INTRODUCTION- DUE DILIGENCE IN M&A
The Due Diligence (DD) is the process of verification and investigation of the potential transactions, to confirm all facts and information which is brought up during a Merger & Acquisitions (M&A) deal and verifying the same. In the sense of M&A, the core objective of the DD is to ascertain any issue pertaining to the deal with respect to assets, liabilities, and operations of the target company that can impact the completion of the transaction between the acquirer and acquired. Although, the process of DD differs from transaction to transaction with same basic purpose to assist acquire in acquiring the target and to ascertain various risks, impediments etc. associated with the target. Therefore, the DD plays an important role in success of the deal/transactions. Further, DD is associated with the verification and investigation of several corporate documents such as charter documents etc., commercial documents, board reports, financial reports, material transactions, corporate agreements, compliance reports, and other industry specific areas.
The main tools for conducting DD are going for the documents in the Physical Data Rooms (PDRs) or Virtual Data Room (VDRs). These data rooms comprise of several important documents to be kept for reviewing in order to communicate certain issues through DD Report to the acquirer.
But this DD process is greatly affected due the amidst pandemic wherein several restrictions have been imposed in the movement which resulted into steep decline during the tenure of the lockdown, but someone has rightly said that “where there is a will, there is a way”, as India has seen a significant growth in the M&A and PE activity post lockdown as deals values in 2020 kept a pace with previous year, reaching 80.4 USD billion, which marked an increase of 5.6 USD billion in such activity compared to last year’s value.
The DD process has undergone a change wherein not it relies less on-site visits and physical meetings and more on VDRs. Therefore, various aspects of DD in M&A are being conducted virtually through use of VDRs. So, the pandemic has shifted the process from PDRs to VDRs. It is evident that working remotely has become more common place, therefor such VDRs has become a vital part of each transaction/deal and it became more important than ever. Though there are some concerns pertaining to providing sensitive data and issues pertaining to data security of the entity to such rooms but it will overcome with the passage of time.
1. The buyer should hire the professional services, with such professional the buyer should plan and strategize the whole process in order to complete DD.
2. Research such industry in which buyer would like to make investment in order to ascertain preliminary risks and obligation associated with such industry.
3. A questionnaire/checklist should be prepared for conducting DD, which should be exhaustive and customized for a particular industry to which the target company belongs to, which should be run through the persons in concern of the target company and ask for industry specific documents which are important for completion of the transaction.
4. Analysis/review/investigate the documents in the form of annexures to the DD Report, received through physical or VDRs means and prepare a requisition list of those documents which are not provided and share the list with the target company.
5. After investigating/reviewing/analyzing the documents, prepare the chapters of main DD Report in association with annexures so drafted along with key findings.
The VDR can be seen as a document repository or a secured online database wherein large volumes of documents are stored in an off-site server or beyond the walls of the entity that enables transacting parties to exchange sensitive documents securely outside the corporate firewall. So, the utility of this room can be utilized for the process of DD in M&A. Therefore, in VDRs documents are stored and presented more efficiently and effectively on a digital repository. Further, these VDRs provides various features and functions such as Q&A Function, Text Search, Audit Trail Function, Indexing, Watermarking, Variety of Documents Format, Documents Alerts, Password Protection, Advance Encryption etc.
One of the basic questions arises that, “Whether the VDR facilitates efficiency in DD process for M&A transaction?” Therefore, to answer this issue it is important to examine importance of VDRs from point of view of both parties i.e., an Acquirer and a Targeted entity.
1. Cost Saving.
2. Comfort/ Ease of use.
3. Time Saving.
5. Fair playing field.
6. Over the clock access.
7. Improvement in diligence.
8. Acceleration of Business Processes
2. Cost Saving
3. Competitive Pricing
4. Legal Compliance
5. Improved Security
6. Times Saving
7. Data Control
8. Ease of Setup
9. Acceleration of Business Processes
As, one of the concerns associated with the VDRs is the data security which is critical to the corporate entity and breach of such critical data can lead to great amount of loss. Therefore, the targeted company extenuating the risks connected with sharing certain confidential information in order to complete the M&A transaction and this information can be used against the company if the deal does not succeed. Even such systems are prone to espionage. Therefore, it is essential to opt for such network which provide a high-level security. Various VDRs provides following benefits in DD provides security by giving password-protected access to the files;
1. Advance encryption standards to store and transmit files;
2. Auditable records and optimize the due diligence process;
3. It provides a logical table of contents of directory and full text search capabilities which makes easy to access different documents in a particular point of time.
4. It reduces laborious tasks which are performed by humans in PDRs.
5. Provides different sections of business data that a company what to share with the acquirer through various segments in VDRs.
Effective conduct of DD can mean the difference between a successful M&A and a failed transaction therefore it is essential to determine key conducts of DD through VDRs as follows:
There are various VDRs providers available in the market such as ideals, citrix, Datasite, box, Caplinked, SS&C INTRA LINK, BlackBerry Workspaces, Brainloop, SmartRoom, Dropbox, these are the top vendors of VDRs worldwide.
A DD process is one of the important steps which is essential for a successful M&A Transaction. Hence in the recent time of pandemic where there is less interaction and most of the corporate activities held virtually therefore the process of DD shifts on a virtual platform i.e., VDRs. VDRs can significantly improve the DD process for all the parties to a M&A deal. A targeted company can easily upload its documents over a document repository which is accessible across the world. This reduces the physical involvement in the DD process, which is the need of the hour in this amidst pandemic. Hence, VDRs more data to investigate and verify which is essential for success of M&A deal. Though the cost for availing VDRs form vendors will determine its future.