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Utah Business

The role of due diligence in M&A transactions

The role of due diligence in M&A transactions

This story appears in the June issue of Utah Business. Subscribe

On July 18, 2023, Extra Space Storage and Life Storage announced a merger. The announcement brought the end of a hectic due diligence period for the companies’ legal teams.

“From start to finish, we were under contract in under 45 days,” says Extra Space Storage Chief Legal Officer Gwyn McNeal.

Due diligence in mergers and acquisitions (M&A) is a timeline and process that changes with each deal and as the market fluctuates. Before a merger or acquisition can take place, companies must do their due diligence “to identify dealbreakers, assess risks, make informed decisions, negotiate effectively, ensure compliance, plan for integration, and set the stage for a successful and value-enhancing merger or acquisition,” Foley & Lardner’s Louis Lehot and Eric Chow wrote in a 2023 blog post.

Noting that these are only a few of the topics covered in a thorough due diligence investigation, Lehot and Chow broke due diligence down into six different categories: financial, accounting and tax; legal; operational; technical; customer and team.

This involves the acquiring company taking a deep dive into financial patterns and revenue, legal topics like intellectual property and pending litigation, operational processes like supply chains, technical aspects such as cybersecurity and software, customer relationships, and information about staff.

The role of due diligence in M&A transactions
Utah Business Forward at the Grand America in Salt Lake City on Thursday, Nov. 16, 2023.

Burning the midnight oil

When a merger or acquisition process begins, it’s all hands on deck. For McNeal, that meant twice as much time spent working as not. 

“It was an amazing opportunity. It was the most energized and fun [experience] I’ve had on a deal,” she says. “That being said, they were 16-hour days for a long time, sometimes more as we got even closer. … My outside counsel, I don’t think many of them slept for 48 hours in a row.”

Tom Taylor, a shareholder in the Dentons Durham Jones Pinegar Salt Lake City office and a member of the law firm’s M&A team, says he’s seen deals that need to be completed in 30 days.

One of the ways that gets done, in addition to long days and nights, is by increasing staffing. On one 30-day, $80 million deal in the fourth quarter of 2022, Taylor says the other side of the deal put as many as 20 lawyers on the deal. In this instance, the buyers had already completed some of the necessary due diligence in a prior year, which helped accelerate the timeline.

With Extra Space Storage and Life Storage, McNeal’s team consisted of four lawyers, eight paralegals and about 20 outside lawyers looking at the big picture down to 401(k) plans.

McNeal notes that, in some cases, these M&A deals do get easier with bigger companies. Both companies were public at the time, which meant a lot of information was already out in the public. With a history of audited financials and disclosure of liabilities, they didn’t have to “start from scratch.”

It was also a special case where a Public Storage hostile takeover bid for Life Storage was rejected earlier in the year, which had some impact on the process.

Market fluctuations

Some say the M&A market has changed over the course of the past year from a seller’s market to a buyer’s market, which means more time for buyers’ due diligence. 

“It definitely felt like ’21-’22 was just a frenetic market for sellers [and] companies raising capital. There was just a lot of money to go around, frankly,” says Blake Tengberg, senior counsel at Foley & Lardner’s Salt Lake City office.

But going into 2023, a lot of those deals that had gone through in 2021 and 2022 began to hit their 12- or 18-month period where “numbers weren’t looking as rosy as the sellers or investors were wanting or were anticipating,” Tengberg says, and valuations started to fall.

N. Todd Leishman, another shareholder at DDJP in Salt Lake City, says that in a seller’s market, quicker deals don’t always mean the buyer isn’t doing their due diligence — it’s just that “the sellers could call the cadence of the transaction more,” and buyers that weren’t moving at the pace sellers wanted would be left out of the deal.

“Sometimes they have to just prioritize what is really the most meaningful data set for them to get and then make a buy decision,” he says. “I don’t personally view that as sloppiness or laxity, I just view it as them needing to prioritize the amount of work they would like to do and the amount of time they have to do it.”

As a result of that changing market, 2023 was a “slow year for mergers and acquisitions,” Tengberg says, though he notes deals are starting to pick up.

“Utah deal volume dropped by almost half last year, so a snap-back in 2024 was expected — and we saw that, certainly, earlier in the year,” says Troy Keller, partner at Dorsey & Whitney. “The second quarter had a slower start, but the pipeline is there and is moving.” 

Citing Dealogic, Bain & Company reported that 2023 had 27,000 deals announced in the M&A arena, but the total M&A market dropped 15 percent to $3.2 trillion, the lowest that figure has been since it was $2.8 trillion in 2013.

In the first quarter of 2024, global M&A volume jumped 30 percent to $755.1 billion, Reuters reported, again citing Dealogic. That was largely spurred by 14 deals worth more than $10 billion.

“Sometimes they have to just prioritize what is really the most meaningful data set for them to get and then make a buy decision.”

Tomorrow’s tech

Looking to the future, there’s some feeling that technology like AI could be on the way to change the due diligence process.

Dentons states on its website — in a post written by AI — that generative AI “holds enormous promise of enhancing workplaces,” but it’s still a question mark for those in the field.

“A lot of people are wondering how it’s going to change what we do, and none of us really know,” Taylor says.

AI was not used by Extra Space Storage in last summer’s big transaction, McNeal says. She thinks the technology may eventually take on some of the work done by outside lawyers, but “it’s probably too early to be helpful on the acquisition process itself,” though she thinks “it’ll come.”

Until then, 30-person teams and 16-hour workdays are part of the deal.