DUE DILIGENCE CHALLENGES IN MERGERS AND ACQUISITIONS POST-COVID.

INTRODUCTION

Global mergers and acquisitions will continue to be significantly impacted by the coronavirus outbreak. The pandemic has an impact on a wide range of other elements outside only the financial system as a whole, seller valuations, and buyers’ eagerness to close agreements quickly. These include the actual deal terms, newly discovered due diligence difficulties, how due diligence is undertaken, the accessibility, cost, and other aspects of deal finance, as well as the length of time required to get all required regulatory and other third-party approvals for the transactions. Additionally, unlike previous crises that had an impact on M&A activity and agreements, this time around there has also been a fundamental shift in the way M&A transactions are created and structured. The efficient use of innovative collaboration tools, techniques, and technology has become even more important as buyers and sellers, M&A financing providers, and all of their respective legal and financial advisors adapt to the new environment while all principals are working remotely.[1]

HISTORY OF DUE DILIGENCE

In fact, the phrase “due diligence” was first used in 1598, just before Shakespeare’s play. However, the demand for more information about the opposing side of a transaction may have existed long before transactions began. Due diligence didn’t take on its current, more organized shape until the 20th century. Due diligence was first mentioned in SEC records in 1933, although it is reasonable to believe that the advent of more advanced management accounting techniques in the second decade of the twentieth century marked the beginnings of the contemporary due diligence movement.[2]

WHAT IS M&A DUE DILIGENCE?

The process of due diligence is a requirement for merger and acquisition deals. It is a type of audit and research activity that offers the buyer a guarantee and contentment with the product they are purchasing. Due diligence, to put it simply, is the process of verifying and examining the facts behind a claim, a company, or a circumstance.[3]

WHAT IS THE IMPORTANCE OF DUE DILIGENCE IN M&A?

To fully comprehend the company’s present financial situation, internal control laws, and operational management, due diligence is crucial. Due diligence services are crucial in every merger or acquisition scenario since they give the buyer knowledge of the target company’s internal operations. Due diligence might take weeks or months because of how complicated mergers and acquisitions are.[4]

TYPES OF DUE DILIGENCE IN M&A

 Legal Due Diligence: In order to make sure that a target business has the intellectual property rights that are essential to its future success, for instance, legal due diligence aims to look into the legal foundation of a deal.

Financial Due Diligence: Verifying the presented financial information and evaluating the business’s underlying performance are the main goals of financial due diligence. Typically taken into account are earnings, assets, liabilities, cash flow, debt, and management.

Commercial Due Diligence: Commercial due diligence takes into account the market in which a company operates, for instance by speaking with consumers, evaluating competitors, and developing a more thorough examination of the premises that support the business plan.[5]

IMPACT OF COVID-19 ON MERGERS&ACQUISITION.

Funds available for acquisition: Since its inception, private equity has often funded M&A through debt. The key issue at hand is the availability of finances. The lenders are putting strict terms and conditions in place, raising the cost, and requiring more due diligence. There aren’t many options available to customers in this case. Due to these difficulties, buyouts may now be a simple way to add equity to debt leverage.

Timing and sluggishness in M&A deals: The duration of the negotiation has increased. Addressing the additional difficulties in due diligence will take time. It will take time for the approvals. Finding funding will be difficult, and the market environment can make waiting necessary. The M&A process will take time to complete at each level. To survive the epidemic, every stage will need a lengthy, in-depth conversation, from the initial talk to the drafting of a statement of intent or agreement. Therefore, in the event of older agreements, the time length and force majure provision need to be revised.

 The Additional necessity for diligence: The acquirer will need to evaluate further difficulties. It’s crucial to consider how this pandemic would affect the sellers’ businesses. The physical inspection will be limited, which will make it more challenging. It will be necessary to evaluate the seller’s track record of keeping important contracts, including evaluating the contracts. Even the specifics of the layoff are probably going to be evaluated in addition to the employees and their benefits. Due diligence will also include checking for employee-related legal compliance, including that of the company’s insured subjects.

Effects of Agreements and its provision: Before engaging in such a transaction, the buyers and sellers sign a number of agreements. The Memorandum of Association, Letter of Intent, and Terms Sheets constitute the whole agreement. After a protracted process of due diligence on the seller’s business, operational results, financial state, clients, suppliers, staff, and business prospects, the letter of intent is likely to adjust itself in light of the epidemic. By leveraging the circumstances, the letter of intent is likely to include closing conditions. The seller would want to discuss the closing certainty and risk. However, due to difficulties, the buyer will request a longer period of exclusivity.[6]

POST-COVID- WHAT TO DO NOW?

