Farming Out Diligence Work To Maximize Deal Value: Off-loading deal research and analysis functions helps buyers stay focused on strategy, synergies, and value drivers

Knowledge process outsourcing (KPO), a budding trend that involves farming out knowledge-intensive business functions that require knowledge, experience, and good judgment, is creeping into the M&A due diligence process. The success companies have had with outsourcing administrative and other tasks has encouraged some to start off-loading higher-end knowledge work, and companies involved in acquisitions – particularly private equity firms – are among them. Cost savings, operational efficiencies, and access to highly skilled professionals are among the benefits that can be reaped from KPO. Financial buyers seem particularly open to the concept because as they move into new markets, trying to put their seemingly bottomless war chests to work, they often find themselves in unfamiliar territory. As they diversify their investments, the resources and industry expertise needed to make successful investments may be lacking. Tapping the know-how of third-party industry specialists relieves buyers of data-gathering tasks and allows them to focus on identifying, pricing, negotiating, and closing more deals. “We see a strong push toward outsourcing of due diligence work among our PE clients, which has been one of the fastest growth areas for our consulting practice over the past 12 months,” notes Natan Shklyar, a Principal and the private equity group leader in the New York office of Droege & Comp., a global consultancy that specializes in working with private equity firms and hedge funds.”This trend is driven largely by the growing professionalization of the private equity industry, especially as mid-market funds mature and grow in size. Notably, many mid-market PE funds are run by former investment bankers from bulge-bracket banks who were used to the world-class professional services and research that their old employers provided.” Too much money chasing too few deals is creating demand for more extensive research, at a reasonable cost, notes Niket Patankar, CEO of Adventity, a research and analytics outsourcing firm. He adds that while it might be expected that firms would prefer to perform certain diligence functions in-house, buyers are feeling the need to leverage outsourced research in order to make investment decisions more quickly and not lose out on opportunities. “Now firms that had to pass on deals because of a lack of resources can outsource some work,” he says. Initially, he says, there was reluctance on the part of companies to outsource diligence work, including investigative research, market analysis, and model building, because of confidentiality and other issues. Ed Hansen, a Partner in the New York office of Morgan, Lewis & Bockius and a member of the firm’s global outsourcing group, is quick to note that with KPO, the information gathering role is being “unloaded,” not the trusted adviser role. While it’s too early to determine whether KPO offers “qualitative” improvement in the deal process, he notes, there could be “quantitative” improvement, since companies are freed up to pursue more deals. Although the KPO trend “makes too much economic sense to disregard,” its long-term effects cannot be ignored, says Roger Wery, Director of PRTM Management Consultants. Junior staffers perform basic research at investment banks and PE firms, and KPO is disrupting the career development of financial analysts, he asserts. “Fewer entry level jobs today mean fewer expert deal makers five to seven years from now.” On the other hand, he says, buyers’ in-house capabilities may be generalist in nature, and KPO would allow them to tap pools of specialists. Robbie Baxter, Principal of Peninsula Strategies, a Menlo Park, Calif.-based consulting firm, agrees, saying that by not loading up on in-house expertise, companies have the flexibility to hire specialists for each deal project. Outsourcing of information gathering maintains neutrality, she adds, which can make a more compelling case that the data are objective. (c) 2006 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com