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DUE DILIGENCE IN MERGERS AND ACQUISITION

Author: Rishabh Mehrotra, IV year of B.B.A.,LL.B. from New Law College, Bharatiya Vidyapeeth, Pune


INTRODUCTION

As the Indian economy opened up with the foreign market, after the 1991 economic liberation revolution, mergers and acquisitions have become one of the common things all over India. Mergers and acquisitions have emerged as one of the fastest ways to organize companies to get competitive benefits. While mergers are described as two firms moving forward to join as a single entity, rather than remain as separate, whereas acquisition is an act where the company takes the stake of the acquired firm. Mergers and acquisitions include the proper amount of effort which has to be required by the buyer. Before the transaction to be committed, the buyer has to make sure of what he is buying, the nature of the litigation risks, intellectual property issues and lots of things. The recent M&A complaints have featured the need for the consumer to be more practical about data fraud, intellectual property issues, potentially employment law, investigating financial statements and many more.


ABOUT DUE DILIGENCE

Due diligence is a very important activity in mergers and acquisition transactions. In the entire process of mergers and acquisition, due diligence allows the buyers to collect information about the sellers such as the finance, contracts, customers etc. It is an appraisal process that is used by buyers to understand the selling business and the risks involved to become the owner of that business and to also verify the information which was stated in the document which was referred to as a confidential information memorandum.[i] There is a lawful component that makes up about 20% of the process and the remaining 80% of the process emphasises the intangibles. Due diligence is a process that is not only about checking finance but also gaining a strong understanding of the business, the talent of employees, and how your business is competing with other businesses in that same industry. In a due diligence process, research has been conducted to make sure that all material facts should come out before entering into the financial transaction. During the company’s acquisition, due diligence includes a full acceptance of company obligations such as their lease agreements, liabilities etc.


Why is Due Diligence important to the M&A Process?

Due diligence is an extreme element of M&A transactions because it facilitates the buyer to find the part of business things that they’re fascinated in getting. It is a process that helps the consumer to understand the growth potential of the business and helps it to get a hand in more customers. The due diligence also certifies the buyer to determine if there are any barriers or risks associated with the transactions. So, mainly due diligence gives a complete picture to buyers upon purchasing the business. And from the seller's purpose of reading, due diligence permits them to grasp the worth of business that is very vital as associate owner purpose of reading. Due diligence is a very interesting way for consumers to protect themselves from the risks involved in business deals. As a greater effort is required for the larger amount of communication between the two groups, businesses are also able to build cooperative relationships.


TYPES OF DUE DILIGENCE

M&A deals involve various types of due diligence. However, there are up to six types of due diligence that will need to be accomplished as part of the process.

  • Accounting Due Diligence

This part of due diligence plays the largest role in the process. Its main focus is to ensure that the financial information that has been provided to them is up to the mark and honest.

  • Business Due Diligence

In this step, the main focus of due diligence is to validate whether the cash flow and company revenue of the company is bearable as a long-term investment and whether the business can grow.

  • IT Due Diligence

In this type of due diligence, a team of IT professionals will be looking towards the downtime issues, security risks and various other IT problems that need to be resolved before the deals to be finalized.

  • Legal Due Diligence

This part of due diligence will look into the legal background of the business. Lawyers will take a look at the recent contracts that you grip with the holder and charge with any potential liability issue.

  • Environment Due Diligence

In such type of due diligence, the team may focus on disclosing any environmental risks that may be associated with acquiring the company now or maybe in the future.

  • Financial Due Diligence

In such types of due diligence, financial professionals bring out the research on the condition and financial matters of a target firm and varieties of correlated factors.

STEPS INVOLVED IN DUE DILIGENCE

Due diligence is a lengthy process in mergers and acquisitions which involves multiple phrases and parties. Here are the general steps of the due diligence process.

  • Evaluate Goals of the Project

The first step in due diligence is to explain the corporate matters and goals. It helps to pinpoint the resources which are required and assure alignment with the firm’s predominant strategy. It also involves introspective questions which revolve around that one’s need to gain from the investigation.

  • Analyze of Business Financials

This step includes the audit of the financial records. It ensures that documents that are depicted in the Confidentially Information Memorandum were not ruined. It also helps to assess the overall financial stability and performance and also detect any red flags.

  • Thorough Inspection of Documents

This step of due diligence begins with the two-ways conversation between buyer and seller. The buyer asks for an interview, surveys with the seller and respective documents to be audited. The buyer examines the information which is collected to ensure proper legal and business practices. It is one of the most major parts of due diligence. In all, the buyer gains a better understanding of the firm and also appraises long term value.

  • Model Analysis

In these steps, the buyer focuses on the company’s business plans and model. This is to be done to assess whether the firm model would contribute with theirs.

  • Final Offering Formation

After the documents, information is gathered and examined, individuals and teams work together to evaluate their findings. They utilize the information which is collected to perform valuation methods and techniques. This validates the final dollar which is willing to offer during the negotiation.

  • Risk Management

This step of due diligence targets the company forecasting risks that may be associated with the transaction.

CONCLUSION

Due diligence helps to provide detailed information to the consumer about the company to be targeting and also helps those to prepare themselves according to the targeting company. It also helps in providing effective planning and measures for the smooth integration process. Regular hard work helps to provide a good relationship between the buyer and targeting company. Let’s say the process of due diligence is not handed in the correct way. In that scenario, there is a risk for the buyer, for all the parties and for the seller, poor process management results in delays, mistakes or impacting deal completion in price. Therefore, due diligence should be done with proper care, otherwise, it could lead to serious consequences.


[i]Adam Putz, “The role of due diligence in mergers and acquisition”, Available at:

https://pitchbook.com/news/articles/ma-101-the-role-of-due-diligence-in-mergers-and-acquisitions