Reconsider how M&A relates to strategy: The mission of the M&A team should be revised as business models evolve and organizations update their top-level corporate strategies. One of the largest problems is that businesses must adopt a new strategy regarding where to purchase vs. construct in order to remain competitive in the years to come as shifting ecosystems and digitalization redefine industries.

Accept unconventional M&A: The top businesses will look beyond straightforward mergers and acquisitions and divestitures. To deliver value in ways that are easier on the balance sheet and business cultures, leaders will leverage joint ventures, partnerships (with or without equity, with or without financial sponsor partners), and corporate venture capital, adapting integration to the deal structure. The majority of M&A practitioners asked to anticipate that partnerships, joint ventures, and corporate venture capital will increase over the next year, while estimates vary by industry. In order to explore new opportunities, businesses can adopt an ecosystem approach by collaborating with other businesses, reserving the right to accelerate if the potential trend takes off.

Early on in the process, involve experts: Considering the expansion of deals’ scope and capabilities, specialized knowledge is needed early on to comprehend the business fit. This frequently entails developing a stronger relationship with the business unit throughout the due diligence procedure or broadening the pool of external partners to include those with the necessary experience. In a world of virtual meetings, this can be particularly difficult, but it also expands the possibility of matching professionals from any company location.

Recognize the terrain and be prepared to move fast: Companies can no longer wait for bankers to approach them or rely solely on one source of transaction intelligence due to the intense rivalry for deals. Companies need to continuously monitor the state of their sector and how it is changing so they can rapidly narrow their attention when possibilities present themselves. Leaders create an ecosystem of external partners (such as bankers, tax and legal advisors, PE players in the sector, and so on) to move quickly and gain quick access to the necessary connections and data sources.

Adapt diligently with new eyes: Understanding a target’s independent worth and the possibility for joint value creation in capabilities agreements is insufficient; factors like culture, sustainability, and customer attitude should also be assessed during the diligence stage. Additionally, sources of value generation and risk are less predictable in scope deals, as we noted in the report from the previous year. Additionally, we observe that getting deals approved faces new obstacles from both consumers and regulators. ESG is one instance, that investors and consumers have both emphasized. Over the last year, ESG has been the driving force behind a number of agreements, and it will continue to do so in the years to come.[7]

CONCLUSION

Even while the due diligence process is never simple, it doesn’t have to be ineffective and disjointed. Diligence may be simple and effective with the right software and practices in place. The effects of the pandemic have been felt by the M&A market, much like other fields and companies. Pandemic effects on M&A transactions to date include: a competitive market for buyers, increased buyer diligence additional clauses that shield consumers and sellers from, possible harm.

Author(s) Name: Ujjwal Vikash (Campus Law Centre, University of Delhi)

References:

[1] Harroch R, ‘The Impact of the Coronavirus Crisis on Mergers and Acquisitions’ (Forbes, 12 October 2022) <https://www.forbes.com/sites/allbusiness/2020/04/17/impact-of-coronavirus-crisis-on-mergers-and-acquisitions/?sh=23857790200a>  accessed 08 December 2022

[2] ‘Due Diligence Process: 7 Vital Steps Explained (Complete Checklist)’ (Dealrooom) <https://dealroom.net/faq/due-diligence-process#faq-3> accessed 08 December 2022.

[3] ‘The Role of Due Diligence in Mergers and Acquisitions’ (Marquee Equity, 09 August 2022) <https://marquee-equity.com/blog/the-role-of-due-diligence-in-mergers-and-acquisitions/> accessed 08 December 2022.

 

[4]A Bhawsar ,‘Due Diligence in Mergers and Acquisitions’ (Signal AXI, 01 November 2022) <https://signalx.ai/blog/due-diligence-in-mergers-and-acquisitions/>  accessed 08 December 2022.

[5] ‘Support for Due Diligence’ (ICAEW) <https://www.icaew.com/library/subject-gateways/corporate-finance/due-diligence/lis-support-for-due-diligence> accessed 09 December 2022.

[6] ‘Impact of Covid-19 on Mergers and Acquisitions’ (IJCLP, 19 June 2021) <https://ijclp.com/impact-of-covid-19-on-mergers-and-acquisitions/> accessed 09 December 2022.

[7] Spits J, ‘Rebuilding M&A Capabilities for the Post–Covid-19 World’ (Bain, 23 December 2021) <https://www.bain.com/insights/rebuilding-capabilities-for-the-post-covid-19-world-m-and-a-report-2021/>  accessed 09 December 2022.

error: Content is protected !!