Mergers and Acquisitions, or M&A for short, it involves the process of combining two companies into one sole. The idea behind the same is when 2 or more businesses get involved in Mergers and Acquisitions they achieve synergy – where they establish a new company with the help of the resources of the former two separate entities. A typical merger occurs when two companies join forces, usually happens between the companies of the same size and which can offer the sales, resources, and manpower, whereas Acquisition is the result of the action in which the receiving company buys the interests of acquired shareholders and ceases to have an interest.
The ideal Merger and Acquisition is the result of the appropriate amount of effort invested by the buyer. This beings well before any actions take palace which is related to monetary transactions the phase where the buyer will want to make sure that he is aware of what he is buying, what obligations he is assuming, the nature and extent of sellers working capital, contingent liabilities, contracts, risks, legal compliance, intellectual property issues, and a lot of things. This is the primary stage which we know by the name- Due Diligence.
What’s the role?
Due Diligence as a block builder can be of various types and each focuses on the different workspace and helps in boosting the company after the report. The due diligence when used in Merger and Acquisitions it’s done from the perspective of the seller, as well as the buyer. Where the consumer or the parties looks into the financials, litigation, patents, and a whole range of relevant information, the seller concentrates on the experience of the buyer, the financial abilities to complete the transaction, and the ability to fulfil responsibilities taken.
Due Diligence is an important activity as called before in mergers and acquisitions transactions as it assists buyers in finding the element of business items they are interested in. By gathering all the concerned information, the buyer is able to understand various interactions, growth potential of the business and is better prepared to make an informed decision and close the agreement with a sense of certainty. Adequate information helps to increase the chances of earning money and reduce future losses. Due Diligence begins when the letter of intent LOI is signed, this also helps businesses to build collaborative relationships.
Due Diligence is the process of evaluation and screening of the material information by an interested buyer to better understand the company’s historical financial statements, related financial metrics along with the reasonableness of the target’s projections of its performance in the near future. The other horizons which a buyer has to cover is inclusive of the company’s customer base, material contracts and company’s commitments, company’s management and employee base investigate and identify the cybersecurity and data privacy risks and liabilities, companies policies, Antitrust and regulatory issues, general corporate records, potential environmental issues, the third party, legal compliance.
Due diligence can be performed in different ways like- by internal teams, external advisors, specialists, experienced / senior executives, or, as by a combination of these methods. Buyers take the help of due diligence to search for “red flags”, deal-breakers or Fatal flaws. It is a comprehensive approach that includes a more detailed analysis of the target’s bread and butter. Beyond this, due diligence can expose fundamental insights, risks, and exposure that have a significant impact on valuation that can help buyers to come to the conclusion for the deal.
Types and Procedure-
A structured due diligence process can also help to assess the likelihood of the success of the proposed acquisition. The role of due-diligence is slightly different when Partnership takes place where it is done for business connections and other alliances and again the role changes when joint partnership or collaborations are scheduled. Other than that, there are certain transactions which can be enlisted for perusing due-diligence- Strategic alliance, business coalitions, outsourcing agreement, product licensing, joint venture, capital investment etc.
Types of Due Diligence- A deal involve various areas and thus the parties have to conduct research and investigate and summarise those to come with the best possible outcome. There are six major types of due diligence that are in the checklist in order to complete the procedure.
- Business Due Diligence- In this, the feature of due diligence seeks to verify whether the company’s revenue and cash flow are sustainable as a long-term investment and whether the business has the capacity to grow.
- Accounting Due Diligence- In this, the main focus is on making sure that the financial information you have provided to them is correct and honest. This part of the due diligence process plays the largest role.
- Legal Due Diligence- This part of the process will entail looking into the legal background of your business. Lawyers will take a look at the recent contracts you hold with providers and charge them for any potential liability issues.
- IT Due Diligence- during the IT due diligence stage, a team of IT professionals will be looking for security risks, downtime issues, and other IT problems that may need to be resolved before the deal can be finalized.
- Environmental Due Diligence- In this, the due diligence team may want to spend some time focusing on the disclosure of any environmental risks that may be connected with acquiring your company now or in the future.
- Financial due diligence- In this, financial professionals bring out an inquiry and research on the financial matters and conditions of the target firm and scrutiny of a variety of correlated factors.
Due-Diligence is an inspection and risk assessment of an upcoming business transaction which acts as a block builder and the role defined of due-diligence is very vast as the deal make or break depends on the same. It holds a certain regulatory frame which can be considered as a process.
