How does digital due diligence work in the post-COVID economy?

Linda Le, Market Analyst, thedocyard

How does digital due diligence work in the post-COVID economy?

Due diligence refers to the process by which a purchaser essentially looks under the hood of a business and digs into its nuts and bolts to understand what makes it tick. Practically this involves looking at the business’ finances, its technology systems, operations, human resources, tax and exposure to labour risks; it also involves looking beyond the business and understanding trends in the broader market it occupies, as well as customer perceptions of the brand and target company.

Due diligence in this brave new world

Due diligence processes have historically relied heavily on being able to physically access or travel to seller sites and property to conduct a variety of essential activities. Buyers often like to tour the business premises and observe what physical assets will be included in the transaction before advancing to later stages of the transaction. It is believed that these physical visits have a positive effect on the depth, clarity and accuracy of due diligence.

COVID-19 social distancing restrictions have heavily restricted access to these sites and sentiment towards long-distance travel in this current climate has soured. A key factor for due diligence success in a post-COVID environment will be developing a way to lessen the burden posed by physical due diligence through the adoption of enhanced technology and systems, such as drones, satellite imaging, google Earth and similar technology.

Drones: a dealmaker’s view from the skies

In response to social isolation measures, some dealmakers are turning to drones.

In 2015, Coty Inc (NYSE: COTY) paid Procter & Gamble Co (NYSE: PG) $12.5 billion in exchange for a number of beauty and cosmetic brands. At the beginning of this year, Coty Inc announced its intention to divest some of these brands for as much as $8 billion.

The sale was meant to bring the company a much-needed cash injection as its stock value has decreased about 59% since its P&G purchase in 2015.

However, instead of following the example of many other M&A transactions that have been stalled due to COVID-19 restrictions, the dealmakers behind this divestiture instead intend to use drones to conduct due diligence over Coty Inc’s manufacturing facilities. Coty’s manufacturing strongholds span the entire globe: from the US, Germany, Ireland, Thailand and the UK.

This would be an M&A-first and may herald a better and brighter future of digital due diligence. If these practices catch on, there are obvious cost-savings to be had; there would also be less travel required for digital due diligence and it might make what is usually a very laborious process that much more time-efficient.

Making deals in virtual environments

COVID-19 has normalised work from home arrangements. Due diligence has not been immune from this phenomena and many deal-makers have turned to technology to facilitate doing due diligence remotely.

In this new world, video conferencing platforms like Zoom, Google Hangouts and Skype have taken the place of traditional face-to-face meetings, supplementing emails and phone calls.

It also means that now, more than ever, dealmakers, purchasers and sellers need to be able to share files virtually in a simple, fast and efficient manner, and virtual datarooms like thedocyard provide an ideal platform to do so.

Data, data and more data

Prior experiences from the 2008-09 Global Financial Crisis have led many dealmakers to anticipate that the COVID-19 recession will produce more troubled assets, uncertainty around future business performance and messier deal processes like complex carve outs, take-privates and bankruptcy buy-outs.

In this climate, insights gained from data can be very valuable in facilitating a more nuanced understanding of the business’ position in light of the global disruption we are currently observing in the marketplace. This data can be mined from a variety of real-time sources including: cellphone pings, credit card swipes, social media and web-traffic patterns, building permits, product reviews, search engine analytics and other sector-specific data points.

These data points are important as they may present a more accurate picture of market changes than industry reports and expert interviews which have traditionally been used in the due-diligence process.