When a private company is being sold via an auction process, an Information Memorandum (IM) – otherwise known as the ‘book’ – serves to encourage offers by providing prospective buyers with key information. IMs are also used when a company is seeking to raise finance and encourage investment. Buyers rely on IMs to give an initial, detailed insight into a company’s future prospects.
Conflicts of interest arise because an information memorandum is the initial document any prospective buyers or investors see, and therefore must entice bids or funds from any serious prospects. Furthermore, as all input in an IM is commissioned by the sell-side, whose aim is to fetch a premium valuation, IMs have the dual (and conflicting) purposes of providing information and marketing an asset.
IMs in the UK are legally required to provide a “full, true and complete disclosure of all information which may materially affect the value of a company” and are regulated by the FCA in an effort to prevent them from morphing into marketing documents. The level of regulation, however, translates into IMs containing multiple disclaimers, removing any accountability if information is omitted or turns out to be misleading. Disclaimers often (cynically) state that all information has been provided by the management and cannot be assumed to be either accurate or comprehensive. In short, it is in the interests of the seller to offer as positive a slant as possible, and in the interests of the buyer(s) to find the pitfalls.
Furthermore, often IMs are aimed at “sophisticated investors”, who are deemed to be experienced enough to correctly evaluate the value of an investment. Legally, “sophisticated investors” are not protected by the regulations that apply to ‘retail investors’; in the eyes of the law they have the resources and wherewithal to accurately estimate risk. Within this definition, it is implicitly understood that any potential buyers or investors will undertake their own independent due diligence of an asset before submitting an offer.
Diligence is key
To prevent investing money into a worthless asset or giving an inflated valuation of a business and paying over the odds based on the potentially biased content of an IM, independent due diligence must be undertaken – investors want to find a company’s leaky pipes and check there are no skeletons hidden in the closet. Using the management’s data-room is instrumental for operations and commercial due diligence.
What about harnessing the world of big data to test the management’s hypothesis presented in the IM? As digital technology has caused earthquakes in industry, it’s now causing ripples in the diligence sector. The ability to cross-reference claims companies up for auction make with hard data points is the holy grail of the due diligence process.
Our consultants use 14 digital data sources, including online search demand, website traffic and volumes, social media volume and sentiment, SEO and online conversion rates, to test a company’s actual and historic performance. We can map the asset against its competitors for paid search, paid per click advertising and all site engagement metrics – it is impossible to assess value without benchmarking. The benefit of using digital data is that we can bypass the data room and provide unbiased insights; ultimately, digital due diligence can give you the competitive advantage when valuing an asset and protect your bottom line.