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6 January 2014

Comprehensive understanding "the key to successful due diligence"

Content team

When it comes to mergers and acquisitions (M&As), many companies may look upon due diligence procedures as little more than a box-ticking exercise rather than a central part of the deal.

But in the last few years, these activities have become more important to any major investment. It was noted by Grant Thornton LLP that as M&A activities become the cornerstone of many firm's business strategy, there is a growing recognition of the importance of a full understanding of both the target and the surrounding environment.

"Diligence is not a tick-in-the-box exercise characterised by a procedure or norm. It calls for experience, sharpness and patience. An effective due diligence is dependent on several crucial factors," the company stated in an article for Hindu Business Line.

These include developing a comprehensive understanding of the business, the transaction details, the legal environment, the financial situation and the people involved, it was stated.

When it comes to the operational aspects, it was observed that a close analysis of the target's business model can determine how strong or weak its strategies are, how they are being executed and how they could meet the acquirers' expectations.

Understanding the personnel involved in the process is also critical. Grant Thornton noted that M&As involve a "marriage of cultures, involving disparate processes, policies and systems". Companies need to have a knowledge of any areas where they will be incompatible and how the leadership skills of key executives will assist in bridging any gaps.

This may seem like a complex and time-consuming process. In fact, a recent survey by Intralinks DealNexus revealed due diligence is seen as the most tedious aspect of an M&A process, with 37.9 per cent of professionals citing this as the most boring part of their jobs.

But if it is done correctly, the benefits can far outweigh the costs. Grant Thornton highlighted a saying attributed to Warren Buffett to illustrate this, noting: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
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Content team, Bureau van Dijk

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