Due Diligence in Mergers and Acquistions

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Due diligence in business transactions (Corporate Finance)

Due Diligence can be defined as:
1. "The examination of a potential target for merger, acquisition, privatisation or similar corporate finance transaction normally by a buyer.
2. A reasonable investigation focusing on material future matters.
3. An examination being achieved by asking certain key questions, including, do we buy, how do we structure the acquisition and how much do we pay?
4. An examination aiming to make an acquisition decision via the principles of valuation and shareholder value analysis."[1]

The Due Diligence process (framework) can be divided into nine distinct areas:[2]

  1. Compatibility audit.
  2. Financial audit.[3][4]
  3. Macro-environment audit.[5][6]
  4. Legal/environmental audit.[7][8]
  5. Marketing audit.[9][10]
  6. Production audit.[11][12]
  7. Management audit.[13][14]
  8. Information systems audit.[15][16]
  9. Reconciliation audit.

It is essential that the concepts of valuations (shareholder value analysis) be linked into a due diligence process. This is in order to reduce the number of failed mergers and acquisitions.[17][18]

In this regard two new audit areas have been incorporated into the Due Diligence framework:[19]


  • the Compatability Audit which deals with the strategic components of the transaction and in particular the need to add shareholder value and
  • the Reconciliation audit, which links/consolidates other audit areas together via a formal valuation in order to test whether shareholder value will be added.[20]

References

  1. ↑ Gillman, Luis (2010). Due Diligence, a Strategic and Financial Approach, 2nd. Durban: LexisNexis. ISBN 9780409046991. 
  2. ↑ Gillman, Luis (2010). Due Diligence, a Strategic and Financial Approach, 2nd. Durban: LexisNexis. ISBN 9780409046991. 
  3. ↑ Harvey MG and Lusch RF, 1995, “Expanding the Nature and Scope of Due Diligence”, Journal of Business Venturing 10: 5–21.
  4. ↑ Kroener PH and Kroener MH, 1991, “Towards more successful Mergers and Acquisitions”, International Journal of Technology Management 6(1/2 ): 33–40
  5. ↑ Harvey MG and Lusch RF, 1995, “Expanding the Nature and Scope of Due Diligence”, Journal of Business Venturing 10: 5–21.
  6. ↑ Kroener PH and Kroener MH, 1991, “Towards more successful Mergers and Acquisitions”, International Journal of Technology Management 6(1/2 ): 33–40
  7. ↑ Harvey MG and Lusch RF, 1995, “Expanding the Nature and Scope of Due Diligence”, Journal of Business Venturing 10: 5–21.
  8. ↑ Kroener PH and Kroener MH, 1991, “Towards more successful Mergers and Acquisitions”, International Journal of Technology Management 6(1/2 ): 33–40
  9. ↑ Harvey MG and Lusch RF, 1995, “Expanding the Nature and Scope of Due Diligence”, Journal of Business Venturing 10: 5–21.
  10. ↑ Kroener PH and Kroener MH, 1991, “Towards more successful Mergers and Acquisitions”, International Journal of Technology Management 6(1/2 ): 33–40
  11. ↑ Harvey MG and Lusch RF, 1995, “Expanding the Nature and Scope of Due Diligence”, Journal of Business Venturing 10: 5–21.
  12. ↑ Kroener PH and Kroener MH, 1991, “Towards more successful Mergers and Acquisitions”, International Journal of Technology Management 6(1/2 ): 33–40
  13. ↑ Harvey MG and Lusch RF, 1995, “Expanding the Nature and Scope of Due Diligence”, Journal of Business Venturing 10: 5–21.
  14. ↑ Kroener PH and Kroener MH, 1991, “Towards more successful Mergers and Acquisitions”, International Journal of Technology Management 6(1/2 ): 33–40
  15. ↑ Harvey MG and Lusch RF, 1995, “Expanding the Nature and Scope of Due Diligence”, Journal of Business Venturing 10: 5–21.
  16. ↑ Kroener PH and Kroener MH, 1991, “Towards more successful Mergers and Acquisitions”, International Journal of Technology Management 6(1/2 ): 33–40
  17. ↑ Gillman, Luis (2010). Due Diligence, a Strategic and Financial Approach, 2nd. Durban: LexisNexis. ISBN 9780409046991. 
  18. ↑ Gillman (2002), The link between valuations and due diligence 6:2}}
  19. ↑ Gillman, Luis (2010). Due Diligence, a Strategic and Financial Approach, 2nd. Durban: LexisNexis. ISBN 9780409046991. 
  20. ↑ Gillman, Luis (2010). Due Diligence, a Strategic and Financial Approach, 2nd. Durban: LexisNexis. ISBN 9780409046991. 
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