“A STUDY ON IMPORTANTS OF DUE DILIGENCE IN

MEREGERS AND ACQUITITIONS”

CAPSTONE PROJECT REPORT
Master of Management Studies
Finance

Taruna Venkatesan Iyer

Batch- 1 Roll no-85.

SIES COLLEGE OF MANAGEMENT STUDIES

Nerul, Navi Mumbai

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“A STUDY ON IMPORTANTS OF DUE DILIGENCE IN
MERGERS AND ACQUITITION’’

CAPSTONE PROJECT REPORT SUBMITTED

AS A PARTIAL FULFILLMENT OF THE CURRICULUM

FOR THE DERGREE
Of
MASTER OF MANAGEMENT STUDIES (MMS)

SIES SCHOOL OF MANAGEMENT STUDIES

NERUL, NAVI MUMBAI
BY

TARUNA VENKATESAN IYER

ROLL NO: 85
SPECILIZATION: FINANCE

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 DECLARATION

I, Ms. TARUNA V IYER, studying in the second year of Masters of Management

Studies at SIES College of Management Studies, Nerul, Navi Mumbai, hereby
declare that I have completed the Capstone Project titled project titled- ‘A Study
on importance of Due Diligence in mergers and acquisition’ as a part of
curriculum requirement for the programme name.

I also declare that the work undertaken by me is original and has not been copied
from any other sources. I further declare that the information presented in this
project report is true and has not been submitted to SIESCOMS or any other
institute for any examination.

Signature of student Date:

Name of student: Taruna Venkatesan Iyer
Roll no: 85.

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 CERTIFICATE BY FACULTY GUIDE

This is to certify that Ms. Taruna Venkatesan Iyer, studying in the second year of
Master of Management Studies at SIES College of Management Studies, Nerul,
Navi Mumbai, has completed the Capstone Project titled “A study on
importance of Due Diligence in Mergers and Acquisition” as a part of the
curriculum requirement for programme name.

Signature of the faculty guide

Name: Dr. Aditya sontakke

Date:

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 ACKNOWLEDGEMENT

I would like to express my gratitude to my faculty mentor Dr. Aditya Sontakke

for his constant guidance and support throughout my capstone project. I am
greatly acknowledging the continuous assistance, inspiration and motivation sir
has given. Heartiest thanks for providing me the required help and support to
complete the project.

Signature
TARUNA VENKATESAN IYER
Date:

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 Executive summary
Due diligence is a process of verification, investigation, or audit of a potential deal or
investment opportunity to confirm all relevant facts and financial information and to verify
anything else that was brought up during an M&A deal or investment process. Due diligence
is completed before a deal closes to provide the buyer with an assurance of what they’re getting.
Due diligence is an audit or investigation of a potential investment to confirm facts that may
have a direct impact on a buyer’s decision to merge or make a purchase. During the due
diligence process, research is conducted to ensure that all facts pan out before entering into a
financial transaction or agreement with another party. In a company acquisition, due diligence
typically includes the full understanding of a company’s obligations, such as their debts, leases,
distribution agreements, pending and potential lawsuits, long-term customer agreements,
warranties, compensation agreements, employment contracts, and similar business
components.

Due diligence plays a pivotal role in the success of mergers and acquisitions (M&A) by
ensuring thorough investigation and analysis of the target company's various facets. Its
importance lies in risk mitigation, as it helps identify potential liabilities and uncertainties, thus
allowing the acquiring company to make informed decisions and mitigate risks effectively.
Moreover, due diligence facilitates accurate valuation by providing insights into the target
company's financial health and growth prospects. This, in turn, aids in strategic decision-
making, enabling the acquirer to assess alignment with its objectives, negotiate favourable
terms, and ensure regulatory compliance. Ultimately, due diligence instils confidence among
stakeholders and significantly enhances the likelihood of a successful M&A outcome,
underscoring its indispensable role in the M&A process.

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 TABLE OF CONTENTS

Sr no Topic Page No
1. Acknowledgement v
2. Executive Summary vi
3. Chapter 1- The Background of the project 1-23
4. Chapter 2- The Project
2.1- Objective of the project 24
2.2- Scope of the project 25
2.3- Methodology 26
2.4- Methods 26
2.5- Overview of data collected and used 27-28
2.6- Sample 29
2.7- Data analysis and interpretation 30-39
5. Chapter 3- Findings, Recommendations, and Limitation
3.1 Findings 40
3.2- Recommendation 41
3.3- Limitation 42-43
6. Chapter 4- conclusion 44
7. Chapter 5- Reference 45

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 CHAPTER 1: BACKGROUND OF THE REPORT

Due diligence is a process of verification, investigation, or audit of a potential deal or investment

opportunity to confirm all relevant facts and financial information and to verify anything else that
was brought up during an M&A deal or investment process. Due diligence is completed before a
deal closes to provide the buyer with an assurance of what they’re getting. Transactions that undergo
a due diligence process offer higher chances of success. Due diligence contributes to making
informed decisions by enhancing the quality of information available to decision-makers.

From a buyer’s perspective

Due diligence allows the buyer to feel more comfortable that their expectations regarding the
transaction are correct. In mergers and acquisitions (M&A), purchasing a business without doing
due diligence substantially increases the risk to the purchaser.

From a seller’s perspective

Due diligence is conducted to provide the purchaser with trust. However, due diligence may also
benefit the seller, as going through the rigorous financial examination may, in fact, reveal that the
fair market value of the seller’s company is more than what was initially thought to be the case.
Therefore, it is not uncommon for sellers to prepare due diligence reports themselves prior to
potential transactions.

Hard vs. Soft Due Diligence

Due diligence can be categorized as "hard" or "soft" based on the approach used.

• Hard due diligence is concerned with the numbers and data found on the financial statements
like the balance sheet and income statement. This can entail fundamental analysis and the
use of financial ratios to get a grasp on a company's financial position and make projections
into the future. This type of due diligence can also identify red flags or accounting
inconsistencies however, Hard due diligence, which is driven by mathematics and legalities,
is susceptible to rosy interpretations by eager salespeople. Soft due diligence acts as a
counterbalance when the numbers are being manipulated or overemphasized.

• Soft due diligence is a more qualitative approach that looks at aspects such as the quality of
the management, the people within the company, and the loyalty of its customer base. There
are indeed many drivers of business success that numbers cannot fully capture, such as
employee relationships, corporate culture, and leadership. When M&A deals fail, as an
estimated 70%-90% of them do, it is often because the human element is ignore.

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TYPES OF DUE DILIGENCE

One of the most important and lengthy processes in an M&A deal is Due Diligence. The
process of due diligence is something that the buyer conducts to confirm the accuracy of the
seller’s claims. A potential M&A deal involves several types of due diligence.

