In an M&A transaction, the buyer generally concentrates on two fundamental forms of due diligence, Finance Due Diligence (FDD) and Legal Due Diligence (LDD). However, they often overlook People Due Diligence (PDD) for several reasons, one being the undervaluation of PDD’s significance.
Over the past five years or so, the demand for PDD from our clients, including buyers in certain M&A transactions and investors in collaborative investment and business partnerships between foreign investors and domestic partners, has notably increased. Most recently, we conducted PPD at the request of a Hong Kong-based law firm, targeting each individual on the Board of Directors (BoD) and the Board of Management (BoM) of a Vietnamese business, with the aim of helping the investor decide whether to invest in this business.
Below are some brief insights on PPD distilled from personal experience, including the practice of PDD in Vietnam and through research. I had begun to study and gather case studies on both domestic and international M&A transactions that include LDD, and monitoring the entire merger process as well as the post-merger phase.
What is involved in PDD?
Broadly speaking, to facilitate an M&A plan, PPD includes evaluating the organizational structure and culture of the target company; the current human resources of the target company; the competencies and attitudes of the management team (concerning the company’s change of ownership or the merger); the extent of similarity in management styles and working cultures between the buyer and the target company; and other human and cultural factors of the target company that may impact the M&A transaction and post-M&A integration.
Going into detail, the PPD process will need to employ various methods to thoroughly assess both the tangible and intangible aspects of the organization, people, and culture of the target company. The tangible aspect focuses on evaluating the organizational structure through diagrams and management methods; the mechanisms and decision-making process of the management levels, including reporting systems (for example: Are decisions actually made through formal channels? Which departments are most capable in decision-making? Consequently, the PDD report will include diagrams depicting the decision-making process.); reviewing documents that describe the functions, tasks, and main roles of the target company’s departments and management positions, and the performance of these roles and responsibilities; obstacles and failures (in achieving goals and responsibilities), and their causes. The intangible aspect, on the other hand, will concentrate on organizational culture through values, beliefs, openness to new values, and/or mechanisms for receiving and responding to negative feedbacks.
In a more specific context, to serve the plan of choosing a local partner for cooperation through investment to jointly implement a project/business activity, the PPD requirements may only pertain to due diligence on the partner (the business/project owner/operator). In this case, PPD focuses on particular individuals, assessing whether they have been or are involved in any criminal or civil charges, their employment history, financial ability, market reputation, and so forth.
The need for PPD usually stems from the objective of the transaction. For acquisition transactions where the buyer’s aim is solely to acquire assets (physical or intellectual property, market share, branding), or in hostile M&A transactions, PPD is typically not required and/or considered unnecessary.
In contrast, for friendly mergers and acquisitions where the buyer intends to inherit the target company’s human resources and embrace its advantageous and compatible cultural values, PPD is essential and should be conducted during early stages.
Advantages of PPD:
The outcome of PPD not only influence decisions on whether to proceed with or abandon a deal, or the purchase price, but also helps the buyer prepare an optimal plan and timeline for the merger. This includes identifying the resources and values to be inherited from the target company: organizational stability; talent retention; human resource management plans such as determining which employees to retain and which to let go, and policies for those being let go; managing employee reactions; choosing an appropriate structure and culture; and strategies for cultural integration. It is no exaggeration to say that in mergers, the integration of culture and human resources is one of the most challenging issues, causing many headaches, and can negatively affect the target company’s entire operation post-M&A. PPD and meticulous preparation after PPD and pre-merger help the buyer avoid post-M&A crises, including cultural and personnel cirses such as mass resignations, negative reactions, resistance, lawsuits,etc., ensuring a smooth merger process.
Who can carry out PPD?
PDD requires personnel with in-depth knowledge and specialized experience in organizational structure, culture, and human resources. Naturally, a lawyer is part of the PPD team, but the involvement of experts in the aforementioned sectors is indispensable.
In conclusion,
PPD is a crucial step before any M&A transaction, as well as in other investment and partnership cooperation deals. Depending on the objectives, nature, and scale of the transaction, the requirements and scope of PPD will vary. However, it is important to keep in mind that performing PPD is no easy task (after all, humans are the most… complex beings!), and for several reasons, PPD is often neglected without regards for consequences. Experience shows that the most successful M&A deals are typically those where the buyer has properly invested time, budget, and other resources in the preparation process, including comprehensive due diligence on financial, legal, and human aspects.
Thuy Le
Managing Partner, Lawlink Vietnam.
Comments