In the previous two articles, we picked up M&A and IPO (Initial Public Offering) as exit strategies for start-up companies. This time, let’s take due diligence.
Due diligence is abbreviated as Due Dee in Malaysia and Due Deli or DD in Japan. The literal meaning of the term is appropriate prudence, but it is often translated as asset assessment or asset investigation in Japan. In an M&A situation, the buyer/investor examine the target company’s assets and business to determine whether there are any problems in continuing the transaction, whether there are any issues that need to be considered after the acquisition/investment, and whether there is any negative impact on the value of the business/transfer price.
When an M&A adviser is delegated by a seller, due diligence is briefly carried out on the target company in order to approach the right potential buyer with an understanding of the target company’s business or to check whether there are any major obstacles to executing the M&A. In some cases, due diligence may also be carried out by the seller to avoid the burden on the seller of being conducted due diligence by several potential buyers at the same time, especially in the case of bidding procedures. However, as due diligence is generally carried out by the buyer/investor, this article focuses on the procedures carried out by the buyer.
Purpose of Due Diligence
Due diligence has various objectives as follows.
1. Understanding the target company’s business and its rights and obligations.
2. Identifying problems in the target company and determining takeover risks, in particular whether there are any significant problems, known as deal breakers.
3. Determining the acquisition price.
4. Drafting the acquisition agreement.
5. Formulating a post-acquisition integration plan.
6. Fulfilment of the duty of care of the buyer’s directors.
Entities carrying out due diligence
Due diligence is carried out from the business, financial, tax, legal, HR, IT, environmental and other aspects of the target company.
Business due diligence from the business aspect is often carried out by the buyer itself together with an M&A adviser if the buyer and the target company are in the same industry, while M&A advisers or consulting companies are often appointed if the buyer is not in the same industry or the buyer is a fund.
Financial and tax due diligence is conducted by an accounting firm and a tax firm respectively in Japan, while in Malaysia it is generally conducted by the accounting and tax teams of the same accounting firm. Legal due diligence is conducted by a law firm in both cases. In a typical M&A transaction, financial, tax, and legal due diligence are carried out.
HR, IT, and environmental due diligence are often not carried out independently, but when they are, specialist consultants are generally hired to carry them out.