1. FINANCIAL DUE DILIGENCE

One of the most important types of due diligence is the financial due diligence that seeks
to check whether the financials showcased in the Confidentiality Information
Memorandum (CIM) are accurate or not. Financial DD aims to provide a thorough
understanding of all the company’s financials, including, but not restricted to, audited
financial statements for the last three years, recent unaudited financial statements with
comparable statements of the last year, the company’s projections, and the basis of such
projections, capital expenditure plan, schedule of inventory, debtors and creditors, etc.

The financial due diligence process also involves analysis of major customer accounts,
fixed and variable cost analysis, analysis of profit margins, and examination of internal
control procedures. Financial DD additionally examines the company’s order book and
sales pipeline in order to create better (more accurate) projections.

Many acquirers have a separate section of financial analysis focused on the target
company’s debt situation, evaluating both short-term and long-term debt, applicable
interest rates, the company’s ability to service its outstanding debt and secure more
financing if needed, along with an overall examination and evaluation of the company’s
capital structure.

Typical focus areas of financial due diligence include the following Financial Diligence Focus
Area

Investigate Valuation Consideration

•Quality of earnings
• Identify unusual or non-recurring adjustments
•Significant operating and financial trends
•Bridging operating periods

Analyse the Technical Application of GAAP

•Understand accounting implications of potential deal

Gain Understanding of business, Operations, and Balance sheet.

•Working capital and other purchase price adjustment mechanisms
•Treatment of debt and other liabilities
•Conduct of business between signing and close
•Regulatory issues
•Representations and warranties, indemnification provisions

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Scope
The scope of the FDD exercise differs based on the industry, scale of business and size of the
company. In general, the following is the focus area of FDD.
• Analysis of revenue generation and assessing the quality of earnings, cash flows and
margins.
• Sustainability of revenue considering factors such as taxes, interest, depreciation,
working capital, financial debts and liabilities, and projected financial numbers.
• Identifying potential liabilities and commitments
• Assessing other crucial variables that may impact the business.

FINANCIAL DUE DILIGENCE CHECKLIST

Our financial due diligence checklist covers everything you need to get ready or review
(depending on whether you're sell or buy-side) during an M&A deal.

1. Income Statement (past five years.

2. Balance Sheets (past five years)
3. Cash Flow Statements (past five years)
4. Use the financial statements to check financial ratios over five years, to allow you to generate
a dashboard of the target company’s financial health. At a minimum, this should include:

• Operating margin
• Gross margin
• Interest coverage
• Profit margin.
• Current ratio.
• Debt ratio.
• Debt to equity ratio.
• Asset turnover.
• Return on assets.
• Return on equity.

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TAX DUE DILIGENCE

Due diligence regarding tax liability includes reviewing all taxes the company is required to
pay and ensuring their proper calculation with no intention of under-reporting of taxes.
Additionally, verify the status of any tax-related case pending with the tax authorities.

Documentation of tax compliance and potential issues typically includes verification and
review of the following:

• Copies of all tax returns – including income tax, withholding, and sales tax – for the
past three to five years
• Information relating to any past or pending tax audits of the company.
• Documentation related to NOL (net operating loss) or any unused credit carry forwards
of deductions or tax credits.
• Any important, out-of-the-ordinary correspondence with tax agencies

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Parties to a proposed merger or acquisition (M&A) need to be confident that they understood
the tax implications of the transaction before the deal closes and have a clear roadmap to
execute post-merger tax strategies. M&A tax due diligence and transaction tax structuring
teams help buyers, sellers and a range of financial institutions and private investors understand
current and future tax structuring options, avoid surprises, and resolve dealbreakers by
thoroughly assessing tax liabilities, identifying potential risks, and comparing alternative deal
structures that could meet each parties’ expectations.

A comprehensive approach to M&A tax due diligence likely includes a discussion of how M&A
transaction tax structuring benefits all parties. The teams work with you to dissect tax
considerations in M&A transactions and determine which tax structures could support your
business strategies, strengthen cash flows, and mitigate tax risks. Particularly now when the
global tax landscape is populated with new regulations, M&A transactions that span borders
should include an experienced, cross-disciplinary team of financial, accounting, legal, and tax
professionals.

The tax due diligence checklist

1. Review of target company’s state and federal income tax returns

1. Ensure that all tax payments are current.

2. Ensure that all the company’s estimated tax has been remitted.
3. Assess whether there may be potential for offsetting some of the target’s historical tax
features (negative income, tax depreciation and amortization, tax credits) against the
costs of the acquisition.

2. Review of target company’s tax audits (if applicable)

1. Evaluate findings of previous audits and if possible, what prompted them.

2. If the tax audit is ongoing, assess what impact this will have on the transaction.
3. Discuss the potential of a tax escrow with the target company, where they assume all
liabilities associated with the tax audit.

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3. Understand the target company’s methods of accounting

1. If the target company has a different method of accounting, simulate its returns after
income has been recalculated using your company’s accounting method.
2. Ensure that there are no tax hangovers from changes in accounting methods made over
the previous 5 years.

4. Ensure that deferred revenue is being recognized in accordance with federal income tax rules

5. Understand the target company’s foreign tax environment (if applicable)

1. Is there sufficient presence abroad to constitute a taxable presence?

2. Understand the company’s tax liabilities in the jurisdiction(s) in question.
3. Understand whether payments made to foreign recipients require withholding.
4. Assess the foreign branch’s legal status and the tax filings association.

6. Understand the target company’s sales and use taxes.

1. Establish the differences in sales and use taxes with the target company, particularly if
they’re operating in a different industry.
2. Understand the sales and use taxes implications post-transaction for the newly merged
entity.

7. Ensure that employees are properly classified for tax purposes.

1. Ensure that employees are not inaccurately classified as ‘independent contractors.

2. Ensure that all statutory employees are designated as such.
3. Review the target company’s 1099 forms to assess its designation of employees and
independent contractors.

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 Due Diligence versus Statutory Audit/Internal Audit

In India, companies are statutory required to get their accounts audited by an independent
Chartered Accountant (known as statutory audit). In certain cases, companies are even required
to carry out an internal audit relating to their processes. Due diligence is quite distinct from
statutory and internal audits.

The keys differences between due diligence and statutory/internal audit are tabulated below.

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Tax due diligence – significance.

