By Barry Bagus, Emptech
Merger and acquisition (M&A) activity can be a critical component for a company’s growth strategy. When done properly, a successful M&A can help a company gain valuable market share, fill in gaps in a company’s product or service portfolio, and increase profits and other performance metrics.
On the other hand, transactions that do not ultimately perform as expected can lead to a number of negative outcomes and cause serious damage to companies. Therefore, for an M&A deal to be successful, it is critical that all parties carefully review and understand compliance programs that will be inherited or developed as part of the transaction.
Taking into account the potential consequences of M&A activity to companies, it is necessary to oversee the transaction process from an early stage to post-closing integration. A critical aspect of this procedure relates to the M&A due diligence process designed to identify potential risks and anticipated benefits that can affect a company’s future.
As an important part of the acquisition process, M&A due diligence represents verification, investigation, or audit of any matter related to business dealings. In M&A, due diligence helps clients recognize any financial, legal, or operational risks that may not be noticeable from outside perspectives. Due diligence contributes to making informed decisions by enhancing the quality of information available to decision makers. As a result, transactions that undergo M&A due diligence process offer higher chances of success.
Due diligence first came into use after the passage of the U.S. Securities Act of 1933 and is a broad concept that covers a significant number of areas. This act transferred responsibility onto securities dealers and brokers to fully disclose any material information related to the securities or instruments that they were selling to potential investors. Since the passage of the Securities Act, the term due diligence has been adapted for use in many situations. Nowadays, M&A due diligence implies that the person conducting the investigation has made a diligent effort to obtain all the relevant and meaningful information pertaining to the matter under investigation and has disclosed all of that information in a forthcoming manner.
Due diligence can be performed in different ways – by internal teams, external advisors, specialists, senior industry professionals, or by a combination of the above mentioned. The process is usually designed as a high-level analysis aimed to discover some fatal flaws or deal killers, highlight fundamental insights, risks and exposures that can have a significant impact on valuation, regulatory environment, technology or the terms of the transaction agreement. Finally, a well-structured due diligence can help management assess the likelihood of the success of the post-transaction period.
Here are some of the key elements that should be considered in a thorough M&A due diligence process:
- Strategic position explores the financial and legal aspects of the deal and determines if the deal is realistic regardless of how good it appears initially.
- Financial due diligence includes an analysis and review of the target company’s financial statements, tax returns, accounting policies, and financial trends. As such, it serves as the starting point for M&A due diligence process.
- Company overview is an important element of M&A due diligence is the analysis and review of the company’s technology, fixed assets and facilities, as well as real estate and insurance coverage. It also looks at whether there is any significant operational risk that affects pricing or executing the deal.
- The legal element of M&A due diligence is critical. This step requires a thorough analysis and review of corporate documents, contracts and agreements, ongoing, pending and potential litigation, environmental factors, legal and regulatory compliance.
M&A transactions can be lucrative for all parties involved, but a favorable result depends on many compliance-related issues. Adhering to unique aspects of the businesses involved is necessary, but M&A due diligence is critical for making informed investment decisions. Costs associated with this process are a justifiable expense compared to the risks associated with failing to conduct it.
Conducting M&A due diligence is a demanding procedure that requires considerable skill and expertise. As a result, firms that do a lot of M&A transactions often develop their own in-house due diligence expertise, while firms that pursue occasional M&A transactions often engage outside professionals to assist them with this highly complex and risky activity.
The M&A process can be significantly improved by fast and efficient consolidation of systems and processes. In order to avoid extended transactions, companies are increasingly turning to automation in M&A. Automation ensures better management of risk, reduced administrative burden and maximum compliance.
Barry Bagus is a Director at Emptech. Emptech is a national compliance company that develops and provides best-of-class administrative human resource technologies backed by dedicated account service teams and consultative tax services. He can be reached at 1-310-787-8477 or b.bagus@emptech.com.
