The Business Standards, on its 27th of May 2021 issue, reads a headline about how million-dollar M & A deals are being sealed in the pandemic situation where countries over the world are facing the wrath of lockdowns.
What is M&A?
M&A, the abbreviated term for Mergers and Acquisitions, is a generalized term describing the coming together of companies or the assets through transactions like mergers, acquisitions, purchase of assets, tender offers, partnerships, and consolidations. The term Merger and Acquisition is often understood as synonymous, whereas they are not.
A merger is the bringing together of two or more separate businesses to form a single new firm. An acquisition is the takeover of a submissive firm by a dominant one, with the dominant firm becoming the owner of the submissive firm. I concluded that before a merger or acquisition, a corporation must study and examine important benefits and drawbacks in order to transform the financial transaction into a lucrative one. And this research must be done meticulously. Here comes the role of ‘Due Diligent Report’.
What is the Due Diligent Report?
The importance of mergers and acquisitions in the development of firms may be demonstrated by using Yahoo as an example. Once a pioneer in the world of the Internet, this company has squandered its value whereas its competitor, Google, has made it to the apex, which is all due to the calculated steps taken during Mergers & Acquisitions.
Prior to paying a large sum of money in a commercial deal, investors conduct extensive research, which is referred to as Due Diligence. It is clear from the term that the act of research is being carried out with the utmost care. This conscious analysis, when presented a summarized in a report, it is known as ‘Due Diligence Report’. A due diligence report includes a statement describing the research, the documents based on which the research is performed, information on assets and liabilities, debts, market analysis, and SWOT Analysis. SWOT stands for Strength, Weakness, Opportunities, and Threats, linked with the company being acquired.
What are the types of Due Diligent Report?
The due diligence report forecasting the estimates of commercial potentialities are primarily of 3 (three) types. They are:-
- Financial Due Diligence
- Business Due Diligence
- Legal Due Diligence
The accounting practices, audits, tax-related compliances, and other financial and commercial prospects of the acquired business are highlighted in the financial due diligence report. The business due diligence report demonstrates the parties engaged in the transaction’s business viability. Legal due diligence, also known as Documents Only due diligence, is the estimation of the legal risks that are evaluated before a merger or acquisition.
Importance of Due Diligent Report
The main objective of the Due Diligent Report is to give the company acquiring a complete overview of the possible risks in the future. These risks, when recognized, can be negotiated likewise for the smooth running of the business.
Sections of the Due Diligence Report
The sections of a due diligence report are as follows:-
- Corporate Records like the certificate of incorporations, certificates of shares, articles of
- Association, memorandums, and the existence of any warrants.
- Financial information of the past five years. The statements of audits, taxes filed, the tax returns, internally generated financial models, etc.
- The records of indebtedness of the company to be acquired like the loan agreements, mortgages, etc.
- The list of employers and the code and policies related to employment. Documents if there is any pending litigation related to labor law.
- Documents relating to the real property of the company.
- All the agreements the target company has entered into.
- Copies of legal proceedings, environmental policy compliances, and licenses obtained.
As a result, a Due Diligent Report is an essential component of any financial transaction involving two or more organizations. The importance of the report emphasizes how meticulously it should be created, as the prospects of both the firm acquiring and the firm acquired are dependent on it, despite the fact that such studies have some limitations. The competency of the workforce remains behind the curtain. The report entirely relies on the information available and this may pose a hurdle for a reliable due diligence report.