Tax is one of the material and unavoidable costs. Hence, tax due diligence plays a significant
role in M&A decision making, though tax is normally not the primary consideration in the
context of M & A transaction.
Conventionally, tax due diligence is carried out to understand the tax profile of the target and
to uncover and quantify tax exposures. However, tax due diligence also encompasses
identifying any tax upside (potential tax benefits that are not being claimed/envisaged by the
target) which may be available with the target. It also assists in identifying and developing a
suitable acquisition structure for the deal in question.
In practice, the most common form for tax risk mitigation is through tax warranties and
indemnities in the agreement. The buyer needs to be balanced while negotiating for this tax
protection to ensure that it does not impact the commerciality of the transaction for the seller.

To summaries, a tax due diligence is normally carried out to:

▪ Validate the representation made by the seller at the time of pre-deal negotiations.
▪ Validate the assumptions made by the buyer in valuing the target.
▪ Identify any material tax exposures that may be residing with the target.
▪ Identify any material upsides (potential tax benefits that are not being
claimed/envisaged by the targets)
▪ Structure the deal in a tax-efficient manner.

Full Scope Tax Due Diligence Approach- Income tax

A typically tax due diligence exercise (in the context of a full scope due diligence) entails a
review of relevant documents wherefrom the tax information can be sourced. The typically
sources of obtaining the relevant tax information are as follows:

1. The financial statements of the targets

2. Its related tax records.

Review of financial statements

Relevant tax information is normally available in the balance sheet and

Related schedules, which disclose the aggregate tax provision and aggregate taxes paid by a
company. It is also accessible from the profit and loss account, which discloses the current tax
charge and deferred tax charge for the relevant year. The notes to the account reveal information
regarding accounting policy relating to income tax and deferred taxes, and contingent liability
with regards to tax disputes demand against the company. The auditor’s report discloses details
of outstanding tax dues. In certain cases, the director’s report discusses the status of ongoing
tax litigations/assessments.

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A review and analysis of each of the items of the tax information disclosed by the financial
statements provides the reviewer a fair insight of the tax position of the target concerned.
Needless to state, the review and analysis, coupled with intelligent discussion with the
management of the targets, would go a long way in obtaining a better perspective in this regard.

The items of tax information available in the financial statements are as follows:

a) Review of Contingent liabilities

The disclosure about contingent liabilities in the notes to the accounts of
Financial statements reveal significant tax information about the target. The reviewer gets a
fair sense of pending tax disputes/demands by reviewing the contingent liability schedule. As
a next step a reviewer may want to analyse the related tax assessment/appellate records to better
understand the disclosure made in the contingent liability schedule.
b) Review of the tax provision and taxes paid in the balance sheet
Normally the balance sheets of targets disclose the tax provision and taxes paid as of the
balance sheet date in two possible formats, as given below.

Format 1- The tax provision is disclosed separately under the current liability section of the
balance sheet, and the taxes paid are disclosed separately under the loans and advance’ section
of the balance sheet.

Format 2- The tax provision and taxes paid are netted off, and the net figure is shown in the
balance sheet. Where the net figure represents the excess of taxes paid over tax provision, it is
disclosed under the loans and advances section of the balance sheet. Where the net figure
represents the excess of tax provisions over taxes paid, it is disclosed under the current liability
section of the balance sheet.

Normally, analysing the tax provision and taxes paid as appearing in the balance sheet is not of
much assistance to the reviewer. However, where a year-wise breakdown of these numbers is
available, it provides a better insight into the tax position of the targets. Once the year-wise
details are received, the first flush impression that one gets about the targets tax position is
regarding the longevity of the tax assessments/disputes of the targets. For instance, in a case
where the year-wise breakdown provides details of the last 15 year as against a case where the
details are from the last 4 years, normally the tax position of the target with a 15-year tax
assessment/dispute history are found to be relatively more complex than those of the target
with a 4-year tax assessment/dispute history.

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A detailed review of the tax provision and taxes paid for each of the year would be either
confirm or dismiss this prima facie impression of the tax position. Without discussing technical
details about the Indian tax laws, it would be relevant to state a specific provision of the Indian
tax laws. A taxpayer is required to pay income tax on a progressive basis during the year in
question, known as an advance tax mechanism. In view of the above, in an idealistic scenario,
all the taxes provided by a company should be paid within the year in year in question.
However, in practice, such an ideal situation is rarely achieved.

It is possible that in a particular year, the tax provision is more than tax paid and simultaneously
in another year taxes paid are more than the tax provision. On a detailed analysis of each of
these situations, a reasonable perspective of the tax position of the target can be understood.

In practice there could possibly be three situations that could arise in this regard:

1. Tax provided is more than taxes paid.

2. Tax provide is less than taxes paid.
3. Tax provided is equal to taxes paid.

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LEGAL DUE DILIGENCE

Legal due diligence is the process of collecting and assessing all of the legal documents and
information relating to the target company. It gives both the buyer and seller the chance to scrutinize
any legal risks, such as lawsuits or intellectual property details, before closing the deal. By
understanding the target company and any potential liabilities, both parties can make an informed
decision in the M&A transaction.

his type of due diligence reviews all the legal agreements between the target company and its partners.
It provides an overview of any contracts, lawsuits, employee agreements, intellectual property rights
issues, or other proprietary information that may affect the deal. Buyers should also look out for legal
issues the target company currently faces, such as civil lawsuits or fines.

To perform legal due diligence, the following will need to be scrutinized:

• Contracts (customer, supply, operating and employee contracts and licenses)
• Leases
• Pending and potential lawsuits
• Intellectual property
• Property and tax liabilities
• Environmental laws
• Representations and warranties
• Organizational documents (company by-laws, limited liability agreements, stockholder
agreements)

Legal due diligence is, of course, extremely important, and typically includes examination and review
of the following elements:

• Copy of Memorandum and Articles of Association.

• Minutes of Board Meetings for the last three years.
• Minutes of all meetings or actions of shareholders for the last three years.
• Copy of share certificates issued to Key Management Personnel.
• Copy of all guarantees to which the company is a party.
• All material contracts, including any joint venture or partnership agreements; limited liability
company or operating agreements.
• Licensing or franchise agreements.
• Copies of all loan agreements, bank financing agreements, and lines of credit to which
company is a party.

