Author: Bhumesh Verma, Managing Partner, Corp Comm Legal
Research and inputs by Paruchuri Bawanth Mohan
Due diligence is the heart and soul of any corporate merger & acquisition (M&A) transaction and very decisive step that is often flouted by the companies due to its perception of being an arduous task.
What is a due diligence?
In a typical corporate M&A transaction, due diligence is the process undertaken by the acquirer to evaluate and realize the advantages and detriments of the contemplated acquisition in terms of legal, business and financial terms.
Why is it important to conduct due diligence?
These days it is highly impossible to evaluate the Business benefits and risks – legal rights, duties and obligations of a company, just to name a few aspects, without conducting proper due diligence on the company records by the team of legal and finance experts.
Due diligence is the only way to hit the company records and information to absorb truthful information about the existing state of affairs (legal, business and financial) of a company and to yield pertinent decision to proceed with M&A transaction or not.
Check list is the heart of due diligence
Checklist is the heart and key to pull off a successful due diligence report. A good checklist will comfort the acquirer to identify the central aspects that need to be reviewed and sideline trivial matters not associated with the transaction. A checklist plays a pivotal role in saving a lot of time and energy of the acquirer and to come up with right plan to conduct due diligence.
Latitude / dimensions of due diligence
Depending on the type of transaction, scope of due diligence will vary from transaction to transaction. For illustration purpose, if the target entity is engaged in business of IT and telecom services and the aquirer is interested only in acquiring IT line of business, then the due diligence will be narrowed down to all records pertinent to target entity IT business only and no aspects of telecom business need to be substantiated.
Advantages of due diligence
- The outstanding advantage of due diligence is that the acquirer will be accorded with the prospect to vision and decide on certain key elements:
- a) Evaluation of the authentic price to acquire the target entity;
- b) The position of acquirer in the financial market post acquisition;
- c) Impact of acquisition transaction on the financial market;
- d) Possibility of exploring new avenues post acquisition previously left untouched;
- e) Acquirer ability to emerge as industry leader taking over its contemporaries in its lines of business etc.
- Due diligence will provide to the acquirer the right of entry to all the relevant legal and business records of the target entity and in coming to the decision to close out the M&A transactions.
- Due diligence involves the legal and finance audit of the target entity records to detect the impending threats that may withhold the transaction from proceeding further.
- Legal audit will encompass end to end review of contracts executed by the target entity to uncover the legal rights owned by and duties/obligations incurred by the target entity.
- Legal audit further help the acquirer to verify that whether the target entity is complying with regulatory and other statutory requirements without fail.
- Financial audit will clinch the review of all financial statement and records of the target entity to make public the existing financial position and to conclude report about financial glitches associated with the transaction.
- Acquirer will be bestowed with the prospect to study each and every minute detail of the target entity from date of incorporation to the date of due diligence process which will compose mammoth role in deciding the fate of the transaction.
A thorough due diligence is actually the architect or destroyer of a transaction. A positive outcome of due diligence report will turn the proposal into a closed transaction and negative outcome of due diligence report will reduce the proposal into ashes.
Therefore, it is very important not to ignore the due diligence step in a M& A transaction as it will safeguard the acquirer from all the unforeseen hiccups and risks prior and post transaction or else acquirer has to face lot of unprecedented business risks, financial hurdles and legal disputes.