Large and medium companies use many different strategies for growth. One of the strategies is merging and/or acquiring other organizations that then facilitate the entry into new markets, taking advantage of synergies and shared knowledge of the sector in which their activity is developed. Some tests demonstrate that this type of operation grew to around 20% in 2016. Without a doubt those processes are long and complicated. The previous stages must be carefully taken to assure success.
One of the most useful tools in these proceedings is “Due diligence” which is as a key procedure for a clear understanding of the “target” of the company to be acquired. Due diligence consists of an exhaustive search for strategic information in order to execute the acquisition. Key elements to sealing a successful merger or acquisition agreement with the aid of due diligence are:
DUE DILIGENCE, MORE THAN JUST AN AUDIT
Although many confuse them, the aim of this tool transcends and goes beyond the performance of an ordinary audit. The Due Diligence allows the knowledge of operational risks that exist in different areas. The main objective is to have them under control and to know how to assess them so that the transaction is carried out with the knowledge that all information is realistic and pertinent (economically, environmentally, or other aspects such as, marketing or even countries matters) to the interested party, which will allow them to take correct decisions, to adjust the price of the transactions or to structure appropriate guarantees.
Sometimes false expectations of such operations can arise due to past mergers or acquisitions being successfully performed. However just because something has gone well in the past does not indicate that this occasion will be successful as well.
Once various meetings have been held where the companies involved have expressed its intention and have agreed a “Memorandum of Understandings” setting out the basic terms and conditions, comes the moment of truth. Is it certain that all the information is being managed adequately? Is there some hidden or passive breach? In this moment due diligence should be suggested.
The interested party should come to an agreement of the undertaking of a detailed and independent investigation that will allow the other party to disclose all necessary information. This information will then allow them to make correct decisions, and for them to be able to renegotiate the agreements that have already been proposed.
WHAT IS (AND WHAT IS NOT) DUE DILIGENCE?
It is not an audit.
- It includes a previous analysis of the data of the company to be acquired or merged.
- It should be a systematic, independent and professional investigation of the benefits and risks associated with the merging or acquisition of companies.
- It is not restricted to the financial results or to the strategic future plans but companies.
- The financial information, procedures, structure, the cultural organization, the reputation of the brand, among others, the corporate environment, macroeconomic investigation of the country in where the company carries out its activities, competitors and the stance taken by its sector and the possible change in the political or legal environment, just as much as the corporate culture of the region.
- The analysis adjusts itself to the size of the business.
DATA SCOPE OF A DUE DILIGENCE
Due diligence includes the financial data of the company, comparing them with the average ratios of the industry in which it is involved, it will also analyze legal issues to detect if there have been any labour or contractual breaches in the past, or in the present, these breaches would then risk the future of the company. Any administrative or tax issues would be analyzed, trying to find out if the company is up to date with its obligations regarding taxes and debts, if there is a pending law suit, and what is the current situation of its assets.
The investigation will be reflected in a report that describes the current state of the company, listing the benefits and risks involved for those who are interested in buying. The report shall point out the elements that require renegotiation. The final objective is to help you understand if the merger or acquisition of the company are adapted to your corporate expectations.
WHO CAN CARRY OUT DUE DILIGENCE EFFICIENTLY?
In an ideal world, this task would be carried out by independent and external professionals, who already have experience in this area. These professionals should be orientated towards getting results and should also be involved in the success of the analysis with the aim of offering a realistic and valuable response to the company interested in the acquisition. Basically, we recommend a specialized Corporate Law Firm which will reinforce its team with other specialists in different fields.
To conclude, in the long term it is virtually impossible to foresee if this type of transaction would be beneficial for the company that has taken the initiative. However, if your business is considering the possibility of executing a merger or acquisition with another or other companies then a “Due Diligence” could be a useful tool in setting guarantees in the transaction. This would then facilitate the adaptation to any possible changes that arise due to the process. In order to take correct decisions, experts should be used to support and guide. You can find out more about our advice services, and due diligence services by clicking here. You will be sure that there will not be any hidden data, and that the operation will be viable.