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Why is Legal Due Diligence Important?
Legal due diligence is important for many reasons, but most importantly to make informed business
decisions.
Understand Your Own Business
Legal due diligence is commonly thought of an investigation performed by one company on another
company. Legal due diligence can also be an investigation into your own company. A legal due
diligence investigation into your own company is most helpful if you're considering a merger or major
sale. Before negotiations begin, it's important to understand the worth of your business. A legal due
diligence investigation can also help the buyer better understand the company. This includes all of
the agreements that make it up.
Value a Target Company
In the same way that a legal due diligence investigation can help your company value itself, a legal
due diligence can help you understand the value of another company. Legal due diligence seeks to
understand a value through information on the company's agreements, assets, and potential problems.
Drafting and Negotiations
A large part of a merger or acquisition is negotiating and drafting the agreement. The good and bad
information gathered during the legal due diligence will lend support to the negotiations. This is true
whether a merger or acquisition. The information discovered in a legal due diligence is especially
helpful in assessing risk. Drafting of the agreement is in-depth and complicated. This should be
created by an experienced lawyer.
Identify Potential Closing Problems
A legal due diligence may also find potential problems that could delay closing the deal. There are
many steps that must be taken before closing. A legal due diligence gathers the information to make
that list.
Legal Opinion
A legal due diligence is typically completed by an attorney who specializes in due diligence
investigations. The lawyer or lawyers will prepare a legal opinion based upon all of the gathered
factual information. Often, a legal due diligence investigation is completed by the selling company
and the buying company. This insures an unbiased opinion.

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INTELECTUAL PROPERTY DUE DILIGENCE

Almost every company has intellectual property assets that they can use to monetize their business.
These intangible assets are something that differentiates their products and services from their
competitors. They may often comprise some of the company’s most valuable assets. A few of the
items that need to be looked at in a due diligence review are:

• Schedule of patents and patent applications

• Schedule of copyrights, trademarks, and brand names
• Pending patents clearance documents
• Any pending claims case by or against the company in regard to violation of intellectual
property

Intellectual property due diligence involves reviewing a company’s patents, trademarks, copyrights,
trade secrets, and other similar organizational documents. The goal is to ensure proper protection and
identify any infringement risks.

Why is IP Due Diligence Important.

1. Valuation of Assets: IP assets like patents, trademarks, copyrights, and trade secrets can
contribute significantly to the value of a company. Proper valuation of these assets is
crucial in determining the fair price for the transaction.
2. Identifying Risks and Liabilities: Due diligence helps in uncovering any potential IP-
related risks such as litigation, infringement issues, or invalid patents that could affect the
transaction or post-merger operations.
3. Strategic Planning: Understanding the strengths and weaknesses of a company’s IP
portfolio aids in strategic planning, including market expansion, R&D focus, and
competitive positioning post-merger.

Key Steps in IP Due Diligence

1. Inventory of IP Assets: Compile a comprehensive list of all IP assets, including registered,

pending, and unregistered IPs.
2. Legal Status and Compliance: Assess the legal status of registered IPs and ensure
compliance with IP-related agreements, licenses, and regulations.
3. Evaluation of IP Agreements: Review all IP-related agreements such as licenses, non-
disclosure agreements, and joint development contracts for any obligations or limitations.
4. Assessment of IP Litigation Risks: Investigate any past or ongoing IP litigations and
evaluate the potential risks they pose.
5. Market and Competitive Analysis: Understand the market position and competitive
advantage offered by the IP assets.

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Best Practices

• Engage IP Specialists: Utilizing experts in IP law and valuation is crucial for an accurate and
comprehensive assessment.
• Collaborative Approach: Involving cross-functional teams including legal, financial, and
technical experts ensures a holistic evaluation.
• Confidentiality and Security: Maintain strict confidentiality and security throughout the due
diligence process.

Challenges and Considerations

• Complexity of IP Laws: IP laws vary significantly across jurisdictions, making the due
diligence process complex, especially in cross-border transactions.
• Rapidly Changing Technologies: In sectors with fast-evolving technologies, assessing the
relevance and longevity of IP assets can be challenging.
• Cultural and Organizational Differences: Understanding the IP culture and practices of the
target company is crucial, as they can differ substantially.

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ENVIRONMENTAL DUE DILIGENCE

Due diligence related to environmental regulation is very important because if the company violates
any major rule, local authorities can exercise their right to penalize the company, up to and including
shutting it down operationally. Hence, this makes environmental audits for each property owned or
leased by the company one of the key types of due diligence. The following should be reviewed
carefully:

• List of environmental permits and licenses and validation of the same

• Copies of all correspondence and notices from the EPA or state and local regulatory agencies
• Verify that the company’s disposal methods are in sync with current regulations and
guidelines.
• Check to see whether there are any contingent environmental liabilities or continuing
indemnification obligations.

Environmental due diligence assesses a company’s environmental permits, practices, and compliance
with environmental regulations. It helps identify potential environmental issues.
Environmental due diligence focuses on assessing any ecological risk associated with a business.
Buyers should be aware of potential environmental liabilities they could face after a merger or
acquisition, such as: Hazardous waste, Asbestos, Soil contamination. M&A lawyers need to
exclusively understand & address environmental risks in transactions as mitigating this risk and
maximizing environmental-related synergies is an essential consideration before closing a deal. Also,
companies should ensure that the existing environmental compliance framework is well integrated
into their M&A strategy and execution. For example, environmental criteria consider how a
company’s operations impact the natural environment, by considering its carbon footprint, its impact
on biodiversity, waste production, and pollution, resource depletion, deforestation, etc. or for example
permission to use groundwater resources may impose the duty on that company to conserve it as well,
and hence trying to maintain the resources in long run. This in turn affects the investment, funding,
and potential business partners’ relation with the company.

By conducting a Phase 1 Environmental Site Assessment (ESA) which covers the following
processes:

• Historical records review dating back to the property's first developed use.
• Carry out checks with regulatory bodies on past spills or fire incidences.
• Site survey to understand current operations, and operations carried out on adjacent
facilities and the surrounding areas.
• Conduct interviews with on-site personnel to confirm identified potential
environmental concerns.
• Conduct a limited environmental, health and safety compliance assessment to
provide an effective due diligence for industrial transactions.

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What is the need to conduct Environmental Due Diligence

Services for Environmental due diligence has become popular worldwide as a proactive
approach to managing the environmental risk for business. To ensure environmental due
diligence compliance proactive steps must be taken to alleviate these environmental liabilities
in advance, here reducing possible hazards and averting needle costs or expenditure down to
the road. Businesses that neglect to maintain ecological cleanups, pay large penalties and risk
associated with legal action plans for not adhering to EDD regulations.

Environmental due diligence can provide insight to M&A deal participants in understanding
and quantifying their potential environmental liabilities. The costs and uncertainties associated
with these risks are typically factored into the transaction in the form of “go-no-go” decisions,
purchase price adjustments, and contractual indemnity obligations.

However, experience has shown that the costs associated with environmental risks often exceed
those forecasted at the time of the transaction. Known and unknown pollution conditions can
develop adversely. If not properly assessed and managed, they can negatively affect several
important elements of a transaction for buyers and sellers, including deal pricing, terms, and
post-transaction financial performance.