- Pre-Diligence- is the primary and the initial step where seller has to act on management of documentation and people. Begins with a letter of Intent which the investor has to sign and the Non-Disclosure Agreement with the targeted buyer. When the documents are duly signed and reviewed the parties can move with the issues and after that arrange documents required for a diligence as required by the law followed by creating a data room to stop the valuable and potential information.
- Diligence Process- right after the signing of the LOI and NDA the professional submits the report, known as the due diligence report which can be either as Summary Report or Detailed Report.
Deal Breakers- In this type of report, the outcome can be very glaring and may uncover various non-compliances that may arise i.e. Any criminal proceedings or known liabilities.
Deal Diluters- The outcome arising out a diligence may contain violations which may have ab impact in the form of quantifiable penalties and as consequence may result in diminishing the value of company
Deal Cautioner – Deal cautioners cover those findings in a diligence which may not impact the financials, but there exists confirmed non-compliances which though fixable, require the investor to step a cautious path.
Deal Makers – Deal Makers are very hard to come by and may not be a fact in the literal sense, in these reports the diligence reports team have not been able to come across any violations, leading them to submit a ‘ Clean Report’.
The outcome of which is ‘The Due Diligence Report’ which has the ultimate objective is to get a clear understanding of how the business will perform in the future.
- Post Diligence- results in rectification of non-compliances found during the course of Due-Diligence. Post Due diligence is the interesting process arising out of the diligence made by the team of experts. The process includes making the application, filing the petition for compounding of offenses, or negotiating the shareholder’s agreement. Post diligence process helps the investor in negotiating the deal.
This approach from the very beginning as regulated under legal guidelines start with the signing of a non-disclosure agreement, notes as the most important step from a legal perspective. The reason behind this step is that a considerable amount of information in the forms of documents, accounts, finances and even personal interaction is revealed and analysed. Within these resources there is a lot of critical info that if made public may lead to losses in terms of finances and other assets or even may put the company in a tough position in terms of its competition with the rival companies.
Thus to protect and ensure that confidential information is safe and sound the non-disclosure agreement is signed so that no such conditions may arise and even if they do , proper legal remedy may be seeked for the damages caused. After the initial process of due diligence a report is prepared comprising of its assets, accounts, shares, capitals, contracts, taxation, insurance, exports and imports, obligations and liabilities, legal proceedings and compliance and non-compliance with the statutes and provisions, third party rights, its shareholders, customers etc. On the basis of this report a final opinion is made by the buyer company in regard to the merger or acquisition of the concerned company. Legal opinions of the attorneys are also taken for the same.
Since a vast amount of information is reviewed so any kind of discrepancy or inadequacy within this process can lead to serious legal consequences for the company. As the end result of any kind of wrong move can bring the company into scrutiny under company law, SEBI, investment law, competition law, and even RBI guidelines. To avoid any such inconvenience it is important that not only proper due diligence is conducted but also it is conducted efficiently. The report will not only eliminate such legal risks but also helps to set the right expectations from the company.
Intellectual Property Due Diligence in Mergers and Acquisitions the value of intellectual property in M&A has elevated the need for all legal and financial professionals to evaluate and assess the assets and their role in commercial transactions. A detailed assessment of I.P.is becoming an integrated part of commercial transactions. Here due diligence is the process of investigating a party’s ownership, right to use, and right to stop others from using the IP rights involved in under-sale or merger. The nature of the transaction and the rights acquired will determine the extent and focus of the due diligence review.
Conclusion- Today, India presents critical freedoms for organizations to take part in multifaceted exchange and mixtures. Indian business sectors are showing critical development in abroad companies in India just as extreme rivalry between business houses looking to extend their market. Due Diligence is an examination to focus on any danger from a legitimate point of view. This cycle happens prior to securing a business or organization. The object is to know about the dangers before buy. From a lawful perspective, the more information on the business assists a purchaser with settling on an educated choice. The consequence of lawful due determination will help clarify the current circumstance of the business, recognize the dangers and design the securing. Understanding, the association and the openness it reflects to the rest of the world, both in Goodwill and monetary perspective are a significant angles for a purchaser to remember prior to entering the arrangement. Adequacy of plan of action and all around consented construction would be an edge that could prompt making of different collaborations. Due Diligence assist financial backers with getting an exact view on what the Company has done as such far and how it may find a way into a wide portfolio or venture system.
Author: SHREYA PANWAR, Maharaja Sayajirao University of Baroda.