Mergers & Acquisition and Due Digilance

Mergers and acquisitions (M&A) are a key part of many organizations’ growth strategies for several reasons:

  • They are a way to grow market share, or provide access to new distribution channels, markets and products
  • They may provide the organization with new capabilities, access to technology or know-how, or access to talent needed to drive growth.

In industries consolidating due to overcapacity, companies may identify opportunities to achieve competitive advantage through increased scale or scope to improve operations. These cost savings and efficiency opportunities arise through technology, globalization, regulation and other market developments that increase the importance of having larger scale or scope from a competitive standpoint.

Companies may deploy M&A as a strategic tool for transforming the business by creating new ways of doing business to sustain or improve competitive positioning. This can occur through an acquisition enabling the creation of a distinctly new value proposition for customers; altering the fundamentals of how money is made within the industry; creating formidable resource advantages in serving the customer (e.g., people, technology, facilities, channels, brands); and/or making possible the re-engineering of processes for delivering value to customers (e.g., faster, better, lower cost). In essence, whether or not to pursue a merger or an acquisition is all about having a clear view early in the deal process and throughout the execution of the integration process of the new opportunities to create competitive advantage and value.

Companies may look to boost revenue and margin growth through leveraging specific customer-focused initiatives to create long-term value. Customer-focused opportunities typically center on improving the go-to-market strategy and achieving higher revenue goals through specific value-creation pursuits (e.g., broaden product and service offerings, expand geographically, acquire research and development [R&D] and other talent, attain better positioning within the value chain, enhance brand management, and improve the customer experience).

Due Diligence

Financial due diligence is a process through which financial professionals carry out an investigation and research on the financial matters and circumstances of the target firm and an analysis of various related factors. The due diligence investigation is managed according to the commissioned concepts and objectives of the acquiring firm. There are a number of methods that are used by the firm implementing the financial due diligence action, such as conducting interviews and discussions with important employees and the senior management, document reviews, comparing various historical financial data, analysis of trends as well as reporting of financial challenges and tax risks. The financial due diligence service providers also study the situation of the actual operations for the target firm so that such information can be delivered to the firm responsible for acquiring them.

Due diligence mainly functions as an assurance engagement report. The accountant responsible for reporting the due diligence must have a thorough understanding of the latest standards associated with accounting and auditing. Even though the accountant who is responsible for managing the auditing and reporting function is not supposed to comment on whether the financial statements are true or false, they may apply financial due diligence regulations associated with ISA or International Standards on Auditing. The main goal of financial due diligence is to understand and establish the actual financial condition of the target firm within the last few years. The financial due diligence can also help in addressing the matter of understanding and predicting the financial situation for the future.

It is also important to clearly understand the current financial condition of the company along with internal control regulations and operations management. Due diligence services are extremely important in any merger or acquisition situation as they provide the buyer with an insight into the operations and inner workings of a target firm. By analyzing the report, an investor can decide whether to acquire the business or invest in it. Further the investor can choose to re-negotiate the price based on the findings of the due diligence and their impact on the target firm's future profitability. In other words, such reports allow investors to make informed decisions and be aware of the possible risks in associating themselves with the business firm. Due diligence experts and auditing professionals help to make sure that a company sticks to proper book keeping format, the applicable accounting standards and correct financial reporting. They can also decide whether there are any alarming aspects or red flags.

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