RESEARCH M&A DUE DILIGENCE MORE THAN JUST FINANCIAL By Mr. Supriya Mitra Majumdar, Consultant - Legal cum Compliance, Planman Technologies (India) Pvt. Ltd. 78 Need the Dough July-October - 2007
MERGERS & ACQUISITIONS <strong>The</strong> Current Scenario: Between 2005 and 2006, on a year-on-year basis, <strong>global</strong> M&A volume had gone up by 37%. People who deal with corporate strategies and M&A dealmakers, think that since the <strong>global</strong> interest rates are still at relatively low levels and hedge funds have taken an active role in the recent past in M&A activities, there is a possibility that <strong>global</strong> fund managers shall continue to allocate more fund for M&A deals at least in near future. <strong>The</strong> objective of this article is to focus on the issues of M&A that require attention of professional managers having specialization in finance, law, strategies etc., since these are crucial by nature. It is the fact of life today that the banks fund M&A mainly for financial reasons realizing the need for faster growth in volume of business through inorganic route. Companies make strategic growth plan through internal operations and acquisition. When mature resources are needed right away, acquisitions perhaps make business sense. Initial Issues: Internally it should be addressed that when normally M&A drives fail to generate greater value then why at all a company should think for it By and large the reason of failure is poor post-merger integration as a result of which proper plan for such integration and accountability aspects are to be drawn up in detail at the strategic plan making stage. Before placing the matter to the Board, the CEO and his team should check whether the added resources of the target company carry any sense to the acquirer Should the acquisition be made to broaden the product line to reach a critical market Is it to address a new customer point Could the brand value of the target be a wealth creator in the hands of the acquirer <strong>The</strong>se need to be hammered out to find a logical answer. Specific issues to be examined like what would be increased capacity of the acquirer and what would the comparison look like if compared with its rivals What was or is the niche market of the target company and how did the target make value out of its overall business and is it still possible to create further value What are the operational hurdles of the target and how the acquirer is <strong>going</strong> to address such hurdles How the scale of economy shall show advantageous to the acquirer Lastly, what would be the incremental cost (interest for borrowing for M&A) vis-à-vis the incremental volume and the incremental return on capital Some Related Issues: <strong>The</strong> recent M&A deals by Indian business groups abroad and by non-resident Indians in Europe and US, is perhaps a positive response to “satisfactory underperformance” as told by late Sumantra Ghosal. <strong>The</strong>se issues are currently being deliberated upon at the management schools. While making analysis relating to M&A strategies some time, it is not uncommon that the companies forget that may be a joint venture or a strategic alliance is more flexible than an acquisition proposal. M&A is an answer for long-term need or when operations are to be integrated perfectly at many levels. <strong>The</strong> question of affordability should also be addressed. In the absence of cash available, private placement, leveraged buyout could be the source of fund. Funding by diluting stake of promoter is also not un-common beside reverse merger. <strong>The</strong> deal maker and the management of the acquirer should settle these issues upfront, because the funding model always creates an impact on the future financial performance of the target and the acquirer. At the legal front collateral agreements are important between the acquirer and the investment banker, consultants, lawyers, auditors in order to avoid confusion and unnecessary disclosure of confidential matters. <strong>The</strong> management of the acquirer should develop its team for due diligence and post-merger integration, to avoid any conflict in the process. In the absence of cash available, private placement, leveraged buyout could be the source of fund Some Observations: <strong>The</strong>re are unfortunate instances of due diligence which echoed the desire of the acquirer in the report and obviously the M&A failed to be a tool for growth of the combining entity. Due diligence have the following as source of information: 1. Public information, public document etc. 2. Research based on feed-back from the customers, suppliers, distributors, alliance partners, former employees, competitors, business journalists, analysts and industry experts. 3. <strong>The</strong> target company, through its management accounts, interviews with management team. 4. And lastly, own understanding of the acquirer from database on customer satisfaction and employee turnover rates etc, and its causes. <strong>The</strong>oretically the due diligence team should meet regularly during the due diligence period to exchange their views and findings and the leader of the team should have courage not to echo the thought of the owner of the acquirer and should carry sufficient amount of courage to arrive at a logical and bankable findings of due diligence report. <strong>The</strong> due diligence team should have ability to adjust objectives and the scope of July-October - 2007 Need the Dough 79
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