M&A Due Diligence (buyers’ perspective)

From buyers’ perspective, M&A due diligence is a comprehensive review and assessment process that evaluates the financial, legal, operational, and other aspects of a target company.

Within the context of an M&A deal, it is advisable that the buyer conducts a thorough review of the ‎target company to understand the company itself, and further identify any risks or contingencies involved in the investment, whether involving any financial, operational and/or legal aspect thereon. ‎To that end, as part of a properly made due diligence review, buyers should seek to analyze, to some extent, the assets and liabilities of the ‎target company, as the same relate to its operations, possibly aiming to gain leverage in the negotiation process, whether relating to the purchase price, the payment conditions, or the structure of the deal itself.  In some cases, the information disclosed by the selling shareholders or partners during the due diligence process solely confirms the substantial information that buyers were aware of in regard to the target company and its core business; however, there are deals where relevant issues or contingencies are identified during due diligence processes, which may result ‎in changes in the transaction’s structure, and consequently, in the transaction documents (i.e., stock purchase agreement, escrow agreement, amongst others), or even the abandonment of the transaction itself. 

The nature and scope of ‎a due diligence review depend on a variety of factors, including the industry and business of the target company, ‎the structure of the transaction (i.e., a stock sale versus an asset sale), the number of material contracts or legally binding commitments in force and effect, that the target company had acquired, including any outstanding debt and the nature of the latter, and the timeline required by the main investors in view of market, economic and political factors, whether domestic or global.

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In furtherance to a legal due diligence process, buyers tend to conduct a thorough review of the target company’s financial, tax, and accounting condition, as well as other aspects related to the target company’s prior operations, ‎environmental matters, and other areas, whether related to technology or otherwise.

Although, a properly drafted stock purchase agreement usually brings certainty to buyers as to having sellers and the target company fully representing and guarantying the quality if the target company itself and its business and clearly determined consequences in the event of any default or misrepresentation causing any damages or economic harm to buyers, it is extremely advisable and convenient for buyers to perform a thorough and extensive due diligence review, but only focused on identifying true red flags or contingencies based on the risk parameters previously determined by the target company’s Board of Directors or Shareholders Meeting; this is, the latter should set a series of elements or parameters involving the potential risks that may be assumed, as well as eventual contention measures that may be adopted in the target company or otherwise to mitigate or reduce such risks. 

A good deal for buyers should always contemplate that sellers actively cooperate with buyers, in a professional manner, in the performance of these due diligence reviews, particularly, regarding the exchange of information and documentation. Some information, such as public database searches, can be ‎obtained by buyers without any input from sellers; however, in our view, cooperation from sellers and their advisors constitutes an essential element aiming to build a solid deal for buyers, always aiming to bring certainty to investors’ table.  Most information ‎necessary to perform a due diligence review should be efficiently delivered by sellers at buyers’ request. In ‎transactions where a large amount of information and documents are reviewed, the ‎information may be delivered to buyers through a virtual data site maintained by sellers (i.e., one drive, dropbox, google drive, internxt  or others). Information can also be conveyed or supplemented by Q&A sessions ‎conducted between external advisors of buyers – external counsel and investment bankers - with management of the target company and its advisors or representatives of sellers.

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The nature and scope of a due diligence review will depend on various factors:‎

• Stock deal vs asset deal.  In an asset deal, the ‎focus of the due diligence review will be on the assets themselves.  In a stock‎ deal, buyers should focus on corporate ‎matters, material contracts and other labor, social security, environmental, debt related and other aspects, in addition to the relevant assets owned or leased by the target company. ‎

• Public or private company.  Public companies are required pursuant to applicable laws to ‎publicly disclose a significant amount of information, including audited financial ‎statements, material agreements, and annual reports. This information helps ‎buyers of a public company to gain relevant knowledge in an efficient and orderly manner and properly identify relevant issues.‎

• Antitrust related issues.  Depending on the purchase price, the structure of the deal and other factors, the parties may be legally required to submit a filing before the competent antitrust authorities aiming to attain an approval to consummate the deal itself. 

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• Cost and time restrictions.  Solid due diligence reviews tend to be time-consuming; however, there are various ways to make this process as efficient as possible (i.e., ‎prioritize key areas of the review, retain experienced advisors to perform the latter, designate a lead manager of the process with some expertise in prior due diligence processes, amongst others).

In conclusion, prior to buying any target company of a particular industry, it is strongly advisable that buyers conduct a thorough review of the target company and its business aiming to identify relevant contingencies (i.e., dealbreakers); assess risks; negotiate effectively; ensure compliance; plan for integration and governance; and establish pre and post-deal responsibilities.

At Pani Abogados, we have extensive experience performing thorough, tailored-made and pragmatic due diligence reviews, focused on red flags which may jeopardize buyers’ position and the deal itself.

Joaquín Pani