DUE DILLIGENCE IN MERGERS AND AMALGAMATIONS

DUE DILLIGENCE IN MERGERS AND AMALGAMATIONS

Due Dilligence refers to the process of appraising, assessing and evaluating business risk with analysis of cost benefit which is involved in Merger & Amalgamation. It is like trying to find a switch to put on the light when in entering a dark room. The decision to merge or amalgamate has to be based on considered opinion, which can be formed only after scanning of information and records available. Due Dilligence embraces the assessment process to judge the benefits vis-à-vis the troubles that will be faced in post merger scenario.  The process of due diligence cannot be sidestepped in Mergers and Acquisitions.

Due Dilligence is a broader term than financial audit. In financial audit, the auditors are mainly concerned so far as the material accuracy of the financials and its presentation in the form of statements with a view to provide true and fair picture of entity’s financials. The due diligence process goes beyond the books of account maintained by the entity and involves analysis of actions of entity – assessment of problems faced by the entity, impact of legal cases, tax assessments, hidden liabilities etc. The due diligence process includes review of cash flows – past and future, status of tax assessments and its financial impact, valuation of assets, digging out hidden liabilities after an independent assessment, assessment of viability, review of technical feasibility, assessment and analysis of information technology security systems etc. In short, it encompasses –

1.         Review of Commercial viability

2.         Review of Financial liability

3.         Review of Tax Assessments

4.         Review of Legal cases

5.         Review of Manpower Resources

6.         Review of compliance of laws

The due diligence process is a team work consisting of chartered accountants, lawyers, valuers having expertise in their own field. The assessment, review, analysis, scrutiny and examination under due diligence process involves specialization and application of mind which goes beyond fact finding exercise i.e. mere checking of records available. The Chartered Accountants play a major role in due diligence process and no meaningful due diligence would be complete without their participation. The team, which has been, assigned the task of due diligence follows the following steps: -

1.         Identification of the purpose of Merger and Acquisition.

2.         Review and Study of past Business operations.

3.         Study of Information System within the organization.

4.         Collection of Documents.

5.         Assemblage of Key Information from Management and Independent sources.

6.         Allocation of review responsibilities amongst team members.

7.         Compilation of findings of team members.

8.         Assessment of findings.

9.         Preparation of due diligence report.