Environmental Practice can help businesses and their M&A advisors better understand the
environmental risks associated with specific transactions, advise on a wide range of solutions
to help mitigate risks, and secure robust risk transfer solutions to protect against adverse risk
development and help deliver superior transaction outcomes.

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OPERATIONAL DUE DILIGENCE

Operational due diligence evaluates the company’s operations, such as manufacturing

processes, supply chain, sales pipeline, IT systems, and organizational structure. The goal is to
identify operational inefficiencies or integration challenges.

This is a comprehensive review of the target company's operations to ensure they meet the
buyer's objectives. It looks at the company's management structure, processes, and policies.
View this as an opportunity to review potential synergies that could increase efficiency and
reduce costs.

ODD objectives
The term due diligence is used by the M&A industry in a broad sense and can cover financial,
legal, operational, commercial, tax, HR, IT, pension and technical engineering matters. The
scope of a due diligence investigation varies, as many internal and external factors influence
the depth and breadth of a due diligence. Due diligence findings are typically used to shape the
following deal documents.

The objectives of an ODD are to:

• Assess the sustainability of the target’s operations into the future, without
additional investment on top of management’s business plan.

• Identify actions and investments needed, not seen or considered by target

management, to accelerate value creation moving forward.

• Advise the deal team on the strategic fit of the contemplated transaction.

• As process, ODD should secure buy-in from all stakeholders for the planned
change.

FEATURES OF OPERATIONAL DUE DILIGENCE

1. ODD is continuous: ODD is a continuous process which does not stop at the end of the
due diligence phase. ODD starts as part of the target selection phase and continues
throughout the deal cycle, up to and including the first 100-days post-closing. Whereas
FDD and LDD findings are key inputs for further negotiation and SPA drafting,
continued processing of ODD findings in the value creation plan, as more access is
granted, is key to secure buy-in from both target and divisional management.

2. ODD is bespoke: As the primary objective of ODD is to provide input to the value
creation plan, the scope is bespoke, as each deal is unique. The scope will be tailored to
the deal rationale, deal structure, industry, and company specific operational risks. There
is no standard approach for an ODD, whereas the approach of a financial due diligence
or legal due diligence are relatively standard. ODD investigations typically answer one
or more of the following three questions:
Are operations robust? What are the operational upsides and what is the full potential
of the target?, Which post-merger synergies can be expected?

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3. ODD is iterative: The iterative character is embedded in the hypothesis-based approach
that is applied to ODDs, in answering the question “how can we best create value with
the contemplated transaction?”. ODDs start with hypotheses, which are tested and
reformulated until they can no longer be broken down. ODDs facilitate creativity, pull
on multiple information sources and allow for interaction between stakeholders. The
best results are achieved by an inductive and iterative process, focused on providing
actionable insights, which are presented in a concise equity story.

4. ODD is a co-creation: Developing an effective value creation plan should be a co-

creation and cannot be a report from an advisor to the acquirer. In testing the investment
thesis, the ODD team needs to work closely with the management team responsible for
implementing the plan post-closing. A proper value creation plan comprises:
a prioritized set of value creation opportunities (synergies and stand-alone performance
improvement initiatives), as well as, a plan for action, describing how to capture the
upsides and to mitigate the execution risks.

5. ODD is forward looking: Commercial Due Diligence (CDD) assesses the attractiveness
of the market the target operates in as well as the relative strengths of the target today
compared to its competitors. Like FDD the as-is assessment of CDD provides important
input for ODD to answer the question “what should we change in our operations to
create more shareholder value?”. The translation of facts into an action plan is at the
heart of ODD and provides its forward-looking orientation. The forward-looking
element of ODD is more important than ever in the context of COVID-19.

6. ODD is opportunity focused: A balanced ODD helps acquirers to look at (i.e. COVID-
19) risks through a different lens. When risks are well understood and managed, it can
be an inspiration for opportunities to grow. Vice versa, when companies’ pursuit
opportunities these will come with risks. ODD plays a role in seeing both sides of the
coin. In the current competitive M&A market deal teams need to strike a balance
between issue and risk based due diligence scoping and the identification and
substantiation of upsides. ODD as part of the overall due diligence scope changes the
lens from ‘due diligence to lose’ into ‘due diligence to win’.

7. ODD compared to other types of due diligence: The above definition urges a comparison
of ODD with other types of due diligence, such as financial-, tax-, commercial and legal
due diligence, which are focused on describing the existing economic value and on
informing the Share Purchase Agreement (SPA)

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The ODD process focuses on value creation: Based on the above description ODD includes:
1) the development of a value creation plan (incl. various (post COVID-19) scenarios),
2) an un-biased advice regarding the strategic fit of the transaction, and
3) an essential process step for obtaining buy-in from target management.
The responsibility for conducting a robust ODD lies with the entity integrating or acquiring the
target company but cannot be performed without involvement from target management.
External ODD advisors can provide additional specialized expertise and significantly increase
the quality of operational analysis. However, they cannot replace the required ownership.

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HUMAN RESOURSES DUE DILIGENCE

Human resources due diligence is extensive. It may include all of the following:

• Analysis of total employees, including current positions, vacancies, due for retirement,
and serving notice period.
• Analysis of current salaries, bonuses paid during the last three years, and years of
service.
• All employment contracts, with nondisclosure, non-solicitation, and non-competition
agreements between the company and its employees. In case there are a few
irregularities regarding the general contracts, any questions or issues need to be
clarified.
• HR policies regarding annual leave, sick leave, and other forms of leave are reviewed.
• Analysis of employee problems, such as alleged wrongful termination, harassment,
discrimination, and any legal cases pending with current or former employees.
• Potential financial impact of any current labour disputes, requests for arbitration, or
grievance procedures pending.
• A list and description of all employee health benefits and welfare insurance policies or
self-funded arrangements.
• ESOPs and schedule of grants.

BEST HR DUE DILIGENCE PRACTICES FOR SUCCESSFUL MERGER AND

ACQUITION

1. Define the scope and objectives.

Before conducting HR due diligence, you need to define the scope and objectives of
the review, based on the strategic rationale and goals of the deal. The scope should
cover the key HR areas that are relevant and material to the transaction, such as
compensation and benefits, talent and performance management, organizational
structure and culture, employee relations and engagement, compliance and policies, and
HR systems and processes. The objectives should specify the expected outcomes and
deliverables of the review, such as identifying potential cost savings, risks, liabilities,
integration issues, and cultural fit.

2. Gather and analyse data.

The next step is to gather and analyse data from various sources, such as financial
statements, contracts, agreements, policies, surveys, interviews, and site visits. The data
should provide a comprehensive and accurate picture of the target company's HR
situation, including its strengths, weaknesses, opportunities, and threats. The analysis
should focus on comparing and contrasting the target company's HR practices with the
buyers, as well as benchmarking them against industry standards and best practices.
The analysis should also highlight any gaps, inconsistencies, red flags, or synergies that
may affect the deal value or integration.

