In a cash-and-stock or all-stock acquisition, does due diligence take place one way or both ways?
This is a relevant question because not only are shareholders of the acquiring company acquiring shares of the target company, but shareholders of the target company are also acquiring shares of the acquiring company.
Take, for example, Foodpanda’s acquisition of Tastykhana in 2014. The source of this snippet, of course, is the brilliant Mint story about Foodpanda earlier this week.
Shachin Bharadwaj, founder of TastyKhana, a Pune-based start-up that Foodpanda acquired in November 2014. After spending two months inside the company, Bharadwaj was disturbed about the lack of processes and had uncovered several discrepancies—fake orders, fake restaurants, no automation, overdependence on open Excel sheets, which were prone to manipulation, and suspicion over contracts awarded to vendors.
“I know I am making allegations,” he told the people in the room. “All I am asking is that we do an independent audit.”
The others were not interested.
“The past is the past,” said Malhotra. “Let’s just resolve the differences and find a way forward for you and Rohit to work together.”
So Foodpanda acquired Tastykhana, and the Tastykhana founder (who became a Foodpanda employee) later found out that Foodpanda wasn’t the company he had assumed it was, and now owning shares of a company he had overestimated, he rightly felt shafted. It’s unlikely that due diligence happened “the other way” in this acquisition.
I had written on LinkedIn a while back about how employees accepting stock in a company that is hiring them are implicitly investing financially in the company, and that they need to be able to do due diligence before they make such an investment. Acquisition works in a similar way.
So I’m repeating myself yet again in this blog post, but is “reverse due diligence” (acquiree checking acquirer’s books) a standard practice in the M&A industry? Does this work differently in big company markets and in startups? Do acquirers get pissed off when acquirees want to do due diligence before getting acquired (when being paid in stock)?
Note that this doesn’t apply to all-cash deals.