What other parties might want to perform due diligence on th

What other parties might want to perform due diligence on the target firm?

Solution

Answer ) 20 Key Due Diligence Activities In A Merger And Acquisition Transaction

Mergers and acquisitions typically involve a substantial amount of due diligence by the buyer. Before committing to the transaction, the buyer will want to ensure that it knows what it is buying and what obligations it is assuming, the nature and extent of the target company’s contingent liabilities, problematic contracts, litigation risks and intellectual property issues, and much more. This is particularly true in private company acquisitions, where the target company has not been subject to the scrutiny of the public markets, and where the buyer has little (if any) ability to obtain the information it requires from public sources.

The following is a summary of the most significant legal and business due diligence activities that are connected with a typical M&A transaction. By planning these activities carefully and properly anticipating the related issues that may arise, the target company will be better prepared to successfully consummate a sale of the company.

Of course, in certain M&A transactions such as “mergers of equals” and transactions in which the transaction consideration includes a significant amount of the stock of the buyer, or such stock comprises a significant portion of the overall consideration, the target company may want to engage in “reverse diligence” that in certain cases can be as broad in scope as the primary diligence conducted by the buyer. Many or all of the activities and issues described below will, in such circumstances, apply to both sides of the transaction.

Financial Matters. The buyer will be concerned with all of the target company’s historical financial statements and related financial metrics, as well as the reasonableness of the target’s projections of its future performance. Topics of inquiry or concern will include the following:

2. Technology/Intellectual Property. The buyer will be very interested in the extent and quality of the target company’s technology and intellectual property. This due diligence will often focus on the following areas of inquiry:

3. Customers/Sales. The buyer will want to fully understand the target company’s customer base including the level of concentration of the largest customers as well as the sales pipeline. Topics of inquiry or concern will include the following:

4. Strategic Fit with Buyer. The buyer is concerned not only with the likely future performance of the target company as a stand-alone business; it will also want to understand the extent to which the company will fit strategically within the larger buyer organization. Related questions and areas of inquiry will include the following:

5. Material Contracts. One of the most time-consuming (but critical) components of a due diligence inquiry is the review of all material contracts and commitments of the target company. The categories of contracts that are important to review and understand include the following:

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6. Employee/Management Issues. The buyer will want to review a number of matters in order to understand the quality of the target company’s management and employee base, including:

7. Litigation. An overview of any litigation (pending, threatened, or settled), arbitration, or regulatory proceedings involving the target company is typically undertaken. This review will include the following:

8. Tax Matters. Tax due diligence may or may not be critical, depending on the historical operations of the target company, but even for companies that have not incurred historical income tax liabilities, an understanding of any tax carryforwards and their potential benefit to the buyer may be important. Tax due diligence will often incorporate a review of the following:

9. Antitrust and Regulatory Issues. Antitrust and regulatory scrutiny of acquisitions has been increasing in recent years. The buyer will want to undertake the following activities in order to assess the antitrust or regulatory implications of a potential deal:

10. Insurance. In any acquisition, the buyer will want to undertake a review of key insurance policies of the target company’s business, including:

11. General Corporate Matters. Counsel for the buyer will invariably undertake a careful review of the organizational documents and general corporate records (including capitalization) of the target company, including:

12. Environmental Issues. The buyer will want to analyze any potential environmental issues the target company may face, the scope of which will depend on the nature of its business. Where an environmental review is conducted, it will typically include a review of the following:

13. Related Party Transactions. The buyer will be interested in understanding the extent of any “related party” transactions, such as agreements or arrangements between the target company and any current or former officer, director, stockholder, or employee, including the following:

14. Governmental Regulations, Filings, and Compliance with Laws. The buyer will be interested in understanding the extent to which the target company is subject to and has complied with regulatory requirements, including by reviewing the following:

15. Property. A review of all property owned by the target company or otherwise used in the business is an essential part of any due diligence investigation, with such review including:

16. Production-Related Matters. Depending on the nature of the target company’s business, the buyer will often undertake a review of the company’s production-related matters, including the following:

17. Marketing Arrangements. As part of diligence, the buyer will want to understand the target company’s marketing strategies and arrangements, including through reviewing:

18. Competitive Landscape. The buyer will want to understand the competitive environment in which the target company’s business operates, including by obtaining information on the following:

19. Online Data Room. It is critically important to the success of a due diligence investigation that the target company establish, maintain, and update as appropriate a well-organized online data room to enable the buyer to conduct due diligence in an orderly fashion. The following are the common attributes and characteristics of an effective data room:

20. Disclosure Schedule. As part of any M&A transaction, the target company will be required to prepare a comprehensive disclosure schedule addressing many of the key diligence topics described above, and identifying any exceptions to the company’s representations and warranties in the acquisition agreement. Careful preparation of this disclosure schedule is extremely important and time-consuming for the company. It is not unusual for the company to have to revise and update the document a number of times before it is ready for delivery to the buyer. That means that is essential for the company to begin preparing the disclosure schedule very early in the planning stages of an M&A transaction. The buyer and the buyer’s counsel will be looking for the following in the disclosure schedule, among many other items:

Conclusion

An M&A transaction typically involves a significant amount of due diligence by the buyer and the buyer’s counsel and accountants. By being prepared for the due diligence activities that a target company will encounter, the process can go smoothly and quickly, serving the best interests of both parties to the transaction.