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3. Evaluate and prioritize findings.
The third step is to evaluate and prioritize the findings from the data analysis, based on
their impact and urgency. The evaluation should consider the financial, operational,
legal, and cultural implications of the findings, as well as their alignment with the deal
objectives and strategy. The prioritization should categorize the findings into high,
medium, or low priority, based on their importance and feasibility. The evaluation and
prioritization should result in a clear and concise report that summarizes the main HR
issues and opportunities, as well as their implications and recommendations.

4. Communicate and collaborate.

The final step is to communicate and collaborate with the relevant stakeholders, such
as the deal team, the target company, the advisors, and the regulators. The
communication should be transparent, timely, and consistent, and should address any
questions, concerns, or feedback that may arise from the HR due diligence report. The
collaboration should involve working together to resolve any issues, negotiate any
terms, plan any actions, and monitor any progress. The communication and
collaboration should aim to build trust, rapport, and alignment among the parties
involved in the deal.
HR due diligence is a vital component of M&A success, as it can help ensure a smooth
and effective integration of the people, culture, and policies of the target company. By
following these best practices, you can conduct a thorough and rigorous HR due
diligence review that can support your deal strategy and value creation.

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INFORMATIONAL TECHNOLOGY DUE DILIGENCE

Information technology due diligence evaluates the target company's IT systems and
infrastructure, including hardware and software. This is critical for companies that rely heavily
on their digital operations, such as cloud services or e-commerce platforms. Information
technology due diligence examines a company’s IT infrastructure and operations, typically
with a focus on security assessment. Due diligence of this type helps the purchasing company
evaluate present IT structures and recognize potential security threats.

IT due diligence should cover the following:

Cybersecurity protocols
Data storage policies
System redundancy
Compliance with data privacy and protection laws
It's also worth remembering that a large company that you might be merging with might have
its own cloud platform, or email archiving platform.

Business owners may not realize how much the target company’s technology systems and
processes can impact their business. The merging of two separate IT systems could lead to a
range of cybersecurity risks if done without care and consideration.

If a company has outdated systems or weak cybersecurity measures, this can leave the new
company vulnerable to cyber-attacks. It could increase the risk of data loss, financial loss and
damage to your professional reputation.

Outdated systems will also impact productivity. If your business uses the latest machines and
technology to provide a service or product, introducing outdated equipment will slow staff
down and ultimately mean a loss of revenue while everyone adjusts. Part of the due diligence
process is planning how systems will be merged and updated (if necessary) so that there is as
little effect on productivity or earnings as possible.

Additionally, IT due diligence can help identify potential compliance issues. It will
highlight if there is non-compliance with GDPR or HIPAA regulations. Non-compliance
with these laws can lead to significant fines, legal action and loss of reputation.
Understanding a company’s ability to manage its data is essential before entering any
deal.

Conducting IT due diligence for a merger can be a complex process. That’s why working with
a team with the expertise and experience to assess the target company’s technology systems
and processes is essential. IT due diligence is critical for all mergers, even for the smallest
companies. A robust due diligence process will help you thoroughly evaluate the validity of a
merger and make sure you know what the risks are before merging the two companies. A
thorough and unbiased assessment of your target company’s technology infrastructure will
ensure there are no surprises and help you build a solid transition process that protects and
supports all those involved.

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CHAPTER 2: THE PROJECT

2.1 Objective of the report

• PRELIMENARY DUE DILIGENCE
1. Identify business risk.
2. Research scouting issues and contact target.
3. Make go/non go decisions.

• DETAILED DUE DELIGENCE

1. Analyse data room and any relevant external information.
2. Feed negotiation, deal structure, valuation and integration.
3. Make go/no-go decision.

• FINAL DUE DILIGENCE

1. Obtain signed Definitive Agreements
2. Reach favourable Close terms & final pricing.
3. Organize for integration.
4. Continuously improve due diligence process

1. Understands business issues and impact to the transaction.

2. Coordinates activities and dependencies across work streams
3. Identifies and addresses resource needs/gaps.
4. Resolves major issues and proactively manages risks.
5. Identifies major decisions and communications.
6. Interfaces with broader integration teams
7. Enables executive visibility through effective tracking and reporting mechanisms.

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2.2 Scope/ Importance of the report
1. Improve/ validates valuation model and deal structure.
2. Improves the synergy/ Synergy Assessment
3. Develop additional negotiating leverage.
4. Provides feedback on acquisition agreement.
5. Identifying, assessing, and minimizing risk

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2.3 METHODOLOGY

Definition of research methodology: Research techniques are the strategies or strategies applied
within the side the series of information or proof for evaluations which we will discover new
data or create higher know how of the topic. There are exclusive style of studies technique
which use exclusive equipment for information series. There are numerous style of studies
technique like survey, experimental, non-public interview, questioner, case studies etc.

2.4 METHODS

There are usually two types of methods used in a research.

1] Primary data: primary facts are the form of facts which is gathered at once from the facts
supply without going through any existing data. It is in the most cases gathered mainly for a
study venture and can be shared publicly for use of different study. It consists of indigenous
information collected for particular purpose. It can be mainly carried through:

• Questioner
• Respondents

2] secondary Data: secondary data are those information or facts already carried out or gathered
by someone Eles. It is not tailored made and the researcher can compose the data collected for
some particular purpose of study only. The secondary data cab be collected through:

• Books
• Official website
• Newspaper
• Financial magazine

For the study of this report both type of data has been used. Primary data has been used to
collect people personal reaction, experience, perspective towards the report and secondary data
was used to collect passed data and study the literature review related to this topic. Official
website and many other sources were used for better elaborating and better understanding of
the topic in depth.

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2.5 OVERVIEW OF THE DATA COLLECTED AND USED

Questioner

Q1. Age

18-25
25-35
35-45
45 and above

Q2.What is the primary purpose of due diligence in mergers and acquisitions?

To expedite the acquisition process

To identify and mitigate risks associated with the target company
To increase the acquisition price
To bypass regulatory requirements

Q3. What role does due diligence play in guiding strategic decision-making for the acquiring
company?

It helps assess alignment with strategic objectives and goals

It Decreases uncertainty in decision-making
looks after regulatory obligations and make recommendation
Has no impact

Q4. How does due diligence contribute to building confidence among stakeholders involved in
M&A transactions?

It provides a overall background check

It shows the weaknesses and potential risk
By inflating the target company's financial figures

Q5. According to you which of the following outcomes is likely to result from a success of due
diligence in business operations?

