Due Diligence: A Key Factor in Mergers and Acquisitions

 

Muhammad Osama
Business Intelligence Analyst – INGENIOUSTRIBE Global Solutions

 

 

In the corporate world, Mergers and Acquisitions are considered crucial for strategic growth and business expansion. Yet, many businesses struggle to achieve M&A success.

Regardless of the optimistic expectations surrounding the results, research suggests that M&A usually do not achieve the desired goals.

Considerable studies comprehensively conclude that due diligence in the preparation phase of a transaction represents one of the key factors of M&A.

Due Diligence is the process of thorough analysis of the target company’s operations, its strengths and weaknesses and its strategic and competitive position within the industry. It includes gathering and verifying information designed to support the valuation of a target company, it’s resources and liabilities. Investigating all aspects of a company, including production, technology, marketing, sales, finance, regulatory framework, human resources and others.

Due diligence as a process of systematic check of truth and fairness, as well as of management behavior concerning risk and utilization of resources, represents a necessary preparatory stage in the process of acquiring companies. Effective due diligence should discover the questions which can stop negotiations, lead to termination of the transaction or even cause prolonged lawsuits. Costs of such actions often exceed investments necessary to conduct due diligence prior to acquisition.

Another important argument in favor of due diligence lies in the fact that in an increasingly complex economy, the impact of corporate acquisitions and strategic and financial business policies of the potential target are not transparent to the investor without a comprehensive and detailed analysis, even if the target is from the same industry as the acquirer. Detailed and comprehensive analysis is thus an absolute precondition for securing the transparency required to make a purchase decision.

Due diligence provides necessary information to evaluate the target company, to facilitate negotiations and to carry out integration after the acquisition. It is a continuous process which should be adjusted to each particular transaction, with the aim to identify, prevent and minimize risks, which could arise after the acquisition process. Many studies have confirmed beyond doubt the importance of thoroughly conducted due diligence process for long term success of M&A.