The due diligence phase of any merger and acquisition is the study of the risk that is involved in the integration process. Due diligence when properly executed can make a difference between success and failure. A deal that may apparently be very good may give ugly figures on spreadsheets. If the integration is an acquisition than the acquirers must go through all facts and figures and be very vigilant on all the facets even for the worst case scenarios. This is why due diligence should be considered with all the other prerequisite activities necessary for the successful function of the combined company.
M&A Due Diligence
The Merger and Acquisition (M&A) due diligence primarily refers to the acquirer’s review of an acquisition candidate to ensure that the deal would pose no unnecessary risks to acquirer’s shareholders.
In essence the M&A due diligence is the assessment of the benefits and liabilities of the proposed acquisition into all relevant factors of the past, present and foreseeable future of the acquired business. The assessors should lay emphasis on risk. It should be noted that due diligence can limit or contain the risk but it can never completely eradicate it.
The acquirers generally assess due diligence by creating a check list of information gathered by the following means:
- Examining financial statements
- Assessing management and operations
- Reviewing legal liability
This process requires acquirers to conduct interviews and visit sites maintaining the record of all this information in virtual as well as in physical form.
The acquirer cannot and should not expect to discover all the possible risk in the merger and acquisition process. This sheer effort can be extremely expensive so much so that it can bankrupt the acquirer and certainly irritate the seller. No investigation can be devised to reveal all the potential risks, since companies are complex entities that are functioning in a complex world.
The due diligence process may be expected to be reasonable and comprehensive but seeking a perfect due diligence is a futile endeavor. If anexpert finds flaws in the due diligence process, the option to plug in wholes and further streamline the process should not be ruled out.
The Extensiveness of Due Diligence Process
The extent to which a buyer can go with due diligence is constrained by two measures. These two main measures are the time and money that the buyer is willing to invest to investigate the company he is willing to buy.
Both of these measures can be influenced by the following factors.
- Status of the candidate company in the community
- The age of the candidate company
- Has the candidate company been audited by a major firm?
- Is the executive turnover being low?
- Establishment of the core stability of the firm (such as long term customer retention)
- If there is a broker involved in the deal, he may wish to require some acquirer due diligence
It is very common that a broker includes a condition in the contract that requires due diligence from the acquirer. Furthermore, the due diligence process heavily varies with the type of the company being acquired. The due diligence process is naturally more extensive and sophisticated for a large enterprise with global presence in a highly regulated industrial environment as compared to small domestic organization with single or few product or limited services in relatively unregulated sector of the industry.
Moreover, the due diligence of a private company varies heavily from a public organization. The transaction of a candidate organization will also determine the level due diligence efforts, a company that has more gains in stock purchases will call for more due diligence than an organization that is more oriented towards asset purchases.
Duration of the Due Diligence Process
The due diligence process continues throughout the acquisition process that can last from few weeks to around a year or more. When a buyer launches a formal, organized due diligence investigation, he should put it on fast track. Due diligence on a fast track ensures minimal disruption of day to day business activities and the process is more cost effective. Another benefit is that the relation between both parties remain pleasant. The biggest benefit of due diligence on fast track is that it helps the buyer to gain timely information regarding the feasibility of the acquisition and helps to settle down the terms and conditions of the acquisition if it is deemed worthwhile. This in turn leads to faster finalization and closing of the deal.
Two Major Benefits of a Due Diligence Process
There are two discrete benefits of due diligence for any acquirer.
Firstly, the experts who have hands-on involvement in the due diligence process gain deep insight in different areas such as financial, operation and legal aspects that they have studied. There services may be acquired in terms of consultancy and guidance at post-acquisition and the time that follows to solve problems and handle different situations can be reduced.
Secondly, in a situation in which a claim is made by the buyer or the seller against each other, that claim may be traced back to the due diligence issues that one of the party may have disclosed or made available in certain documents, so an emerging problem may be easily averted.
Acquirers that have comprehensively performed the due diligence process and have kept records of their efforts are better prepared to face such challenges and they are good at dealing with greater future endeavors that involve risk and opportunities faced by the newly formed entity.