Improved decision-making
Enhanced reputation and credibility
Ease in legal compliance

27
Q6) Choose all the ways in which employees can actively contribute to maintaining a culture
of due diligence within the company.

By overlooking errors and oversights in their work

By collaborating and enhancing teamwork
By proactively seeking information and verifying sources
By adhering strictly to established processes and procedures

Q7) Which of the following statements are true regarding the role of due diligence in driving
success?

It helps identify market opportunities and threats.

Due diligence increases bureaucracy and slows down processes.
It contributes to sustainable growth and competitive advantage.
Due diligence is relevant in decision-making processes.

Q8) What are the potential consequences of neglecting due diligence in mergers and
acquisitions?

Exposure to undisclosed liabilities and risks

Legal disputes and financial losses
Rough and uneven integration of operations post-merger
Decreased chances of regulatory scrutiny

Q9) Which aspects of the target company are typically scrutinized during the due diligence
process in mergers and acquisitions? Select all that apply.

Financial statements and performance metrics

Intellectual property rights and patents
Customer contracts and relationships
Corporate governance structure and regulatory compliance

Q10) Which of the following statements accurately reflects the importance of due diligence
in assessing the value of a target company in mergers and acquisitions?

Due diligence is unnecessary as the target company's value can be determined solely based
on its market reputation.
Due diligence helps uncover hidden liabilities and overvalued assets, providing a more
accurate assessment of the target company's worth.
Due diligence only involves reviewing financial statements and does not impact the
valuation process.

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2.6 SAMPLE

Sample size determination is that act of selecting the quantity of observation or replicates to
incorporate in an exceedingly applied mathematics sample. The sample size is a vital feature
of any empirical study which main goal is to create interface with a couple of population from
a sample.

It is usually impractical to have a look on entire population as on this report questioner survey
is used, sampling is a way that leads the researcher to gather records approximately a populace
primarily based totally on effect from the subset of the populace, while not having to analyse
it individually. With the help of questionnaire one can reach towards largely population with
less time and in much cheaper way.

Sample size is one hundred respondents has been chosen as sample size for the analysis.

29
2.7 DATA ANALYSIS AND INTERPRETATION

Q1) Age?

INTERPRETATION

From the above chart we can understand that, out of (100) respondents, (53%) of the
respondents are from the age group between 18-25, (35%) 0f the respondents are from the age
group between 25-35, (11%) of the respondents are from the age group between 35-45 and
(1%) of the respondents are from the age group between 45 and above.

Thus, it is shown that maximum of the respondents is from the age group between 18-25 and
the least number of respondents are from the age group between 45 and above.

30
Q2) What is the primary purpose of due diligence in mergers and acquisition?

INTERPRETATION

From the above chart we can understand that, out of (100) respondents, (36%) of the
respondents thinks main purpose of due diligence is to expedite the acquisition process, (45%)
of the respondents thinks the main purpose of due diligence is to identify and mitigate the risks,
(17%) of the respondents thinks that main purpose of due diligence is to increase the acquisition
price, (2%) of the respondents thinks the main purpose of due diligence is to bypass the
regulatory requirement.

Thus, this shows that the maximum number of respondents thinks that the main purpose of due
diligence process is to identify and mitigate risk associated with the target company.

31
Q3) What role does the due diligence plays in guiding strategic decision making for the
acquiring company?

INTERPRETATION

From the above chart we can understand that, out of (100) respondents, (38%) of the
respondents thinks it helps in assessing alignment with strategic objective as main goal, (38%)
of the respondents thinks the main role is to decrease the uncertainty in decision making, (24%)
of the respondents thinks main role is to look after regulatory obligations and make
recommendations.

Thus, it is shown that maximum number of respondents thinks that the main role of due
diligence is to assess in alignment with the objectives and decreases the uncertainties in
decision making.

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Q4) how does the due diligence contributes to building confidence among the stakeholder
involved in M&A transaction?

INTERPRETATION

From the above chart we can understand that, out of (100) respondents, (47%) 0f the
respondents thinks that due diligence provides a overall background check for building
confidence among stakeholders, (32%) of the respondents thinks due diligence shows the
weakness and the potential risk of the company for building confidence, (21%) of the
respondents thinks due diligence inflates the target company financial figures for building
confidence.

33
Q5) according to you which of the following outcomes is likely to result from the success of
due diligence in business operations?

INTERPRETATION

From the above chart we can understand that out of (100) respondents, (48%) of the
respondents believes in improved decision making as a success of due diligence, (40%) of the
respondents believes success of due diligence will enhance the reputation and creditability,
(12%) of the respondents believes success in due diligence process will bring ease in legal
compliance.

34
Q6) Choose all the ways in which employees can actively contribute to maintain a culture of
due diligence within the company?

INTERPRETATION

From the above chart we can understand that out of (100) respondents, (48%) of the
respondents believes by overlooking on errors and oversight in their work they can actively
contribute, (45%) of the respondents believes by collaborating and enhancing teamwork the
employees can actively contribute, (32%) of the respondents believes by proactively seeking
information and verifying sources an employee can take active contribute and (13%) of the
respondents believes by adhering strictly to the rules and procedure can make a employee to
take active contribution.

35
Q7) Which of the following statement are true regarding the roles of due diligence in driving
success?

INTERPRETATION

From the above chart we can understand that out of (100) respondents, (45%) of the
respondents believes due diligence helps in identifying market opportunities and threats drives
success, (42%) of the respondents believes due diligence increases the bureaucracy and slows
down the process makes it successful, (29%) of the respondents believes due diligence
contributes to a sustainable growth and competitive advantage to drive success , (13%) of the
respondents believes due diligence is relevant in decision making process that drives success.

36
Q8) What are the potential consequences of neglecting due diligence in mergers and
acquisitions?

INTERPRETATION

From the above chart we can understand that out of (100) respondents, (34%) of the
respondents believes exposure to undisclosed liabilities and risk could be the possible
consequences of neglecting due diligence, (31%) of the respondents believes legal disputes and
financial losses can occur due to neglecting due diligence, (29%) of the respondents believes
rough and uneven integration of operations can occur by neglecting due diligence, (6%) of the
respondents believes decreased chances of regulatory scrutiny can occur due to neglections of
due diligence.

37
Q9) which aspects of target company are typically scrutinized during the due diligence process
in mergers and acquisitions?

INTERPRETATION

From the above chart we can understand that out of (100) respondents, (67%) of the
respondents believes target company are scrutinized on basis of financial statements and
performance metrics, (36%) of the respondents believes target company are scrutinized on the
basis of intellectual property rights and patents, (11%) of the respondents believes target
company are scrutinized on the basis of customer contracts and relationships, (20%) of the
respondents believes target companies are scrutinized on the basis of corporate governance
structure and regulatory compliance .

