On May 25th, 2018, the major data privacy legislation known as General Data Protection Regulation (GDPR) takes effect. GDPR introduces substantial changes to existing European Union privacy laws and provides a regulatory framework for the treatment of personal data belonging to EU citizens. Given the linkage between personal data exchange and M&A transaction activity, teams engaged in deal making need to understand the implications to their due diligence and transaction processes.
The impetus for corporate venturing is obvious: a corporation’s investment in startup companies can create new means to drive growth, financial return and advance strategic priorities.
Technological advancement is changing the way companies compete. The torrid pace of innovation requires commitment to digital transformation in a way that few companies can keep up with using internal capabilities alone. This is why M&A transaction rates continue to climb - see here. Companies with well-oiled deal processes find that these campaigns safeguard and advance their business models, while keeping them at the forefront of industry leadership.
Keeping track of and properly vetting your M&A Targets is key to determining the value you'll drive through M&A. If your process to do so is spread across email threads, shared folders and Excel files, the momentum required to drive that value hits snags and loses critical steam.
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Environmental concerns are becoming an increasingly important part of M&A due diligence, yet they are still often overlooked. The key objective of environmental due diligence is the identification of all material environmental risks that may effect a transaction, either pre- or post-closing. Environmental issues can significantly impact the valuation of a transaction from the Acquirer’s perspective (such as if liabilities are discovered).
An IT due diligence should paint a clear picture of how IT helps the Target run and whether there are any “deal breakers” that would cause the Acquirer to abort the transaction or to seek a price reduction (for instance, due to significant capital expenditure being required to upgrade IT systems).
1. Governing Documents
A review of the Target’s governing/constitutional documents (e.g. Articles/Memorandum of Association, Charter, Shareholders' Agreement, etc.) should be conducted as part of the legal due diligence process. Such a review should result in assurance being gained over the fact that there are no “surprise” entities within the Target’s group or in the way in which the Target may be run post-transaction (for instance, how shares may be allotted or how contracts may be assigned).
1. Accounting Standards
During the due diligence process, it often becomes apparent that the Target has failed to comply with at least some accounting standards (for various reasons). Typical examples include the Target recognizing income on a cash basis (rather than an accruals basis) or recognizing revenue incorrectly (this is more likely if the Target has multiple revenue streams and/or long-term contracts with stage payments spanning accounting years). From an M&A perspective, it is very likely that there will be differences between the accounting standards adopted by the acquirer and those of the Target (such differences may be more pronounced if the transaction is cross-border and where there are two (or more) accounting conventions being considered (for instance, US versus UK GAAP).
There are two main ways for a company to grow. One is via increasing sales and the general size of a company’s operations over time – a strategy often referred to as “organic” or “internal growth." The other is via acquiring another company or a number of companies (it is also possible for a company to pursue growth via some form of coalition/partnership such as joint venture, licensing or strategic alliance).
If you have decided to pursue an M&A strategy, and have identified a Target, consideration must be given to Due Diligence – an in-depth fact-finding exercise helping you to understand a Target in detail and establish whether the acquisition makes Strategic, Commercial and Financial sense for your organization.