Today, public companies are seeing the value in growing their entities and easing shareholder anxieties with a streamlined acquisitions and merger process which increases corporate holdings, stimulates share value and trading volume while offering a valuable and unrivaled incubation process for the company being merged (or a profitable exit strategy for those being acquired).
There are a minimum of 12 angles that one should observe and research during the due diligence phase: Corporate Documentation, Securities, Entity Financials, Tax, Contracts, Government and/or Organizational Licenses, Litigation, Product Offering, Marketing, Executive Staff, Corporate Assets and Research and Development. To keep this educational article from becoming a book we will simply list, in general terms the basic intricacies of the above categories:
Corporate Documentation, meaning articles of incorporation, bylaws and articles of association; as well as recent shareholder communications, certificates of operating authorization and minutes of board and other meetings.
Securities should be evaluated using copies of stock certificates, copies of options and warrants, stock register, shares issued and when they were issued, holdings stated by percentage, outstanding preferred stock and any applicable covenants. Your due diligence officer should also examine outstanding warrants, options or other securities as well as options and other employee benefits and employee stock ownership.
One of the most crucial components in a merger or acquisition are the Entity Financials which are composed of, for the most part (but not exclusively limited to) audited financials since inception, balance sheets, cash flow, accounting methods and practices and revenue recognition policies. Don’t forget the basics such as management accounts, budgets and projections and of course the business plan spelling out the premise of the company and its use of proceeds etc. Furthermore, there should be a critical evaluation of the corporation’s accounts receivables and policies, revenues and margin by product, extraordinary incomes and expenses, analysis of material write downs and bad debt summary (don’t forget to collect data on outstanding contingent liabilities and external financial reports and studies if applicable).
Though fraud is always an issue in transactions of this sort, there are added investigative measures that are more difficult to ‘fraudulently convey’ and by doing so is a federal offense. Therefore Tax records should always be investigated by gathering federal, local and state tax returns for the past three years, details of any and all government audits and for European transactions a VAT Registration should always be a mandatory prerequisite for all pre acquisition/merger data collection.
Having a well-rounded comprehension of the targets Contracts is an important element depicting the liabilities and arrangements in place that you’ll inherit when the transaction is completed. Particular points of investigation should be initiated by collecting bank and non-bank lending contracts, JV and purchase agreements, liens list, equipment leases, mortgages and other loans (as well as insurance contracts). Other basic contracts that should be reviewed are supplier and vendor contracts for a sufficient contractual investigation. Government and/or Organizational Licenses will need to be investigated in many cases depending on the particular industry genre and nature of business therefore copies of (as well as transfer process criteria for) permits, licenses and registration certificates should be examined at the offset of your investigation. During this process one should record the reports to and requests from official bodies and/or organizations.
Nothing damages a promising M&A process more than Litigation. One should have their legal tactician gather data on pending litigation ‘against’ and ‘by’ the target company, potential liabilities and potential costs as well as settlement documentation, employee claims or litigation, patent actions and intellectual property actions that could hinder your ability to proceed as planned.
Product Offerings (in addition to assets) is typically the primary reason entities engage in M&A. when analyzing the products of a target company the following will be good places to start investigation: product or service offering, market share by product, total market size, inventory list and valuations, obsolescence policy, product backlog analysis and seasonality as well as major suppliers and supplier spend analysis.
Marketing plans and information will tell how well the company understands its competition and client base. When investigating the marketing process the target’s documents should include: list of competitors and competitors market share, major clients, major client income, pricing strategy, marketing collateral (brochures, website, blog, etc.), sales projections by product/service and commission structure.
Executive and Support Staff within the target need to be committed to the process and remain motivated after the completion. To gather intelligence on the structure population you should start with an organizational chart, blogs for senior staff, labor disputes information, employee compensation plan and pension plan, options/profit sharing plan, management incentives, non-cash payments, non-salary compensation such as medical/insurance, car and travel. The basics of evaluation of this particular aspect of the company should be evaluation of employee, confidentiality, non-compete agreements and IPR protection. Many M&A agents forget to investigate the obvious such as corporate consultants and consulting agreements, employee numbers, absenteeism/sickness records, copy of employee manual(s), health and safety policy, company directors and blogs for company directors.
Many times a merger’s value lies in direct correlation to its Corporate Assets. Asset investigation items to check are: fixed asset register, asset valuation, property owned/leased, recent surveys and appraisals, mortgages, deeds, easements, encumbrances, leases and sub-leases. Continuing research should also cover growth and contraction plans, patents, trademarks, domain names and other intangible assets.
Research and Development is a valuable aspect to M&A in patent heavy industries such as pharmaceutical and biotech among others. Elements to investigate should start with research in progress, research budget, documentation policies, sample documentation, patent policies, IPR protection and of course IPR Register.
Other general items to look into are (but not limited to) social media presence, crisis management models, current defamation issues on the internet or other media venues, IT policies, backup and recovery, business continuity plan, press and media relationships as well as the basic internal communications and intranet and newsletter history.
The above is a general criteria checklist for initiating dialog and facilitating due diligence for a basic merger or acquisition transaction. Of course each transaction brings with it its own issues that may deviate the researcher from this basic process therefore this should be a research tool that is used as a template to develop a customized strategy for completing the necessary due diligence to bring both parties to the table to close the transaction. The above does not take into consideration the psychological elements involved with a merger from the viewpoint of the ‘founder’ of the company being merged into a larger entity or the corporation being acquired. Most times, public relations and a solid communications director can grease the wheels for the human elements that will come into play. Before engaging in mergers or acquisitions of any kind proper legal counsel should be engaged to assist you in the process.
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