38
Q10) which of the following statements accurately reflects the importance of due diligence in
assessing the value of a target company in mergers and acquisitions?

INTERPRETATION

From the above chart we can understand that out of (100) respondents, (10%) of the
respondents believes due diligence as the target company’s value can be determined solely
based on its market reputation, (86%) of the respondents believes due diligence helps uncover
hidden liabilities and overvalued assets, providing a more accurately assessment of target
company and (4%) of the respondents believes due diligence only involves reviewing financial
statements and does not impact the valuation process.

39
CHAPTER 3: FINDINGS, RECOMMENDATION AND LIMITATION

3.1: FINDINGS
Here are the key findings that highlight the importance of due diligence in M&A:

1. Risk Mitigation: Due diligence helps identify potential risks and liabilities associated with
the target company. This can include legal risks, financial risks, operational issues,
environmental concerns, and compliance with regulatory requirements. By identifying these
risks early, the acquiring company can develop strategies to mitigate them or reconsider the
transaction.

2. Valuation and Pricing: Due diligence provides the data and insights necessary to accurately
assess the target company's value. This includes examining financial statements, revenue
streams, expenses, assets, and liabilities. A thorough analysis ensures that the acquiring
company offers a fair price for the acquisition.

3. Legal and Regulatory Compliance: Due diligence ensures compliance with relevant laws
and regulations. This includes checking for ongoing or potential litigation, regulatory
investigations, employment law compliance, intellectual property rights, environmental
regulations, and more. Identifying these issues early can prevent costly legal battles and
penalties after the acquisition.

4. Operational Integration: An in-depth understanding of the target company's operations,

culture, and management structure is critical for successful integration. Due diligence allows
the acquiring company to assess how the target company operates, identify potential cultural
clashes, and develop an integration plan that maximizes synergies.

5. Stakeholder Assurance: Conducting thorough due diligence can help build confidence
among stakeholders, including shareholders, employees, and customers. It demonstrates that
the acquiring company is making informed decisions and has taken steps to ensure the
acquisition's success.

6. Information Disclosure and Transparency: Due diligence encourages transparency between

the acquiring and target companies. This openness is crucial for building trust and ensuring that
both parties have a clear understanding of the transaction's terms and conditions.

40
3.2: RECOMMENDATION
1. Case Studies: Analyse real-life case studies of mergers and acquisitions where due diligence
played a crucial role. Look for examples of successful deals where thorough due diligence led
to positive outcomes, as well as instances where inadequate due diligence resulted in problems
post-merger.

2. Literature Review: Conduct a comprehensive review of academic articles, journals, and

books on the topic of due diligence in mergers and acquisitions. Look for studies that discuss
the various aspects of due diligence, its importance, best practices, and its impact on deal
success.

3. Interviews and Surveys: Conduct interviews with professionals in the field of mergers and
acquisitions, including lawyers, investment bankers, and company executives, to gather
insights on their experiences with due diligence. You could also design surveys to gather
quantitative data on the importance of due diligence in deal-making.

4. Cultural Due Diligence: Investigate the importance of cultural due diligence in mergers and
acquisitions. Understand how assessing cultural compatibility between the acquiring and target
companies can impact the success of the deal and post-merger integration.

41
3.3: LIMITATION
1. Unsure of what to ask: To offer your business the best chance of posing the appropriate
questions, it pays to start your due diligence preparations well before the process begins.
Asking the inquiries that go to the heart of the subject is what we mean by “the appropriate
questions.”

2. Lack of adequate technology: The use of spreadsheets and email in the due diligence process
has grown too commonplace among due diligence teams. The procedure, which is already
expensive per hour, is only served by being slowed down.

3. Inadequate Communication: The different due diligence teams (operations, finance, legal,
etc.) can function independently without ever communicating with one another. Another
concern is how to effectively communicate with the other party to the transaction and ensure
that the entire process is transparent to everyone.

4. Time Constraints: The phrase “anything that drags gets dirty” is used informally in the
context of the challenges of due diligence, with the meaning being that the longer due diligence
lasts, the more likely it is that relations between the buyer and seller will deteriorate.

5. Involved Costs: It’s important to approach due diligence as an investment rather than a cost
to avoid the challenges of due diligence. Performing due diligence on a large or complex
company can be expensive. The process can be difficult for smaller companies/businesses that
may lack adequate resources.

6. Lack of expertise: Finding the right personnel to fill the gaps between what your internal due
diligence team can and cannot do is one of the major challenges of due diligence. For instance,
an ordinary accountant is unlikely to be able to give the level of analysis needed for a thorough
investigation into the target company’s financials.

7. Subjectivity Nature of Due Diligence: Due diligence involves making judgments and
decisions based on incomplete or imperfect information, which can make it somewhat
subjective. As a result, it can be difficult to form a clear judgment about the suitability of a
business relationship with the company.

42
8. Limited Access to Information: One of the typical challenges of due diligence is incomplete
information, which only sometimes indicates that the seller is being evasive. It could be a case
of improper record keeping or a lack of access to the data that your due diligence team is
requesting.

9. Legal Issues: Due Diligence sometimes exposes legal issues or potential liabilities facing the
company under investigation. These situations are one of the major challenges of due diligence.
The buying side may require assistance from a legal counsel to mitigate the challenge.

10. Using information gathered to make an accurate valuation: The amount of new information
that can be discovered during even a brief period of due diligence on a small business is
enormous, and almost all of it will be relevant to determining the company’s valuation.

43
Chapter 4- conclusion

In conclusion, due diligence plays a pivotal role in ensuring the success of mergers and
acquisitions. It serves as the foundation for informed decision-making, allowing the acquiring
company to identify and mitigate risks, accurately assess the value of the target company, and
ensure compliance with legal and regulatory requirements. Through comprehensive due
diligence, companies can better structure deals, address integration challenges, and build
stakeholder confidence. Ultimately, the thoroughness and accuracy of due diligence can be the
difference between a successful merger that generates long-term value and a costly acquisition
fraught with unforeseen complications. As such, it is indispensable for any organization
considering M&A to invest the necessary time and resources into a rigorous due diligence
process.

44
Chapter 5: Reference

References
CSI( Corporate Finance Institute). (n.d.). Retrieved from
https://corporatefinanceinstitute.com/resources/valuation/types-of-due-
diligence/

Deloitte company document. (n.d.). Retrieved from

https://corporatefinanceinstitute.com/resources/valuation/types-of-due-
diligence/

wikipedia . (n.d.). Retrieved from https://en.wikipedia.org/wiki/Due_diligence

45