Know The Importance Of Due Diligence In M & A Transaction
Merger and Acquisition transaction can be an important component even a critical one for a company’s growth strategy. A successful acquisition with the help of “Due Diligence” can help a company make a quantum leap in terms of market presence, filling in gaps in a company’s product or service portfolio, and improving profitability and other performance metrics.
Overview Of M & A Process
A merger or acquisition is a combination of two companies where one corporation is completely absorbed by another corporation. The less important company loses its identity and becomes part of the more important corporation, which retains its identity. A merger extinguishes the merged corporation, and the surviving corporation assumes all the rights, privileges, and liabilities of the merged corporation.
A merger is not the same as a consolidation, in which two corporations lose their separate identities and unite to form a completely new corporation.
M&A deal has a process to follow, having contacted an experienced company like MARC advises their clients on various M & A steps in the process. The usual M & A deal process has following steps:
1. Develop an acquisition strategy – Develop a solid strategy outlining why the business should make acquisitions, and what the desired outcomes are
2.Set the M&A criteria – Set specific criteria such as company value, industry, country, revenue, margins, growth, employees, etc.
3.Search for acquisition targets – Use the above criteria to filter opportunities, which can arise from in-bound interest, searching on Capital IQ or Bloomberg, or using bankers
4.Begin acquisition planning – This step involves reaching out to selected companies that meet the criteria and commencing a dialogue with management
5.Perform valuation analysis – Once preliminary discussions have taken place a target company will likely provide detailed financial information which can be used to value the company in more detail
6.Negotiation – After a view on valuation has been established an offer can be made and negotiations will go back and forth
7..M&A due diligence – Once an offer has been accepted it will be subject to due diligence, a process of confirming that all information about the target is accurate
8.Purchase and sale contracts – Upon successful completion of due diligence the final purchase and sale agreement can be signed (share purchase or asset purchase)
9.Financing strategy for the acquisition – This step may occur earlier, but the final strokes of financing will come into place after the deal has been signed but before it closes
10.Closing and integration of the acquisition – Finally, the official transaction closes (tombstones are handed out) and the long process of integration begins
Importance Of Due Diligence In M & A
When negotiating mergers or acquisitions, due diligence serves as an in-depth review of the target bank organization—both its operations and its people. Much of due diligence involves a review of the quality of the assets to be acquired, but it also includes a review of bank operations, earnings and staff.
Before committing to the transaction, the buyer will want to ensure that it knows what it is buying and what obligations it is assuming, the nature and extent of the target company’s contingent liabilities, problematic contracts, litigation risks and intellectual property issues, and much more.
This is particularly true in private company acquisitions, where the target company has not been subject to the scrutiny of the public markets, and where the buyer has little if any ability to obtain the information it requires from public sources.
Due Diligence Carries Several Of Inspection
It is through the due diligence process that you identify potential risks and develop a list of issues to be addressed in the definitive agreement.
Due diligence might include a review or inspection of:
- Financial information
- Corporate information, including material contracts and agreements
- Asset quality
- Lending policies and procedures
- Asset/liability management function
- Deposits an analysis of deposit growth, core deposits and rates paid on deposits
- Internal controls
- Environmental issues
- Employees and human resources
- Federal, state and local tax reporting
- Regulatory compliance
Results Of Due Diligence Supports Decision-making
For requiring much detail, the due diligence is not a procedure to be hastily performed. Although duration is related to the business size and the investigated scope, the study should be in a greater depth to guarantee its accuracy and reliability.
This information analysis leads to the identification of errors and points of attention that may pose threats to the client. This result shall provide a clearer picture of the moment of business and risks, basing future decisions.
The final report will be the fair report in which the observed facts are described in details. The due diligence does not indicate whether the transaction is advantageous to the parties and does not suggest values for negotiation. This judgment is up to the investor, who, in possession of material, will be provided with qualified information to make the most appropriate and profitable decision.
It is necessary to combine the technical knowledge to ethical performance in this thorough assessment. Hence, the importance of having a renowned assistance to perform this work. MARC brings together experts in this subject and has a consolidated presence in operational due diligence, which enable it to assist companies of all sizes and segments in this process.
MARC can help you with all of your new venture formalities, giving you guidance and expert suggestions.
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