under investigation and has disclosed all of that information in a dutiful and forthcoming manner. In other words, thorough, conscientious due diligence continues to provide a defense to those who find themselves tasked with the investigation of an important business matter.\nMerger and acquisition (M&A) due diligence\nDue diligence is a vital activity in M&A transactions, and may consume several months of intense analysis if the target firm is a large business with a global presence. Using a variety of methods and accepted principles, the due diligence team pursues an answer to the question: \u201cDo we buy\u2013and if so\u2013how do we structure the transaction and how much do we pay?\u201d To answer this question, M&A due diligence activities typically focus on four areas at a target firm:\n\n\u00a0Strategic Position\n\u00a0Financial Data\n\u00a0Operational Assets\n\u00a0Legal Matters\n\nEach of these four areas can be further sub-divided into business, legal, and functional areas\u2013including IT\u2013each receiving the appropriate level of attention and analysis based upon the category and nature of the deal.\nConducting M&A due diligence in today\u2019s global marketplace is a demanding, high-pressure undertaking that requires considerable skill and expertise. As a result, firms that do a lot of M&A transactions often develop their own in-house M&A due diligence expertise, whereas firms that pursue occasional M&A transactions often engage outside professionals to assist them with this highly complex and risky activity.\nIn my next post I will describe the categories of M&A IT due diligence.