The Berkshire Hathaway/Precision Castparts case underscores the importance of probative and thorough diligence in an acquisition. The fraud perpetrated on Berkshire Hathaway—a financial giant with first rate legal and financial advisors at its disposal—by German target Wilhelm Schulz was a collaborative scheme to induce subsidiary Precision Castparts to consummate the purchase despite the target’s insolvency. Disclosed post-closing by a whistleblower, it is unlikely that the fraud would have been uncovered pre-closing despite the buyer’s thorough 6 month diligence process. Nevertheless, the due diligence process in an acquisition remains crucial.
Some of the best advice I ever gave a client was to walk away from a deal during diligence. I had no proof of fraud or bad faith but the seller was difficult during the diligence process, which was a red flag. My client walked—and we discovered afterward that the seller had in fact been dishonest about the health of his business. Sometimes during the diligence process you unearth a deal breaker—and sometimes you just need to trust your gut.