![]() ![]() A full understanding of tax benefits and exposures may lead to renegotiating deal terms and structure to achieve desired tax benefits Benefits in negotiation: Due diligence can facilitate better negotiation of deal terms, such as those pertaining to net working capital targets and definitions, net debt definitions, and optimal allocations of tax benefits and exposures.Inaccurate financial information: Even if prepared with the best of intentions, financial information can be incomplete, inaccurate or misleading, due to myriad difficulties involved in identifying contingencies, non-recurring matters, the outcomes of tax issues, and other related items.Incentives: The parties to a transaction–executives and other employees of both the buyer and seller-as well as some of their external advisors can receive sizeable payouts if the transaction closes, and may take a haircut, or receive little or nothing, if it does not.(This may be particularly true when the acquirer is a public company required to disclose pro forma financial information) Buyers can be unrealistic about the extent of synergies and the speed with which they may be achieved. Sellers typically present optimistic forecasts and/or base their forecasts on growth assumptions that may be unrealistic. Inherent bias: Both buyers and sellers can be inherently (if unintentionally) biased.Some of the key reasons why due diligence is imperative are as follows: Transactions that undergo a due diligence process are more likely to be successful 2 than those that do not. Over the years, M&A practitioners in the legal, accounting, and other professions have heard reasons cited why due diligence is not a necessity: Thus, it is in the board's interest to emphasize the importance of and facilitate a well thought-out diligence process. In other words, due diligence done well can provide significant insights into the target company and allows for a more informed assessment of the potential risks and anticipated benefits of the transaction. Specifically, boards should seek to satisfy themselves that management conducts a robust due diligence process designed to ferret out potential risks and valuation considerations, assess their magnitude and the probability of the risks' occurrence, consider whether mitigation is possible, and respond accordingly. A critical aspect of this oversight responsibility relates to the due diligence process. Given the potential consequences of M&A activity to companies and their boards, directors have a stake in overseeing the transaction process from an early stage through to post-closing integration. In 2015, through lawsuits, shareholders challenged 65 percent of M&A deals valued at over $100 million or more, involving Delaware-incorporated companies. On the other hand, transactions that don’t ultimately perform as expected, including not providing positive returns or resulting in large negative surprises, can cause serious damage to companies and their boards of directors, ranging from litigation to the ouster of managements and even board members. A successful acquisition can help a company make a quantum leap in terms of market presence, filling in gaps in a company's product or service portfolio, and improving profitability and other performance metrics. Merger and acquisition (M&A) activity can be an important component-even a critical one-for a company’s growth strategy. Due diligence should be important, and yet…
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