I. The commoditisation process. In the M&A business, the legal due diligence has become a sort of commodity. Clients seem reluctant to pay full price for it and, as a consequence, the average quality of the job is pointing downwards. It is also true that when the M&A market shrunk during the credit crunch of late 2008, law firms started to compete heavily. One way to make some margin while offering a cheap service, was to pack due diligence teams with trainees with no experience. This process often resulted in downgrading the due diligence to a mere summary of the reviewed documents, with little or no critical analysis.
II. How to get the most from due diligence while keeping costs low. There are ways to contain legal due diligence costs and get a good product: (i) one is to exclude from the scope those matters that can be assessed by technical experts, thus involving lawyers only in the assessment of the legal consequences impacting the deal. Environmental and construction issues are among those matters that can be devolved to technicians. Using trademark attorneys instead of lawyers may also reveal cost efficient; (ii) another way is to offer a so-called red-flag report rather than a full descriptive report. The red-flag report will only address those issues involving legal risks rather than describing any single legal relationship of the target company. We noticed that our clients are very happy with a bit of both worlds, i.e. a red-flag report with tables describing main contracts and litigations.
In Part 2, I list my best practices for an effective legal due diligence.